Family Offices - New York County Lawyers' Association

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FAMILY OFFICES: A TO

Z ABOUT ACTING AS LEGAL COUNSEL FOR A

FAMILY OFFICE Prepared in connection with a Continuing Legal Education course presented at New York County Lawyers’ Association, 14 Vesey Street, New York, NY

scheduled for April 21, 2015

Faculty:

Program Co-sponsor: NYCLA's Lawyers in Transition Committee

Moderator: E. David Smith, Smith & Associates

Faculty: Timothy P. Terry, Hartz Capital; Steve Thayer, Handler Thayer, LLP;

Richard C. Wilson, Family Offices Group

Program Chair: Yitzy Nissenbaum, Chair, NYCLA's Lawyers in Transition Committee

This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 2 Transitional and Non-Transitional credit hours: .5 Professional Practice/Law Practice Management;.1 Skills; .5 Ethics

This program has been approved by the Board of Continuing Legal education of the Supreme Court of New Jersey for 2 hours of total CLE credits. Of these, .5 qualify as hours of credit for ethics/professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal law, workers compensation law and/or matrimonial law.

ACCREDITED PROVIDER STATUS: NYCLA’s CLE Institute is currently certified as an Accredited Provider of continuing legal education in the States of New York and New Jersey.

Information Regarding CLE Credits and Certification

Family Offices: A to Z about Acting as Counsel for a Family Office April 21, 2015; 6:00 PM to 8:00 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your

course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at

the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time

you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

Family Offices: A to Z about Acting as Legal Counsel for a Family Office Tuesday, April 21, 2015 6:00 PM to 8:00 PM

Program Co-sponsor: NYCLA's Lawyers in Transition Committee

Moderator: E. David Smith, Smith & Associates

Faculty: Timothy P. Terry, Hartz Capital; Steve Thayer, Handler Thayer, LLP; Richard C. Wilson, Family Offices Group

Program Chair: Yitzy Nissenbaum, Chair, NYCLA's Lawyers in Transition Committee

AGENDA

5:30 PM – 6:00 PM Registration 6:00 PM – 6:10 PM Introductions and Announcements. 6:10 PM – 8:00 PM Presentation and Discussion

Anatomy of a Family Office

Family Family Advisory Board

Investment Committee

Philanthropy Committee

Succession & Tax Planning

Board of Managers

Family Trustees

Independent Trustees

Institutional Trustees

Trust Protectors Family Trusts

Dynasty Trusts

Family Office Management, LLC

Family Holding Company I, LLC

Family Holding Company II, LLC

Springing Member

Independent Manager

Service Providers Private Public

Banks Broker-Dealers

Registered Investments Advisors

Non-Registered Investment Advisors

Accountants Lawyers

Insurance Brokers Other Providers

Direct Investments

Equity Debt

Assets Other

Interests

Fund Investments

Registered Investment Funds

Mutual Funds

Exchange Traded Funds

Other Investment Funds

Exempt Investment Funds

Hedge Funds Private Equity Funds

Venture Capital Funds Fund of Funds

“Family Offices: A to Z About Acting as a

Legal Counsel for a Family Office.”

Program Agenda I. General Introduction to Acting as Legal Counsel

A. What is a family office and what do they accomplish for families?

B. What areas and level of issues do you need to be prepared to address?

II. Ethical Issues Associated with Representing a Family Office

A. Who is the Client? Where is the Client? Where are You? a. In General and in the cases of In-House Counsel and Outside Legal Counsel

B. Multiple Representation Conflict of Interest Waivers C. Unresolvable Conflicts/Required Withdrawals D. Attorney-Client Privilege – who has it and protecting it

E. The rights and obligations of Trusts, Trustees and Beneficiaries in general and upon certain events

a. An example of the issues related to managing changing information in a Family

Office F. Ethical Issues in Family Office Business Decisions G. Conflicts in Family Offices and How to Minimize Them

III. Organization of a Family Office A. Basic Tax and Estate Planning – Starting with a Good Core Estate Plan B. Advanced Tax & Estate Planning – Uses of Revocable & Irrevocable Trusts for

Ownership of Family Assets (Living Trusts, Dynasty Trusts, Minor Trusts, Life Insurance Trusts, Asset Protection Trusts)

C. Family Office Structures

1. Management Company – The Advisor/Manager of the Family Office

Structure a. Choice of Entity & Jurisdiction (Corporation/LLC) b. Tax Election (S-Corp., C-Corp, Partnership Status)

c. Ownership (Individuals or Trusts; Tends to be Static/Fixed) d. Governance & Control Issues (Shareholder Agreements)

e. Management f. Committee Structure (Engaging the Family/Key Advisors) g. Succession Planning

h. Mission/Vision/Business Plan i. Business Registration & Licensing j. Investment Advisor Regulation k. Broker Dealer Regulation 2. Asset Holding Companies – The FLLC a. Choice of Entity (Jurisdiction/Type) - (DE LLC)

b. Tax Election (Tends to be Partnership Election) c. Ownership

(i) Static or Fixed Ownership (ii) Multiple Class Participating Percentage Model (iii) Multiple Series Participating Percentage Model (iv) Multiple Entity Structure (Use of Single Member LLCs)

d. Governance & Control Issues (i) Opt In/Opt Out (Hedge Fund Approach) (ii) Required Commitment Period (PE/VC Approach) (iii) Term (Defined or Never Ending)

e. Management (Removal Rights) f. Succession Planning (Controlled by Agreement or Trusts)

g. Investment Committee h. Investment Strategy 3. Charitable Giving Structures and Strategies a. Annual Gifting to Tax Exempt Organizations b. Donor Advised Funds c. Use of Complex Trusts d. Family Foundations (Operating/Non-Operating) IV. Tax, Regulatory, and Operational Issues Associated with a Family Office A. Income Tax Issues – Managing the Flow of Income/Deductions

1. Benefit Planning (ERISA)

a. Control Group Rules b. Affiliates Service Group Rules c. Compliance & Reporting

2. Flow of Income to Members/Managers a. Allocation of Profits to Managers versus Management Fee Income

b. Allocation of Profits and Losses to Members – Having Substantial Economic Effect

3. What are “Ordinary & Necessary” Business Deductions for a Family Office?

B. Estate Tax Issues – Transferring Value to the Next Generation 1. Gifting of Membership Interests 2. Sale or Transfer of Membership Interests 3. Uses of Private Annuities

4. Sales to Intentional Defective Trusts 5. GRATS 6. Valuation and Discounts 7. Current Rules/Case Law Associated with All of the Above

C. Securities Registration & Compliance Issues

1. Investment Advisor Registration (State & Federal) – Family Office Exemptions: The Dodd-Frank Act creates in its place a new exclusion from the Advisers Act in section 202(a)(11)(G) under which family offices, as defined by the Commission, are not investment advisers subject to the Advisers Act. (See: https://www.sec.gov/rules/final/2011/ia-3220.pdf)

2. Commodities Registration & Exemptions: The CFTC will not recommend that the Commission take an enforcement action for failure to register with the Commission as a CPO against a CPO that is a Family Office within the meaning and intent of 17 CFR § 275.202(a)(11)(G)-1, as amended, provided that the CPO complies with the following set forth in their No Action letter. (See: CFTC No Action Letter at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-37.pdf)

3. Broker Dealer Registration & Related Exemptions: Section 3(a)(4)(A) of the Act generally defines a "broker" broadly as “any person engaged in the business of effecting transactions in securities for the account of others.” See SEC Guide to Broker Dealer Registration at: http://www.sec.gov/divisions/marketreg/bdguide.htm

4. Investment Company Act Registration & Exemptions: See Section 3(c)(1) (100 Person Rule) and 3(c)(7) (Qualified Purchaser Fund)

D. Securities Reporting Issues

1. 13(f) Reporting ($100M Rule): An institutional investment manager that uses the U.S. mail (or other means or instrumentality of interstate commerce) in the course of its business, and exercises investment

http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/

discretion over $100 million or more in Section 13(f) securities (explained below) must report its holdings on Form 13F with the Securities and Exchange Commission (SEC). (See http://www.sec.gov/answers/form13f.htm)

2. 13D(G) Reporting (5% Rule): When a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934, they are required to file a Schedule 13D with the SEC. (Depending upon the facts and circumstances, the person or group of persons may be eligible to file the more abbreviated Schedule 13G in lieu of Schedule 13D.) See: http://www.sec.gov/answers/sched13.htm)

3. 13H Reporting (Large Trader Rule): Rule 13h-1 will require a “large trader,” defined as a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month, to identify itself to the Commission and make certain disclosures to the Commission on Form 13H. (See http://www.sec.gov/rules/final/2011/34-64976.pdf)

4. Insider Trading Reporting: When corporate insiders trade in their own securities, they must report their trades to the SEC. For more information about this type of insider trading and the reports insiders must file, See Forms 3, 4, 5 in Fast Answers databank that are linked at http://www.sec.gov/answers/insider.htm.

E. Managing/Running the Family Office

1. Control and Governance of Day to Day Affairs a. Control issues, voting vs. non-voting b. Involving the younger generations

2. Outsourcing versus Insourcing of Key Roles a. Chief Investment Officer/Use of Registered Investment Advisors b. Chief Executive Officer c. Chief Operating Officer d. General Counsel/Outside Counsel for Legal Matters e. Bookkeeping, Accounting & Tax Compliance 3. Insurance & Risk Management 4. Security 5. Life Style Management 6. Conflict Resolution

http://www.sec.gov/about/laws/sea34.pdf

http://www.sec.gov/about/forms/form13f.pdf

http://www.sec.gov/rules/final/2011/34-64976.pdf

7. Philanthropy

F. Other Issues

1. FCPA 2. Direct Investing

A. Due Diligence B. Manager Due Diligence and Oversight C. Direct and Indirect Investors

Family Office Club & Billionaire Family Office | Richard C. Wilson | [email protected]

Global Family Office Benchmark Survey

We are conducting an ongoing family office benchmark study, to date, we

have 181 responses, and we expect to reach our goal of 500 responses by the

end of 2015 with the help of our single family office network. If you would

like to participate, please visit http://SingleFamilyOffices.com/Survey

Current Family Office Survey Results: Please find below summary data

on the results of the survey to date. While some of these data points are

referenced and included in a few previous sections of the book, we thought

presenting them all together here in one place would be useful for some

readers who want to access this data later as a reference point. I hope you

find these data points as interesting and useful as we have.

mailto:[email protected]

http://singlefamilyoffices.com/Survey


If you would like to participate in this survey, please visit

http://SingleFamilyOffices.com/Survey


http://singlefamilyoffices.com/Survey

4 � March 2015 The New York County Lawyer

By E. David Smith, Esq. and Yitzy Nissenbaum, Esq.

When I tell other attorneys that I rep-resent �family of�ces,� many give me a puzzled look and say �oh, so you do matri-monial law?� Well, no.

Others think the term �family of�ce� refers to a family-owned business. That may be closer to the truth.

So what is a family of�ce? Essentially, it's a private company handling the affairs for a wealthy family. The Investopedia reference website de�nes family of�ces as �private wealth management advisory �rms that serve ultra-high net worth investors. Family of�ces are different from traditional wealth management shops in that they offer a total outsourced solution to managing the �nancial and investment side of an af�uent individual or family.�1

Family of�ces can serve very differ-ent purposes, providing services ranging from simply acting as a concierge ser-vice, arranging vacations and the like, to managing all the day-to-day operations for a family, including payroll activities, accounting, and legal issues.

The Family Of�ce Exchange (FOX), the largest peer-to-peer network for ultra-wealthy families and their family of�ces, identi�es seven common of�ce types, although many family of�ces are hybrids of the branded of�ce types. These are: (1) Founder's Of�ce; (2) Business Owner Of�ce; (3) Diversi�ed Business/Private Equity Of�ce; (4) Investment Of�ce; (5) Compliance Of�ce; (6) Philanthropy Of�ce; and (7) Multi-Generational Of�ce.

The Founder's Of�ce model is designed to support the founding family of the business and generally concerned with addressing issues outside the scope of the actual operating business. In contrast, a Business Owner's Of�ce provides aid to the shareholders regarding the control and maintenance of the primary business. The Diversi�ed Business/Private Equity Of�ce assists the owners in extending the realm of their business activities beyond the original business. An Investment Of�ce supports owners choosing public equity investing over private equity investing, overseeing the investment process. A Compliance Of�ce serves in the area of wealth management, functioning to control costs. Sometimes the purpose of the family of�ce is to aid the family in its philanthropic ventures and activities, with that type of of�ce recog-nized as a Philanthropy Of�ce. Finally, there is a Multi-Generational Of�ce tasked with the challenge of delivering a broad range of offerings for family members of different generations.2

The array of family of�ce types means that different family of�ces have vastly different legal needs, with some of�ces needing a full complement of legal services. A family of�ce may need legal counsel related to tax plan-ning, estate and succession planning, trust planning, investment management, corpo-rate governance, real estate, employment, privacy, regulations, and insurance, to name

their wealth. Some of today's legendary investors have converted their hedge funds into family of�ces. Steve Cohen, founder of SAC Capital Advisors, transformed his hedge fund into a family of�ce in 2014, fol-lowing a string of highly publicized insider trading allegations against his company. George Soros also decided, in 2011, to change his hedge fund into a family of�ce. These are just two examples from among the many renowned investors who have chosen the family of�ce structure to man-age their portfolios.

While it is true that family of�ces origi-nally catered only to the extremely wealthy, there has been a growth in family of�ces as the structure's appeal becomes clear to oth-ers whose assets are slightly more modest.3

While there's little formal data de�nitively accounting for the number of family of�ces, FOX estimates that there are 2,500 to 5,000 family of�ces in the U.S., with another 6,000 informal family of�ces operating inside privately-controlled businesses. Moreover, in Europe and Asia, where family of�ces are a newer development, the number of family of�ces is surging.

In addition to classifying family of�ces according to their focus, as in the seven main categories above, family of�ces can also be categorized according to the num-ber of families they represent: a single-fam-ily of�ce (SFO) and a multi-family of�ce (MFO). A SFO is a structure that manages the �nancial and personal affairs of only one wealthy family. A MFO is broader in focus and supports multiple families in managing their affairs. Though this distinc-tion seems obvious, in reality the differences can be quite complex, and determining the established structure of the family of�ce is critical for regulatory purposes.

Historically, family of�ces sidestepped much of the SEC regulation imposed by the Investment Advisers Act of 1940 (IAA). The IAA, until recently, contained a �private adviser exemption� under Section 203(b)(3) ((15 U.S.C. 80b-3(b)), which allowed an investment adviser with fewer than 15 clients over a 12 month period to avoid registration with the SEC. Under the �pri-vate adviser exemption� many hedge funds, private equity funds, venture capital funds, and family of�ces, which would include properly-structured multi-family of�ces, were excluded from SEC oversight.

This law changed in 2010 when President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) into law. The new law elimi-nated the �private advisor� exemption, forc-ing entities that had previously been exempt from oversight to register with the SEC.

When Dodd-Frank was �rst proposed, family of�ces recognized that the elimina-tion of the exemption could compel family of�ces to register with the SEC. In response, family of�ce representatives joined to form the Private Investor Coalition, which spear-headed a lobbying effort to establish a for-mal de�nition of the term �family of�ce.�

This lobbying effort succeeded in creat-ing a �family of�ce exemption� from SEC registration, although this exemption was

(G)-1)), family of�ces must meet certain SEC requirements to avoid being consid-ered an investment adviser. To meet these requirements, a family of�ce must (1) have no clients other than �family clients�; (2) be wholly owned by �family clients� and exclu-sively controlled (directly or indirectly) by one or more family members and/or family entities; and (3) not hold itself out to the public as an investment adviser.

The rule also delineates who may be con-sidered a permissible �family client.� The non-exhaustive list primarily comprises family members, former family members, and key employees. Subject to certain conditions, it can also include former key employees. A family of�ce is allowed to serve clients of non-pro�t or charitable organizations or estates of those members, if the organization or estate is funded exclu-sively by former or present family members and employees. Similarly, it can manage various trusts in which the trust is either controlled, conveyed, exclusively funded or has as an enumerated primary client a ben-e�ciary of the trust, and where a company is wholly owned and operated for the sole bene�t of family clients. The rule also allows certain family of�ces to be grandfathered in to avoid registration with the SEC.5

A family of�ce's legal needs do not begin and end with merely complying with regu-latory requirements. Numerous questions will arise in the formulation of a family of�ce, even with an SEC exemption, as to what is the appropriate legal entity sta-tus for a family of�ce. The choice of legal structure, whether it will be a partnership, a limited liability company (LLC), or a S Cor-poration, may have far-reaching tax impli-cations. Furthermore, complex issues can arise with respect to the needs and legalities of estate planning.

While family of�ces are often like a corpo-ration, the legal counsel has a responsibility to the family behind the family of�ce, since the family of�ce is only a vehicle to accomplish the family's goals. Hence, legal counsel is required to confront any issues a family of�ce faces with a critical eye to both the present and the future generations' possible goals.

This role is different from that of legal counsel to a regular corporation. In a regu-lar corporation, the goal is to maximize the return for shareholders, and shareholders can sell their shares if the return is not to their liking. In a family of�ce, the interested parties are family members for life. They cannot just simply sell their interests and cash out. Therefore, there is a far greater interplay of the con�icting interests of both the present and the future generations. Accordingly, a family of�ce can have more nuanced and complex legal concerns than a typical Fortune 500 corporation.

The demands of the family of�ce on its counsel will vary depending on the services it provides, which could include corporate work, intellectual property work, compli-ance, information governance, and assis-tance on mergers and acquisitions. Since family of�ces typically engage in direct investments, they will need legal advice on how to best perform legal and regulatory

the interests of family members from dif-ferent generations. All too often, this raises dif�cult questions about who, exactly, is the client, creating potential con�icts of interest for an attorney, particularly with respect to attorney-client privilege.

To learn more about family of�ces, join us at NYCLA's CLE on the topic, �Family Of�ces: A to Z about acting as legal counsel for a Family Of�ce� on April 21. Visit nycla.org to learn more and register.

E. David Smith, Esq., is outside general counsel for US-based companies and international entities focusing on positioning companies for growth

opportunities and mitigating risk. Combining his experience in corporate transactions, �nancing and governance, corporate litigation and intellectual property, he provides strategy and quarterbacks companies' and family of�ces' legal needs. As part of guiding his clients in the creation and growth of their wealth, he counsels clients in asset preservation.

Yitzy Nissenbaum, Esq.,is a practicing attorney in NY. He was formerly Of Counsel with Kirkland & Ellis and an Associate with Kenyon & Kenyon. He is an active

member in various NYCLA Committees, including the Federal Courts Committee and the Cyberspace Law Committee. He is also currently serving as a Chair of NYCLA's newly formed Lawyers in Transition Committee.

1 Family Of�ces�, Def. INVESTOPEDIA, available at http://www.investopedia.com/terms/f/family-of�ces.asp (last vis-ited February 5, 2015).

2 �Types of Family Of�ces, Seven Com-mon Models De�ned�, FAMILY OFFICE EXCHANGE, available at https://www.familyof�ce.com/understanding-family-of�ce/types-family-of�ces (last visited February 5, 2015).

3 See Julie Steinberg & Kelly Greene, Finan-cial Advice, Served Rare, WALL ST. J., May 17, 2013, http://www.wsj.com/articles/SB10001424127887323551004578441002331568618 (last visited February 5, 2015).

4 �Family Of�ce�, INVESTMENT ADVIS-ERS ACT RELEASE NO. 3220 (June 22, 2011), available at http://www.sec.gov/rules/�nal/2011/ia-3220.pdf (last visited February 5, 2015).

5 Id. 6 See E. David Smith, Make Sure your Direct Investments Float Your Boat, Don't Sink it, FAMILY OFFICE CAPITAL NETWORK (FOCAPNET), available at http://edslaw.net/wordpress/wp-content/uploads/2014/03/FOCAPNET-Make-Sure-Your-Direct-Investments-Float-Your-Boat-Dont-Sink-It.pdf (last visited February 5, 2015).

New Frontiers in Family Of�ces


Creating a Family Office—Pantheon Process: One of the core values in our office at

Billionaire Family Office and other related Wilson Holding Company operating businesses is

“Pantheon Thinking” which to us means thinking long-term over a generation of time about what

we are building, what value we are providing, and why we are investing energy into a project.

Below is the five-part process that we are using right now to help one of our family clients create

their single family office:

1. Listening & Needs Assessment (Estimated Time Needed—Two Weeks): Identify what

is known, expected, review past troubles, stories of others to emulate. Follow on active

dialogue to dig into issues deeper, explore and define priorities.

2. Family Office Compass Construction (Estimated Time Needed—One to Three

Months): Values, Mission, Objectives, Constraints, Governance, Ethics, Confidentiality,

Public Image, Life management, etc. (Active dialogue).

3. Resource & Talent Assessment (Estimated Time Needed—Two Weeks): Family Office

Construction Plan, Timeline & Budget, Advisory Board Construction & Missing

Professional Roles.

4. Implementation Phase (Estimated Time Needed—Two to Six Months).

5. Ongoing Operations, Processes, and Investment Decision Making Policies (Estimated

Time Needed—Ongoing).

Video: Here is one of the more popular videos that I recorded on

starting a family office:

http://SingleFamilyOffices.com/Startup

Family Office Location: Where your family office is located is

important and it can affect taxation, your level of hands-on management of your family office,

team, and steady access to industry talent and outsourcing firms.

While many families simply set up their single family office in

the location where their wealth was created, but some states are

less tax friendly to millionaires and billionaires. For this reason,

many single family offices are based or structured in places that

have lower taxes, such as Texas, Florida, and Nevada in the

United States. Abroad, favored destinations are London,

Bahamas, Puerto Rico, Monaco, Singapore, Switzerland, and the

Cayman Islands.

We have identified Florida as an especially attractive location

for many family offices, particularly Miami. The state has

established a pro-business climate and receptiveness to affluent

individuals, unlike some other states or locales that tax businesses, investments, and wealth


http://singlefamilyoffices.com/Startup/

http://singlefamilyoffices.com/startup/


excessively. There are a growing number of family offices establishing offices in Miami and

many large single and multi-family offices at least have one team member in Florida. In addition

to our New York City office, I personally have moved to Key Biscayne, an island community

just a few minutes from Miami.

In some places, such as the Cayman Islands, legal structures and representatives are all that is

tied to the location. But with most of the family living nearby, they may have changed their place

of residence to establish their single family office. In some cases, changing the location of the

family office could save enough money annually to operate the entire single family office.

Video: If you haven’t considered starting a virtual family office,

you may want to look into this. Here is a short video I recorded in

Berlin on Virtual Family Offices:

http://SingleFamilyOffices.com/Virtual

Accounting & Administration: While the CFO or CIO of most single family offices has some

form of accounting background, the accounting and administration work at many small to mid-

sized family offices is outsourced. The administration in a family office involves formal

reporting, value calculations, and distribution calculations for various members of the family.

Traditional accounting is more challenging for a family office than a typical business because of

illiquid assets such as: real estate, operating businesses, large public stock market investments,

hedge fund allocations, and venture capital or private equity commitments. Any of these illiquid

investments may pose valuation challenges and potential tax liabilities. Creating systems and

processes to accomplish this requires some powerful technology solutions.

Technology Solutions: Many family offices face significant IT expenses to cover accounting,

fund administration, reporting, aggregation of trading, overall portfolio risk vs returns tracking,

data room services, risk management, and inter-family or team communication. Aggregating

accounts and building custom reporting or accounting systems can become very costly. Many

family offices spend $20,000-$100,000 on technology and software each year, but larger ones

often spend over $200,000 annually.

Direct Investing & Operating Businesses: Our research indicates that more than 85% of single

family offices own operating businesses, and typically these holdings make up 40-75% of the

family’s net worth. One 6th generation family that I know has diversified their investments

across a dozen different industries, while others that I know only invest in certain industries like

commodity businesses, for example, because that is where they made their wealth initially.

While direct investing has always been a top priority for Asian and Middle Eastern families, it is

just now thriving as a core component of single family offices in the United States which in the

past had done direct investing, but also had trusted more in traditional private equity funds and

the public markets. We have included this area in a few chapters in this book because it is

critical that families who are newly ultra-wealthy or operating a single family office know how


http://singlefamilyoffices.com/Virtual

http://singlefamilyoffices.com/virtual/


other families manage their direct investments, operate these holdings, co-invest with other

families, and participate in club deals.

Investment Management: Traditional investment management covers a family’s investing

activities in publicly traded equities, cash equivalents, real estate, commodities, hard assets,

bonds, money market funds, REITS, mutual funds or ETFs, MLPs, and alternative investment

funds, such as private equity or hedge funds. Part Three of this book touches on these areas of

investment management in detail.

Risk Management: Every area of investment brings with it different types of risks. For each

type of investment (real estate, operating business, alternative investment fund, etc.), your risk

should be analyzed separately or classified so that the unique risks to that area can be assessed by

a professional who is familiar with the area. Families can manage risk by using seasoned

investment professionals, risk consultants, independent insurance advisors, and, to some degree,

their internal systems and real-time investment reporting. While forming your family office, you

will need to assess which types of risk are most prevalent given the investments you are making,

and what processes, professionals, and systems are in place to mitigate those risks. Managing

risk and protecting capital are the chief reasons why most family offices are established.

Insurance: By the time someone becomes ultra-wealthy, they typically have multiple types of

insurance in place. The goal of the single family office is to assess the technical coverage of the

insurance against the real risks that the individual or family faces. Many policies may have

overlapping coverage, exclusions, or technicalities that could be devastating for the client. The

types of insurance often used for families of exceptional wealth include personal and business

property, excess liability or umbrella policies, general liability, and life insurance. This list is not

comprehensive and an insurance professional with extensive experience in the field should be

consulted or hired in-house before making changes to coverage. The level of insurance will

depend on the operations, direct investments, liquidity of the family’s wealth, and

intergenerational considerations.

Philanthropy and Charitable Giving: Philanthropy can be a way to unite multiple generations

of a family, create good press for a business, and add meaning to an ultra-wealthy family’s work.

One client of mine explained to me that he didn’t need any more money for himself; he wouldn’t

even know what to do with it really. He simply works now to give more away every year to

children in need and that is what motivates him to make sure his businesses perform well now.

There is a lot of confusion and even conflict around the idea of giving away money that the

family has worked so hard to earn. The issues you may face include:

1. A lack of understanding by second and third generation family members, which may

lead to frustration, arguments within the family, and disappointment if someone feels

like they are not getting their expected “fair share.” Establishing your family’s core

values, objectives, and mission first will help avoid this type of trouble.



2. Being aware of the taxation rules and documentation procedures that apply to writing off

monetary donations to a non-profit or foundation administered by a family member.

3. Ensuring that there is some governance and process around how and when the money is

given away. Once these are set in place, you need to resolve how you deal with giving

opportunities which don’t fit within those procedures. A governance process should be

followed even when exceptions arise.

I grew up around my father advising ultra-wealthy individuals and non-profit hospitals and

universities on philanthropy. My father has raised over $1B for these groups through this

philanthropy advisory work and this led to an early appreciation for what goes into ensuring

donors are getting a positive ROI as well as transparency on their donated money.

Privacy & Control: While setting up a family office, the level of public exposure needs to be

decided early on in the process. Will the family have a public-facing website or will everything

be hidden behind a password-protected area online? Will staff have business cards, encouraged

to write books, allowed to attend conferences and speak at seminars, or will they even be allowed

to speak on the record in any way? If so, is there a process that they must follow regarding

certain non-disclosure rules? Many $1B+ single family offices have been quoted in this book,

speak at our events, and otherwise provide value publicly; but most of these executives have

little direct motivation to do so, as they can’t accept new clients even if they are approached by

them. Privacy policies regarding family matters should be set up from the beginning and

violations of these policies should be met with swift repercussions in order to set an example to

other team members. As I mentioned in my last book on family offices, many people in this

space like to operate on the theory that “a submerged whale does not get harpooned.” As a

number of families have learned, once a thread is revealed, a media professional will keep

pulling until he or she unravels a story. This might mean that the original story is blown out of

proportion or exaggerated in subsequent reports. Privacy controls and media relations processes

help to guard against these issues. One simple compromise is to create a holding company

which operates under The XYZ Single Family Office name instead of the family’s name to keep

the press and general public at arm’s length away from the actual family.

Security: Even families who primarily reside in the United States have a wide variety of

security measures in place, ranging from identify theft prevention, background checks, ex-

military drivers, random insurance, and bulletproof cars and bodyguards while traveling abroad.

Defining what these risks are, how much it would take to mitigate them, and how far the family

wants to go to improve their safety is something that should be discussed upfront. Often, this

important issue is glossed over by traditional wealth management firms and private banks.

Press & Public Relations: From the beginning, it should be decided

what public relations and press goals exist. As we discussed in the

previous chapter, a family’s PR needs depend greatly on their investing

and personal activities. Does the family want to stay 100% below-the-



radar, or use their foundation and philanthropic activities to shed a positive light on the family

and connect commercial enterprises?

Some families may want to capture their legacy within a book and video format to help carry on

their message to future generations or the general public. Many families shy away from

attention, but don’t often have an open discussion of the trade-offs involved in adopting a public

vs. private strategy.

Concierge Services & Lifestyle Management: Many single family offices have the side

benefit of helping leverage the patriarch or entire family with

lifestyle and concierge services. These services can include

assistance with purchasing concert tickets, chartering a helicopter or

private plane, ordering a wedding dress, renting a car, or simply

planning a trip.

These services could also involve interviewing potential nannies

for a child, visiting prospective private schools and evaluating them, or helping manage the

family’s calendar and activities. Most multi-family offices shy away from offering any

concierge services because they are afraid of losing a $100 million account over ordering the

wrong wedding dress, but this is a significant benefit of having a single family office.

Strategic Partners & Outsourcing Solutions: Many entrepreneurs are thrifty at heart; they

don’t want to spend too much money on an area like an accounting department if they don’t feel

that is their strength. This thriftiness and the hope that a lean single family office can be created

drive many organizations to refer their investment work to an outsourced chief investment

officer service or investment consultant. This allows the family office to focus their energy

exclusively on those few industries that they feel like they have a strategic advantage in, such as

real estate, commodity investments, or industry-specific operating businesses.

The desire for an internal focus on core competencies has led to a major trend of outsourcing

many areas of a single family office and dozens of options exist for those who wish to do so.

The number one strategic priority in this first phase of setting up a single family office should be

in creating the strongest brain trust possible for the family.

Scenario Planning: While deciding what expertise you need on your board and core team, think

through the top five to seven most likely and extreme scenarios and how you would react to each

of them. These scenarios could include another Great Recession, death of the patriarch or

matriarch, a lawsuit, a change in industry norms, and other undesirable events. If you agree on

what these scenarios are, write out a series of step-by-step instructions and assign the power for

someone to carry those out in case the situation ever arises. You will then be able to identify

which experts are still missing from the advisory board or core team. This type of scenario

planning activity can create an improved sense of comfort for the wealth creator.



Critical Questions: Anyone that recommends a type of family office that you should create

before at least asking many of the questions provided to you below as a minimum starting point

may not understand your personal goals, values, and objectives. The following should serve as a

starting point for getting down to the core needs of your single family office:

Information Gathering:

1. How did you first hear about family offices, single family offices, and what is your

understanding of what a single family office is and isn’t?

2. What form of a single family office or wealth management solution do you have in place

right now?

3. What has been your experience with this current solution and past ones that were in place

before it?

4. Why do you want to form a single family office?

5. Are there a few single family offices or ultra-wealthy individuals that you have heard of

or would like to emulate in the creation of your family office?

6. What are your top two fears in setting up a single family office; what do you want to

avoid at all costs?

7. What is more important to you, capital preservation, growth of wealth, taxation, or

income?

8. Which of these items is most important to you in managing your non-operating-business

investible assets: peace of mind with light oversight, active involvement, extreme

diversification, or focused industry investments in areas that you understand?

9. Can you provide us access to your balance sheet, financial reports, estate plans, and other

financial details so that we can put together a high-level view of your finances?

10. Who are your most trusted advisors?

11. If not already mentioned, who do you trust most in the areas of wealth management,

taxation, real estate, direct investments, and trust & estate planning?

12. Which of your advisors do you need to replace, and which are good but not great?

13. Is there an advisor or two so excellent that a second opinion to make sure everything is

set up right legally, operating effectively, and insured to the right levels would not be

needed?

14. What pieces of wealth management and asset protection do you have in place that you

would want to keep going forward?

15. What insurance policies do you current have, and what assets are these protecting?



16. What is your total liquid and illiquid net worth and where is that money invested right

now?

17. What types of legal structures do you have set up around your assets, real estate, public

market, land, business, joint venture, co-investment, and other types?

18. What level of retirement planning and asset protection strategies do you have in place

now or would like to have in place?

19. What is your investment risk appetite?

20. What are your income needs annually for you and your extended family?

Digging in with Deeper Questions

1. Is it most important to be quick, or lean, or have ultimate control and transparency on

decisions and the investment portfolio? This mindset going into these deeper questions is

important, as every option has a trade-off.

2. Do you want to keep a low profile or be a high profile single family office that attracts

attention and as a result, deal flow as well? How will you “fly under the radar” and keep

a low profile if that is what you want to achieve?

3. What type of day-to-day control, management, and decision-making responsibilities do

you want for yourself?

4. To what degree do you want to rely on family members for core family office positions

such as CEO, CIO, Portfolio Manager, etc.?

5. What is your annual budget for operating the single family office operations?

6. How are investments being structured?

7. How will you set up legal structures and investments so that multi-generations are being

considered or planned for in each case? Or is that even important to you and your family

right now?

8. How will you insert the perspective and opinion of your tax advisor into every investment

move you make, so mistakes aren’t made on investments, purchases, location decisions,

etc.?

9. Where are your personal and business assets located now, and what possible locations

would you want to have an office or team in, vs. your personal residence?

10. How will complex assets be managed, such as sports teams, commercial real estate,

boats, vacation houses, bullion, etc.?

11. Have you spoken to an attorney on where to domicile your assets, and have you

considered that being different from where your team is based?



12. Who is going to be on your advisory board and investment committee and how often do

you plan on having those two groups meet?

13. How will charitable giving decisions be made?

14. Will someone be in charge of family concierge services, such as family trip planning, car

rentals & purchases, etc.?

15. Are you going to set up a family bank of some type, and are intra-family loans provided

if certain terms are agreed to?

16. What powers and real decision-making authority will the CEO or President of the single

family office have, particularly if that person is not going to be you?

17. What will be the scope of investments for the organization—will you only invest in one

industry, diversify into all types of hedge funds, CTA funds, private equity funds, real

estate, etc.?

18. How strategic vs. tactical do you want to be with your investments? Do you want to have

two investment committees—one that is strategic and meets monthly and one that is

tactical and meets weekly and can meet on-demand intra-day as needed?

19. What is the investment mandate and priorities, how much income is needed to be

produced monthly, how important is holding cash, preserving capital, investing globally,

etc.?

20. How will you set up governance for the single family office? Who will be able to hire

service providers, fund managers, etc. in a way that ensures favors aren’t being done for

college friends, or family members of employees or your own family, to the detriment of

the investment portfolio.

21. What types of insurance, security, and risk mitigation solutions do you need in place for

your organization and family overall?

22. How will you define success for your single family office?

Implementation Questions

1. By what date would you like the single family office to launch and be baseline

operational?

2. Who is going to be the project manager in charge of this single family office launch to

make sure that bottlenecks are taken care of, and details are managed along the way?

3. What do you foresee as the top three challenges in getting launched? Here is a hint,

identifying and recruiting talent, and deciding on legal domicile/residence location can

both slow things down by an entire year or more in some cases.

4. What is needed to get operational vs. fully launched and operating in a more robust long-

term established manner?



5. What daily, week, and monthly things need to happen like clockwork in the single family

office to operate at full steam? Who needs to create what report, what systems are

needed, what daily meetings, payroll processing, portfolio reviews, etc.? Create an

operational binder for the single family office which answers this question.

Family Office Startup Checklist: The following is a high-level list of things which you should

consider having in place while forming a single family office. This list is not exhaustive, and

would need some customization for each family’s unique needs and goals, but it should help

guide the process.

A Family Compass document has been created to ensure that from the beginning, the

vision, objectives, goals, values, mission, and history of the family has been documented

and incorporated into the investing and operating plans of the single family office.

An operating plan on how day-to-day activities are carried out within the single family

office has been established. A binder has been created which documents each of the Key

Performance Indicators and critical processes to ensure the family office is operating as it

should.

Financial controls are in place to prevent embezzlement, unauthorized investments, and

style drift within an investment portfolio.

A core team has been identified and one individual has been appointed as the single

family office CEO and/or CIO to act as the key executive making operational and/or

investment decisions.

Ethics and governance policies have been established to set out expectations for how

personnel decisions are made, who can use family assets for personal benefit, how

conflicts of interest should be managed, and what ethical obligations each family member

is under.

Legal structures set up properly for real estate holdings, operating businesses,

investments, etc. Legal counsel has reviewed the entities to ensure that if one goes

bankrupt or gets sued that it would not take down the entire family empire.

Independent insurance professionals have been consulted who are not on commission to

sell you more insurance to ensure proper coverage.

Contingency plans for death, disasters, divorces, etc. how adaptations to breaking up the

larger family office or changing family goals/values will be dealt with, etc.

A diverse advisory board and investment committee have been established with policies

on how they operate and help oversee governance issues within the single family office.


1

U.S. COMMODITY FUTURES TRADING COMMISSION Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581 Telephone: (202) 418-5977 Facsimile: (202) 418-5407

[email protected]

Division of Swap Dealer and Intermediary Oversight

Gary Barnett Director

CFTC Letter No. 12-37

No-Action

November 29, 2012

Division of Swap Dealer and Intermediary Oversight

Re: Family Offices

This letter is in response to written correspondence to and telephonic conversations with

(together, “the Correspondence”) Division of Swap Dealer and Intermediary Oversight ( the

“Division”) requesting that the Division address the rescission of Regulation 4.13(a)(4)1 through

the adoption of relief for certain family offices from Part 4 of the Commission’s Regulations.

A family office is, generally, a professional organization that is wholly-owned by clients

in a family and is exclusively controlled (directly or indirectly) by one or more members of a

family and/or entities controlled by a family. Typically, a family office structure is employed

when one or more direct members of a family create substantial wealth, and share that wealth in

whole or in part with other members of that family, either through direct transfer, inheritance, or

similar means. The family office is then used to provide personalized services to that family,

including advice regarding issues of tax, estate planning, investment, and charitable giving.

In February 2012, the Commission promulgated certain amendments to Part 4 of the

Commission’s Regulations.2 Notable, and at issue here, is the rescission of Regulation

4.13(a)(4), which had previously exempted from registration3 Commodity Pool Operators

(“CPOs”) who, inter alia, operated a pool for only those individuals who met a certain “qualified

eligible person” standard.4 In general, family offices relied on Regulation 4.13(a)(4) as an

exemption from registration. Pursuant to these recent amendments, absent affirmative relief,

many family offices would be required to register with the Commission as a CPO.

The Correspondence asserts generally, that family offices are not operations of the type

and nature that warrant regulatory oversight by the Commission. That is, because a family office

is comprised of participants with close relationships, and there is a direct relationship between

1 See, “Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations,”

77 FR 11252 (Feb. 24, 2012); correction 77 FR 17328 (March 26, 2012). 2 Id.

3 In addition to an exemption from registration as a commodity pool operator, 4.13(a)(4) functionally relieved such

commodity pool operators from the disclosure and compliance requirements of the Commission’s Regulations. 4 The “qualified eligible person” standard is comprised primarily of criteria based on assets owned by an individual

or entity.

Family Offices

Page 2

the clients and the adviser, such relationships greatly reduce the need for the customer

protections available pursuant to Part 4 of the Commission’s Regulations. Importantly, as a

function of these relationships, any disputes that arise between any of the family members

concerning the operation of the family office could be resolved within that family unit, or

through state courts under laws designed to resolve such family disputes.5

Further, it has been suggested that this issue has similarly been addressed by the

Securities and Exchange Commission (“SEC”), which resulted in an exclusion for family offices

that would otherwise be required to register as an investment adviser.6 The Division notes that

the SEC has devoted substantial time and resources to addressing this issue. Further, the

Division observes that the fundamental issue of the appropriate application of investor protection

standards as required by each respective agency’s regulations is substantially similar in the issue

at hand. The Division further notes that placing both agencies on equal footing with respect to

the application of investor protections relevant to this issue will facilitate compliance with both

regulatory regimes.

Based on the foregoing, the Division will not recommend that the Commission take an

enforcement action for failure to register with the Commission as a CPO against a CPO that is a

Family Office within the meaning and intent of 17 CFR § 275.202(a)(11)(G)-1, as amended,

provided that the CPO complies with the following requirements.

Family Office No-Action

The Division will not recommend enforcement action for failure to register with the

Commission as a CPO against any CPO that is a Family Office as defined by the SEC, provided

that the CPO (i) submits a claim to take advantage of the relief, and (ii) remains in compliance

with § 275.202(a)(11)(G)-1, as amended, regardless of whether the CPO seeks to be excluded

from the Investment Advisers Act of 1940.

Claim of No-Action Relief

This relief is not self-executing. Rather, an eligible CPO must file a claim to perfect the

relief. A claim submitted by a CPO will be effective upon filing, so long as the claim is

complete.

Specifically, the claim of no-action relief must:

a. State the name, main business address, and main business telephone number of

the CPO claiming the relief;

5 This rationale is also noted in the adopting release of the SEC’s family office exclusion. See, Family Offices; Final

Rule 76 FR 37983 at 37984 (June 29, 2011). 6 Id. The Division notes that the SEC rule explicitly does not apply to “multifamily offices,” which are family

offices serving multiple families. Id. at 37991. Accordingly, the relief in this letter does not extend to multifamily

offices.

Family Offices

Page 3

b. State the capacity (i.e., CPO) and, where applicable, the name of the pool(s), for

which the claim is being filed;

c. Be electronically signed by the CPO; and

d. Be filed with the Division using the email address [email protected] with the

subject line of such email as “Family Office” prior to December 31, 2012 (for a

Family Office in operation as of December 1, 2012) or, for a Family Office that

begins to operate after December 1, 2012, within 30 days after it begins to operate

as a Family Office.

Further, prior to March 31, 2013 (or, for a Family Office that begins to operate after that

date, within 30 days after it begins to operate as a Family Office), it must confirm that the CPO

is a Family Office within the meaning and intent of 17 CFR § 275.202(a)(11)(G)-1, and that the

CPO will notify the Division if it is no longer a Family Office within the meaning and intent of

such regulation.

The no-action relief provided herein contains a collection of information, as that term is

defined in the Paperwork Reduction Act.7 Therefore, a control number for the collection must be

obtained from the Office of Management and Budget. In accordance with 44 U.S.C. § 3507(d)

and 5 C.F.R. §§ 1320.8 and 1320.10, the Division will, by separate action, prepare an

information collection request for review and approval by OMB, and will publish in the Federal

Register a notice and request for public comments on the collection burdens associated with the

no-action relief. If approved, a family office may not rely on the Division's determination not to

recommend an enforcement action to the Commission unless the vehicle provides the

information the Division has determined is essential to the provision of no-action relief.

In granting CPOs the relief described herein, the Division seeks to strike the appropriate

balance between the Commission’s regulatory objectives and addressing the public concerns of

Family Offices and family clients. As such, the Division believes that not recommending

enforcement action will address these concerns.

This letter, and the positions taken herein, represent the view of this Division only, and

do not necessarily represent the position or view of the Commission or of any other office or

division of the Commission. The relief issued by this letter does not excuse the affected persons

from compliance with any other applicable requirements contained in the Act or in the

Commission’s regulations issued thereunder. For example, affected persons remain subject to all

antifraud provisions of the Act. Further, this letter, and the relief contained herein, is based upon

the representations made to the Division. Any different, changed or omitted material facts or

circumstances might render this letter void.

7 44 U.S.C. § § 3501 et. seq.

Family Offices

Page 4

Should you have any questions, please do not hesitate to contact Amanda Olear, Special

Counsel, at 202-418-5283 or Michael Ehrstein, Attorney-Advisor, at 202-418-5957.

Very truly yours,

Gary Barnett

Director,

Division of Swap Dealer

and Intermediary Oversight

cc: Regina Thoele, Compliance

National Futures Association, Chicago

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 13F

OMB APPROVAL OMB Number: 3235-0006 Expires: b July 31, 2015Estimated average burden hours per response. . . . . .23.8

INFORMATION REQUIRED OF INSTITUTIONAL INVESTMENT MANAGERS PURSUANT TO SECTION 13(f) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULES THEREUNDER

GENERAL INSTRUCTIONS

1. Rule as to Use of Form 13F. Institutional investment managers (“Managers”) must use Form 13F for reports to the Commission required by Section 13(f) of the Securities Exchange Act of 1934 [15 U.S.C. 78m(f)] (“Exchange Act”) and rule 13f-1 [17 CFR 240.13f-1] thereunder. Rule 13f-1(a) provides that every Manager which exercises investment discretion with respect to accounts holding Section 13(f) securities, as defined in rule 13f-1(c), having an aggregate fair market value on the last trading day of any month of any calendar year of at least $100,000,000 shall file a report on Form 13F with the Commission within 45 days after the last day of such calendar year and within 45 days after the last day of each of the first three calendar quarters of the subsequent calendar year.

2. Rules to Prevent Duplicative Reporting. If two or more Managers, each of which is required by rule 13f-1 to file a report on Form 13F for the reporting period, exercise investment discretion with respect to the same securities, only one such Manager must include information regarding such securities in its reports on Form 13F .

A Manager having securities over which it exercises investment discretion that are reported by another Manager (or Managers) must identify the Manager(s) reporting on its behalf in the manner described in Special Instruction 6.

A Manager reporting holdings subject to shared investment discretion must identify the other Manager(s) with respect to which the filing is made in the manner described in Special Instruction 8.

3. Filing of Form 13F. A Manager must file a Form 13F report with the Commission within 45 days after the end of each calendar year and each of the first three calendar quarters of each calendar year. As required by Section 13(f)(5) of the Exchange Act, a Manager which is a bank, the deposits of which are insured in accordance with the Federal Deposit Insurance Act, must file with the appropriate regulatory agency for the bank a copy of every Form 13F report filed with the Commission pursuant to this subsection by or with respect to such bank. Filers who file Form 13F electronically can satisfy their obligation to file with other regulatory agencies by sending (a) a paper copy of the EDGAR filing (provided the Manager removes or blanks out the confidential access codes); (b) the filing in electronic format, if the regulatory agency with which the filing is being made has made provisions to receive filings in electronic format; or (c) for filers filing in paper format under continuing hardship exemptions, a copy of the Form 13F paper filing.

4. Official List of Section 13(f) Securities. The official list of Section 13(f) Securities published by the Commission (the “13F List”) lists the securities the holdings of which a Manager is to report on Form 13F. See rule 13f-1(c) [17 CFR 240.13f-1(c)]. Form 13F filers may rely on the current 13F List in determining whether they need to report any particular securities holding. The current 13F List is available on www.sec.gov/divisions/investment/13flists.htm. The 13F List is updated quarterly.

INSTRUCTIONS FOR CONFIDENTIAL TREATMENT REQUESTS

Pursuant to Section 13(f)(4) of the Exchange Act [15 U.S.C. 78m(f)( 4)], the Commission (1) may prevent or delay public disclosure of information reported on this form in accordance with Section 552 of Title 5 of the United States Code, the Freedom of Information Act [5 U.S.C. 552], and (2) shall not disclose information reported on this form identifying securities held by the account of a natural person or an estate or trust (other than a business trust or investment company). A Manager must submit in accordance with the procedures for requesting confidential treatment any portion of a report which contains information identifying securities held by the account of a natural person or an estate or trust (other than a business trust or investment company).

Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control SEC 1685 (1-12) number.

A Manager should make requests for confidential treatment of information reported on this form in accordance with rule 24b-2 under the Exchange Act [17 CFR 240.24b-2]. Requests relating to the non-disclosure of information identifying the securities held by the account of a natural person or an estate or trust (other than a business trust or investment company) must so state but need not, in complying with paragraph (b)(2)(ii) of rule 24b-2, include an analysis of any applicable exemptions from disclosure under the Commission’s rules and regulations adopted under the Freedom of Information Act [17 CFR 200.80].

Paragraph (b) of rule 24b-2 requires a Manager filing confidential information with the Commission to indicate at the appropriate place in the public filing that the confidential portion has been so omitted and filed separately with the Commission. A Manager should comply with this provision by including on the Summary Page, after the Report Summary and prior to the List of Other Included Managers, a statement that confidential information has been omitted from the public Form 13F report and filed separately with the Commission.

AManager must file in paper, in accordance with rule 101(c)(1)(i) of Regulation S-T [17 CFR 232.101(c)(1)(i)], all requests for and information subject to the request for confidential treatment filed pursuant to Section 13(f)(4) of the Exchange Act. If a Manager requests confidential treatment with respect to information required to be reported on Form 13F, the Manager must file in paper with the Secretary of the Commission an original and four copies of the Form 13F reporting information for which the Manager requests confidential treatment.

AManager requesting confidential treatment must provide enough factual support for its request to enable the Commission to make an informed judgment as to the merits of the request. The request should address all pertinent factors, including all of the following that are relevant:

1. If confidential treatment is requested as to more than one holding of securities, discuss each holding separately unless the Manager can identify a class or classes of holdings as to which the nature of the factual circumstances and the legal analysis are substantially the same.

2. If a request for confidential treatment is based upon a claim that the subject information is confidential, commercial or financial information, provide the information required by paragraphs 2.a through 2.e of this Instruction except that, if the subject information concerns security holdings that represent open risk arbitrage positions and no previous requests for confidential treatment of those holdings have been made, the Manager need provide only the information required in paragraph 2.f.

a. Describe the investment strategy being followed with respect to the relevant securities holdings, including the extent of any program of acquisition and disposition (note that the term “investment strategy,” as used in this instruction, also includes activities such as block positioning).

b. Explain why public disclosure of the securities would, in fact, be likely to reveal the investment strategy; consider this matter in light of the specific reporting requirements of Form 13F (e.g., securities holdings are reported only quarterly and may be aggregated in many cases).

c. Demonstrate that such revelation of an investment strategy would be premature; indicate whether the Manager was engaged in a program of acquisition or disposition of the security both at the end of the quarter and at the time of the filing; and address whether the existence of such a program may otherwise be known to the public.

d. Demonstrate that failure to grant the request for confidential treatment would be likely to cause substantial harm to the Manager’s competitive position; show what use competitors could make of the information and how harm to the Manager could ensue.

e. State the period of time for which confidential treatment of the securities holdings is requested. The time period specified may not exceed one (1) year from the date that the Manager is required to file the Form 13F report with the Commission.

f. For securities holdings that represent open risk arbitrage positions, the request must include good faith representations that:

2

i. the securities holding represents a risk arbitrage position open on the last day of the period for which the Form 13F report is filed; and

ii. the reporting Manager has a reasonable belief as of the period end that it may not close the entire position on or before the date that the Manager is required to file the Form 13F report with the Commission.

If the Manager makes these representations in writing at the time that the Form 13F is filed, the Commission will automatically accord the subject securities holdings confidential treatment for a period of up to one (1) year from the date that the Manager is required to file the Form 13F report with the Commission.

g. At the expiration of the period for which confidential treatment has been granted pursuant to paragraph 2.e or 2.f of this Instruction (the “Expiration Date”), the Commission, without additional notice to the reporting manager, will make such security holdings public unless a de novo request for confidential treatment of the information that meets the requirements of paragraphs 2.a through 2.e of this Instruction is filed with the Commission at least fourteen (14) days in advance of the Expiration Date.

3. If the Commission grants a request for confidential treatment, it may delete details which would identify the Manager and use the information in tabulations required by Section 13(f)(4) absent a separate showing that such use of information could be harmful.

4. Upon thedenialby theCommissionofa request forconfidential treatment, orupon theexpirationof theconfidential treatment previously granted for a filing, unless a hardship exemption is available, the Manager must submit electronically, within six (6) business days of the expiration or notification of the denial, as applicable, a Form 13F report, or an amendment to its publicly filed Form 13F report, if applicable, listing those holdings as to which the Commission denied confidential treatment or for which confidential treatment has expired. If a Manager files an amendment, the amendment must not be a restatement; the Manager must designate it as an amendment which adds new holdings entries. The Manager must include at the top of the Form 13F Cover Page the following legend to correctly designate the type of filing being made:

THIS FILING LISTS SECURITIES HOLDINGS REPORTED ON THE FORM 13F FILED ON (DATE) PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FOR WHICH (THAT REQUEST WAS DENIED/CONFIDENTIAL TREATMENT EXPIRED) ON (DATE).

SPECIAL INSTRUCTIONS

1. This form consists of three parts: the Form 13F Cover Page (the “Cover Page”), the Form 13F Summary Page (the “Summary Page”), and the Form 13F Information Table (the “Information Table”).

2. When preparing the report, omit all bracketed text. Include brackets used to form check boxes.

The Cover Page:

3. The period end date used in the report (and in the EDGAR submission header) is the last day of the calendar year or quarter, as appropriate, even though that date may not be the same as the date used for valuation in accordance with Special Instruction 9.

4. Amendments to a Form 13F report must either restate the Form 13F report in its entirety or include only holdings entries that are being reported in addition to those already reported in a current public Form 13F report for the same period. If the Manager is filing the Form 13F report as an amendment, then, the Manager must check the amendment box on the Cover Page; enter the amendment number; and check the appropriate box to indicate whether the amendment (a) is a restatement or (b) adds new holdings entries. Each amendment must include a complete Cover Page and, if applicable, a Summary Page and Information Table. See rule 13f-1(a)(2) [17 CFR 240.13f-1(a)(2)].

5. Present the Cover Page and the Summary Page information in the format and order provided in the form. The Cover Page may include information in addition to the required information, so long as the additional information does not, either by its nature, quantity, or manner of presentation, impede the understanding or presentation of the required information. Place all additional information after the signature of the person signing the report (immediately preceding the Report Type section). Do not include any additional information on the Summary Page or in the Information Table.

3

6. Designate the Report Type for the Form 13F report by checking the appropriate box in the Report Type section of the Cover Page, and include, where applicable, the List of Other Managers Reporting for this Manager (on the Cover Page), the Summary Page and the Information Table, as follows:

a. If all of the securities with respect to which a Manager has investment discretion are reported by another Manager (or Managers), check the box for Report Type “13F NOTICE,” include (on the Cover Page) the List of Other Managers Reporting for this Manager, and omit both the Summary Page and the Information Table.

b. If all of the securities with respect to which a Manager has investment discretion are reported in this report, check the box for Report Type “13F HOLDINGS REPORT,” omit from the Cover Page the List of Other Managers Reporting for this Manager, and include both the Summary Page and the Information Table.

c. If only part of the securities with respect to which a Manager has investment discretion is reported by another Manager (or Managers), check the box for Report Type “13F COMBINATION REPORT,” include (on the Cover Page) the List of Other Managers Reporting for this Manager, and include both the Summary Page and the Information Table.

Summary Page:

7. Include on the Summary Page the Report Summary, containing the Number of Other Included Managers, the Information Table Entry Total and the Information Table Value Total.

a. Enter as the Number of Other Included Managers the total number of other Managers listed in the List of Other Included Managers on the Summary Page, not counting the Manager filing this report. See Special Instruction 8. If none, enter the number zero (“0”).

b. Enter as the Information Table Entry Total the total number of line entries providing holdings information included in the Information Table.

c. Enter as the Information Table Value Total the aggregate fair market value of all holdings reported in this report, i.e., the total for Column 4 (Fair Market Value) of all line entries in the Information Table. The Manager must express this total as a rounded figure, corresponding to the individual Column 4 entries in the Information Table. See Special Instruction 9.

8. Include on the Summary Page the List of Other Included Managers. Use the title, column headings and format provided.

a. If this Form 13F report does not report the holdings of any Manager other than the Manager filing this report, enter the word “NONE” under the title and omit the column headings and list entries.

b. If this Form 13F report reports the holdings of one or more Managers other than the Manager filing this report, enter in the List of Other Included Managers all such Managers together with their respective Form 13F file numbers, if known. (The Form 13F file numbers are assigned to Managers when they file their first Form 13F.) Assign a number to each Manager in the List of Other Included Managers, and present the list in sequential order. The numbers need not be consecutive. The List of Other Managers must include all other Managers identified in Column 7 of the Information Table. Do not include the Manager filing this report.

Information Table:

9. In determining fair market value, use the value at the close of trading on the last trading day of the calendar year or quarter, as appropriate. Enter values rounded to the nearest one thousand dollars (with “000” omitted).

10. A Manager may omit holdings otherwise reportable if the Manager holds, on the period end date, fewer than 10,000 shares (or less than $200,000 principal amount in the case of convertible debt securities) and less than $200,000 aggregate fair market value (and option holdings to purchase only such amounts).

11. A Manager must report holdings of options only if the options themselves are Section 13(f) securities. For purposes of the $100,000,000 reporting threshold, the Manager should consider only the value of such options, not the value of the

4

underlying shares. The Manager must give the entries in Columns 1 through 5 and in Columns 7 and 8 of the Information Table, however, in terms of the securities underlying the options, not the options themselves. The Manager must answer Column 6 in terms of the discretion to exercise the option. The Manager must make a separate segregation in respect of securities underlying options for entries for each of the columns, coupled with a designation “PUT” or “CALL” following such segregated entries in Column 5, referring to securities subject respectively to put and call options. A Manager is not required to provide an entry in Column 8 for securities subject to reported call options.

12. Furnish the Information Table using the table title, column headings and format provided. Provide column headings once at the beginning of the Information Table; repetition of column headings on subsequent pages is not required. Present the table in accordance with the column instructions provided in Special Instructions 12.b.i through 12.b.viii. Do not include any additional information in the Information Table. Begin the Information Table on a new page; do not include any portion of the Information Table on either the Cover Page or the Summary Page.

a. In entering information in Columns 4 through 8 of the Information Table, list securities of the same issuer and class with respect to which the Manager exercises sole investment discretion separately from those with respect to which investment discretion is shared. Special Instruction 12.b.vi for Column 6 describes in detail how to report shared investment discretion.

b. Instructions for each column in the Information Table:

i. Column 1. Name of Issuer. Enter in Column 1 the name of the issuer for each class of security reported as it appears in the current official list of Section 13(f) Securities published by the Commission in accordance with rule 13f-1(c) (the “13F List”). Reasonable abbreviations are permitted.

ii. Column 2. Title of Class. Enter in Column 2 the title of the class of the security reported as it appears in the 13F List. Reasonable abbreviations are permitted.

iii. Column 3. CUSIP Number. Enter in Column 3 the nine (9) digit CUSIP number of the security.

iv. Column 4. Market Value. Enter in Column 4 the market value of the holding of the particular class of security as prescribed by Special Instruction 9.

v. Column 5. Amount and Type of Security. Enter in Column 5 the total number of shares of the class of security or the principal amount of such class. Use the abbreviation “SH” to designate shares and “PRN” to designate principal amount. If the holdings being reported are put or call options, enter the designation “PUT” or “CALL,” as appropriate.

vi. Column 6. Investment Discretion. Segregate the holdings of securities of a class according to the nature of the investment discretion held by the Manager. Designate investment discretion as “sole” (SOLE); “shared-defined” (DEFINED); or “shared-other” (OTHER), as described below:

(A) Sole. Designate as “sole” securities over which the Manager exercised sole investment discretion. Report “sole” securities on one line. Enter the word SOLE in Column 6.

(B) Shared-Defined. If investment discretion is shared with controlling and controlled companies (such as bank holding companies and their subsidiaries); investment advisers and investment companies advised by those advisers; or insurance companies and their separate accounts, then designate investment discretion as “shared-defined” (DEFINED).

For each holding of DEFINED securities, segregate the securities into two categories: those securities over which investment discretion is shared with another Manager or Managers on whose behalf this Form 13F report is being filed, and those securities over which investment discretion is shared with any other person, other than a Manager on whose behalf this Form 13F report is being filed.

Enter each of the two segregations of DEFINED securities holdings on a separate line, and enter the designation DEFINED in Column 6. See Special Instruction vii for Column 7.

5

(C) Shared-Other. Designate as “shared-other” securities (OTHER) those over which investment discretion is shared in a manner other than that described in Special Instruction (B) above.

For each holding of OTHER securities, segregate the securities into two categories: those securities over which investment discretion is shared with another Manager or Managers on whose behalf this Form 13F report is being filed, and those securities over which investment discretion is shared with any other person, other than a Manager on whose behalf this Form 13F report is being filed.

Enter each segregation of OTHER securities holdings on a separate line, and enter the designation “OTHER” in Column 6. See Special Instruction vii for Column 7.

NOTE: A Manager is deemed to share discretion with respect to all accounts over which any person under its control exercises discretion. A Manager of an institutional account, such as a pension fund or investment company, is not deemed to share discretion with the institution unless the institution actually participated in the investment decision-making.

vii. Column 7. Other Managers. Identify each other Manager on whose behalf this Form 13F report is being filed with whom investment discretion is shared as to any reported holding by entering in this column the number assigned to the Manager in the List of Other Included Managers.

Enter this number in Column 7 opposite the segregated entries in Columns 4, 5 and 8 (and the relevant indication of shared discretion set forth in Column 6) as required by the preceding special instruction. Enter no other names or numbers in Column 7.

A Manager must report the conditions of sharing discretion with other Managers consistently for all holdings reported on a single line.

viii. Column 8. Voting Authority. Enter the number of shares for which the Manager exercises sole, shared, or no voting authority (none) in this column, as appropriate.

The Commission deems a Manager exercising sole voting authority over specified “routine” matters, and no authority to vote in “non-routine” matters, for purposes of this Form 13F report to have no voting authority. “Non-routine” matters include a contested election of directors, a merger, a sale of substantially all the assets, a change in the articles of incorporation affecting the rights of shareholders, and a change in fundamental investment policy; “routine” matters include selection of an accountant, uncontested election of directors, and approval of an annual report.

If voting authority is shared only in a manner similar to a sharing of investment discretion which would call for a response of “shared-defined” (DEFINED) under Column 6, a Manager should report voting authority as sole under subdivision (a) of Column 8, even though the Manager may be deemed to share investment discretion with that person under Special Instruction 12.b.vi.

13. Preparation of the electronic filing:

a. No line on the Cover Page or the Summary Page may exceed 80 characters in length. See rule 305 of Regulation S-T [17 CFR 232.305]

b. No line in the Form 13F Information Table may exceed 132 characters in length. See rule 305 of Regulation S-T [17 CFR 232.305].

c. If the Form 13F Report Type is “13F HOLDINGS REPORT” or “13F COMBINATION REPORT,” then place one EDGAR <PAGE> tag at the end of the Cover Page and one <PAGE> tag at the end of the Summary Page. Additional EDGAR <PAGE> tags are not required. Those electing to include additional <PAGE> tags should, for each page containing a <PAGE> tag, include no more than sixty (60) lines per page, including the line on which the <PAGE> tag is placed.

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d. In preparing the Form 13F report for electronic filing, a Manager may omit underscoring used in the form to indicate the placement of information that the Manager is to furnish.

e. Use the following EDGAR submission types for the following Form 13F Report Types:

Form 13F Report Type EDGAR Submission Type

13F HOLDINGS REPORT Initial Filing 13F-HR Amendments 13F-HR/A

13F NOTICE Initial Filing 13F-NT Amendments 13F-NT/A

13F COMBINATION REPORT Initial Filing 13F-HR Amendments 13F-HR/A

PAPERWORK REDUCTION ACT INFORMATION

Persons who are to respond to the collection of information contained in this form are not required to respond to the collection of information unless the form displays a currently valid OMB control number.

Section 13(f) of the Exchange Act requires the Commission to adopt rules creating a reporting and disclosure system to collect specific information and to disseminate such information to the public. Rule 13f-1 under the Exchange Act (17 CFR 240.13f-1) requires institutional investmentmanagerswhoexercise investmentdiscretionovercertainaccountsofequity securities described in Section 13(d)(1) of the Exchange Act [15 U.S.C. 78m(d)(1)] (generally, certain U.S. exchange-traded equity securities, as set forth in rule 13f-1(c)) having, in the aggregate, a fair market value of at least $100,000,000 to file quarterly reports with the Commission on Form 13F with respect to the value of those securities over which they have investment discretion. The purpose of Form 13F is to provide a reporting and disclosure system to collect specific information and to disseminate such information to the public about the holdings of institutional investment managers who exercise investment discretion over certain accounts of equity securities described in Section 13(d)(1) of the Exchange Act [15 U.S.C. 78m(d)(1)] (generally, certain U.S. exchange-traded equity securities, as set forth in rule 13f-1(c)) having, in the aggregate, a fair market value of atleast$100,000,000. We believe that investors will find Form 13F report information useful in tracking institutional investorholdings in their investments and that issuers, too, will find detail as to institutional investor holdings useful because much of their shareholder list may reflect holdings in “street name” rather than beneficial ownership. We believe that mandatory electronic dissemination of this data will help ensure timely and efficient dissemination of this important information. We believe that these reports should have the same degree of availability as other filings with the Commission, and that electronic filing will speed their dissemination in accordance with the intent of Congress.

We estimate that each filer spends an average of 24.7 hours preparing each quarterly report. In addition, we estimate that, each quarter, approximately 210 managers will resubmit information to: (1) correct an error or omission; or (2) supplement a request for confidential treatment that expires or is denied, and that each such manager will spend an additional 4 hours on the resubmission.

Any member of the public may direct to the Commission any comments concerning the accuracy of this burden estimate and any suggestions for reducing this burden.

Responses to the collection of information are mandatory. See Section 13(f) of the Exchange Act [15 U.S.C. 78m(f)] and rule 13f-1 [17 CFR 240.13f-1] thereunder.

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Section 13(f)(3) of the Exchange Act [15 U.S.C. 78m(f)(3)] authorizes the Commission, as it determines necessary or appropriate in the public interest or for the protection of investors, to delay or prevent public disclosure of any information filed under Section 13(f) upon request. It also prohibits the Commission from disclosing to the public information identifying securities held by the account of a natural person or any estate or trust (other than a business trust or investment company).

This collection of information has been reviewed by OMB in accordance with the clearance requirements of 44 U.S.C. Section 3507.

8

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 13F FORM 13F COVER P AGE

Report for the Calendar Year or Quarter Ended: _______________________________

Check here if Amendment [ ]; Amendment Number: ______ This Amendment (Check only one.): [ ] is a restatement. [ ] adds new holdings entries.

Institutional Investment Manager Filing this Report:

Name: __________________________________________ Address: __________________________________________ __________________________________________ __________________________________________

Form 13F File Number: 28-____________

The institutional investment manager filing this report and the person by whom it is signed hereby represent that the person signing the report is authorized to submit it, that all information contained herein is true, correct and complete, and that it is understood that all required items, statements, schedules, lists, and tables, are considered integral parts of this form.

Person Signing this Report on Behalf of Reporting Manager:

Name: __________________________________________ Title: __________________________________________ Phone: __________________________________________

Signature, Place, and Date of Signing:

____________________________________ _________________________________ _______________ [Signature] [City, State] [Date]

Report Type (Check only one.):

[ ] 13F HOLDINGS REPORT. (Check here if all holdings of this reporting manager are reported in this report.)

[ ] 13F NOTICE. (Check here if no holdings reported are in this report, and all holdings are reported by other reporting manager(s).)

[ ] 13F COMBINATION REPORT. (Check here if a portion of the holdings for this reporting manager are reported in this report and a portion are reported by other reporting manager(s).)

List of Other Managers Reporting for this Manager: [If there are no entries in this list, omit this section.]

Form 13F File Number Name

28-__________________ ________________________________________________ [Repeat as necessary.]

9

FORM 13F SUMMAR Y PAGE

Report Summary:

Number of Other Included Managers: _____________________

Form 13F Information Table Entry Total: _____________________

Form 13F Information Table Value Total: _____________________ (thousands)

List of Other Included Managers:

Provide a numbered list of the name(s) and Form 13F file number(s) of all institutional investment managers with respect to which this report is filed, other than the manager filing this report.

[If there are no entries in this list, state “NONE” and omit the column headings and list entries.]

No. Form 13F File Number Name

____ 28-________________________ ______________________________________

[Repeat as necessary.]

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FORM 13F INFORMATION TABLE

COLUMN 1 COLUMN 2 COLUMN 3 COLUMN 4 COLUMN 5 COLUMN 6 COLUMN 7 COLUMN 8

VALUE SHRS OR SH/ PUT/ INVESTMENT OTHER VOTING AUTHORITY NAME OF ISSUER TITLE OF CLASS CUSIP (x$1000) PRN AMT PRN CALL DISCRETION MANAGER SOLE SHARED NONE

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________________________

[Repeat as Necessary]

11

1

SECURITIES EXCHANGE ACT OF 1934

[AS AMENDED THROUGH P.L. 112-158, APPROVED AUGUST 10, 2012]

TABLE OF CONTENTS

TITLE I—REGULATION OF SECURITIES EXCHANGES.

Sec. 1. Short Title. Sec. 2. Necessity for Regulation As Provided in This Title. Sec. 3. Definitions and Application of Title. Sec. 3A. Swap Agreements. Sec. 3B. Securities-Related Derivatives. Sec. 3C. Clearing for Security-Based Swaps. Sec. 3D. Security-Based Swap Execution Facilities. Sec. 3E. Segregation of Assets Held As Collateral in Security-Based Swap Trans-

actions. Sec. 4. Securities and Exchange Commission. Sec. 4A. Delegation of Functions by Commission. Sec. 4B. Transfer of Functions With Respect to Assignment of Personnel to Chair-

man. Sec. 4C. Appearance and Practice Before the Commission. Sec. 4D. Additional Duties of Inspector General. Sec. 4E. Deadline for Completing Enforcement Investigations and Compliance Ex-

aminations and Inspections. Sec. 5. Transactions on Unregistered Exchanges. Sec. 6. National Securities Exchanges. Sec. 7. Margin Requirements. Sec. 8. Restrictions on Borrowing by Members, Brokers, and Dealers. Sec. 9. Prohibition Against Manipulation of Security Prices. Sec. 10. Regulation of the Use of Manipulative and Deceptive Devices. Sec. 10A. Audit Requirements. Sec. 10B. Position Limits and Position Accountability for Security-Based Swaps and

Large Trader Reporting. Sec. 10C. Compensation Committees. Sec. 10D. Recovery of Erroneously Awarded Compensation Policy. Sec. 11. Trading by Members of Exchanges, Brokers, and Dealers. Sec. 11A. National Market System for Securities; Securities Information Processors. Sec. 12. Registration Requirements for Securities. Sec. 13. Periodical and Other Reports. Sec. 13A. Reporting and Recordkeeping for Certain Security-Based Swaps. Sec. 14. Proxies. Sec. 14A. Shareholder Approval of Executive Compensation. Sec. 14B. Corporate Governance. Sec. 15. Registration and Regulation of Brokers and Dealers. Sec. 15A. Registered Securities Associations. Sec. 15B. Municipal Securities. Sec. 15C. Government Securities Brokers and Dealers. Sec. 15D. Securities Analysts and Research Reports. Sec. 15E. Registration of Nationally Recognized Statistical Rating Organizations. Sec. 15F. Registration and Regulation of Security-Based Swap Dealers and Major

Security-Based Swap Participants. Sec. 15G. Credit Risk Retention. Sec. 16. Directors, Officers, and Principal Stockholders. Sec. 17. Accounts and Records, Examinations of Exchanges, Members, and Others. Sec. 17A. National System for Clearance and Settlement of Securities Transactions. Sec. 17B. Automated Quotation Systems for Penny Stocks. Sec. 18. Liability for Misleading Statements. Sec. 19. Registration, Responsibilities, and Oversight of Self-Regulatory Organiza-

tions.

2Sec. 1 SECURITIES EXCHANGE ACT OF 1934

Sec. 20. Liability of Controlling Persons and Persons Who Aid and Abet Violations. Sec. 20A. Liability to Contemporaneous Traders for Insider Trading. Sec. 21. Investigations; Injunctions and Prosecution of Offenses. Sec. 21A. Civil Penalties for Insider Trading. Sec. 21B. Civil Remedies in Administrative Proceedings. Sec. 21C. Cease-And-Desist Proceedings. Sec. 21D. Private Securities Litigation. Sec. 21E. Application of Safe Harbor for Forward-Looking Statements. Sec. 21F. Securities Whistleblower Incentives and Protection. Sec. 22. Hearings by Commission. Sec. 23. Rules, Regulations, and Orders; Annual Reports. Sec. 24. Public Availability of Information. Sec. 25. Court Review of Orders and Rules. Sec. 26. Unlawful Representations. Sec. 27. Jurisdiction of Offenses and Suits. Sec. 27A. Special Provision Relating to Statute of Limitations on Private Causes of

Action. Sec. 28. Effect on Existing Law. Sec. 29. Validity of Contracts. Sec. 30. Foreign Securities Exchanges. Sec. 30A. Prohibited Foreign Trade Practices by Issuers. Sec. 31. Transaction Fees. Sec. 32. Penalties. Sec. 33. Separability of Provisions. Sec. 34. Effective Date. Sec. 35. Authorization of Appropriations. Sec. 35A. Requirements for the Edgar System. Sec. 36. General Exemptive Authority. Sec. 37. Tennessee Valley Authority. Sec. 38. Federal National Mortgage Association, Federal Home Loan Mortgage Cor-

poration, Federal Home Loan Banks. Sec. 39. Investor Advisory Committee.

TITLE II—AMENDMENTS TO SECURITIES ACT OF 1933.

TITLE I—REGULATION OF SECURITIES EXCHANGES

SHORT TITLE

SEC. 1. This Act may be cited as the ‘‘Securities Exchange Act of 1934’’.

(June 6, 1934, ch. 404, title I, Sec. 1, 48 Stat. 881.)

NECESSITY FOR REGULATION AS PROVIDED IN THIS TITLE

SEC. 2. For the reasons hereinafter enumerated, transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are effected with a national public inter-est which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto, including transactions by officers, directors, and principal security holders, to require appropriate reports, to remove impediments to and perfect the mechanisms of a national market system for securi-ties and a national system for the clearance and settlement of secu-rities transactions and the safeguarding of securities and funds re-lated thereto, and to impose requirements necessary to make such regulation and control reasonably complete and effective, in order to protect interstate commerce, the national credit, the Federal tax-ing power, to protect and make more effective the national banking

3 Sec. 3SECURITIES EXCHANGE ACT OF 1934

system and Federal Reserve System, and to insure the mainte-nance of fair and honest markets in such transactions:

(1) Such transactions (a) are carried on in large volume by the public generally and in large part originate outside the States in which the exchanges and over-the-counter markets are located and/ or are effected by means of the mails and instrumentalities of interstate commerce; (b) constitute an important part of the cur-rent of interstate commerce; (c) involve in large part the securities of issuers engaged in interstate commerce; (d) involve the use of credit, directly affect the financing of trade, industry, and transpor-tation in interstate commerce, and directly affect and influence the volume of interstate commerce; and affect the national credit.

(2) The prices established and offered in such transactions are generally disseminated and quoted throughout the United States and foreign countries and constitute a basis for determining and establishing the prices at which securities are bought and sold, the amount of certain taxes owing to the United States and to the sev-eral States by owners, buyers, and sellers of securities, and the value of collateral for bank loans.

(3) Frequently the prices of securities on such exchanges and markets are susceptible to manipulation and control, and the dis-semination of such prices gives rise to excessive speculation, result-ing in sudden and unreasonable fluctuations in the prices of securi-ties which (a) cause alternately unreasonable expansion and unrea-sonable contraction of the volume of credit available for trade, transportation, and industry in interstate commerce, (b) hinder the proper appraisal of the value of securities and thus prevent a fair calculation of taxes owing to the United States and to the several States by owners, buyers, and sellers of securities, and (c) prevent the fair valuation of collateral for bank loans and/or obstruct the effective operation of the national banking system and Federal Re-serve System.

(4) National emergencies, which produce widespread unemploy-ment and the dislocation of trade, transportation, and industry, and which burden interstate commerce and adversely affect the general welfare, are precipitated, intensified, and prolonged by ma-nipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and mar-kets, and to meet such emergencies the Federal Government is put to such great expense as to burden the national credit.

(June 6, 1934, ch. 404, title I, Sec. 2, 48 Stat. 881; June 4, 1975, Pub. L. 94-29, Sec. 2, 89 Stat. 97; Pub. L. 111-203, title IX, Sec. 985(b)(1), July 21, 2010, 124 Stat. 1933.)

DEFINITIONS AND APPLICATION OF TITLE

SEC. 3. (a) When used in this title, unless the context other-wise requires—

(1) The term ‘‘exchange’’ means any organization, associa-tion, or group of persons, whether incorporated or unincor-porated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securi-


ties the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.

(2) The term ‘‘facility’’ when used with respect to an ex-change includes its premises, tangible or intangible property whether on the premises or not, any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service.

(3)(A) The term ‘‘member’’ when used with respect to a na-tional securities exchange means (i) any natural person per-mitted to effect transactions on the floor of the exchange with-out the services of another person acting as broker, (ii) any registered broker or dealer with which such a natural person is associated, (iii) any registered broker or dealer permitted to designate as a representative such a natural person, and (iv) any other registered broker or dealer which agrees to be regu-lated by such exchange and with respect to which the exchange undertakes to enforce compliance with the provisions of this title, the rules and regulations thereunder, and its own rules. For purposes of sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 17(d), 19(d), 19(e), 19(g), 19(h), and 21 of this title, the term ‘‘member’’ when used with respect to a national securities ex-change also means, to the extent of the rules of the exchange specified by the Commission, any person required by the Com-mission to comply with such rules pursuant to section 6(f) of this title.

(B) The term ‘‘member’’ when used with respect to a reg-istered securities association means any broker or dealer who agrees to be regulated by such association and with respect to whom the association undertakes to enforce compliance with the provisions of this title, the rules and regulations there-under, and its own rules.

(4) BROKER.—(A) IN GENERAL.—The term ‘‘broker’’ means any per-

son engaged in the business of effecting transactions in se-curities for the account of others.

(B) EXCEPTION FOR CERTAIN BANK ACTIVITIES.—A bank shall not be considered to be a broker because the bank en-gages in any one or more of the following activities under the conditions described:

(i) THIRD PARTY BROKERAGE ARRANGEMENTS.—The bank enters into a contractual or other written ar-rangement with a broker or dealer registered under this title under which the broker or dealer offers bro-kerage services on or off the premises of the bank if—

(I) such broker or dealer is clearly identified as the person performing the brokerage services;

(II) the broker or dealer performs brokerage services in an area that is clearly marked and, to


the extent practicable, physically separate from the routine deposit-taking activities of the bank;

(III) any materials used by the bank to adver-tise or promote generally the availability of bro-kerage services under the arrangement clearly in-dicate that the brokerage services are being pro-vided by the broker or dealer and not by the bank;

(IV) any materials used by the bank to adver-tise or promote generally the availability of bro-kerage services under the arrangement are in compliance with the Federal securities laws before distribution;

(V) bank employees (other than associated persons of a broker or dealer who are qualified pursuant to the rules of a self-regulatory organiza-tion) perform only clerical or ministerial functions in connection with brokerage transactions includ-ing scheduling appointments with the associated persons of a broker or dealer, except that bank employees may forward customer funds or securi-ties and may describe in general terms the types of investment vehicles available from the bank and the broker or dealer under the arrangement;

(VI) bank employees do not receive incentive compensation for any brokerage transaction un-less such employees are associated persons of a broker or dealer and are qualified pursuant to the rules of a self- regulatory organization, except that the bank employees may receive compensation for the referral of any customer if the compensation is a nominal one-time cash fee of a fixed dollar amount and the payment of the fee is not contin-gent on whether the referral results in a trans-action;

(VII) such services are provided by the broker or dealer on a basis in which all customers that receive any services are fully disclosed to the broker or dealer;

(VIII) the bank does not carry a securities ac-count of the customer except as permitted under clause (ii) or (viii) of this subparagraph; and

(IX) the bank, broker, or dealer informs each customer that the brokerage services are provided by the broker or dealer and not by the bank and that the securities are not deposits or other obli-gations of the bank, are not guaranteed by the bank, and are not insured by the Federal Deposit Insurance Corporation. (ii) TRUST ACTIVITIES.—The bank effects trans-

actions in a trustee capacity, or effects transactions in a fiduciary capacity in its trust department or other department that is regularly examined by bank exam-iners for compliance with fiduciary principles and standards, and—


(I) is chiefly compensated for such trans-actions, consistent with fiduciary principles and standards, on the basis of an administration or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under manage-ment, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers, or any combination of such fees; and

(II) does not publicly solicit brokerage busi-ness, other than by advertising that it effects transactions in securities in conjunction with ad-vertising its other trust activities. (iii) PERMISSIBLE SECURITIES TRANSACTIONS.—The

bank effects transactions in—(I) commercial paper, bankers acceptances, or

commercial bills; (II) exempted securities; (III) qualified Canadian government obliga-

tions as defined in section 5136 of the Revised Statutes, in conformity with section 15C of this title and the rules and regulations thereunder, or obligations of the North American Development Bank; or

(IV) any standardized, credit enhanced debt security issued by a foreign government pursuant to the March 1989 plan of then Secretary of the Treasury Brady, used by such foreign government to retire outstanding commercial bank loans. (iv) CERTAIN STOCK PURCHASE PLANS.—

(I) EMPLOYEE BENEFIT PLANS.—The bank ef-fects transactions, as part of its transfer agency activities, in the securities of an issuer as part of any pension, retirement, profit-sharing, bonus, thrift, savings, incentive, or other similar benefit plan for the employees of that issuer or its affili-ates (as defined in section 2 of the Bank Holding Company Act of 1956), if the bank does not solicit transactions or provide investment advice with re-spect to the purchase or sale of securities in con-nection with the plan.

(II) DIVIDEND REINVESTMENT PLANS.—The bank effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of that issuer’s dividend reinvestment plan, if—

(aa) the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connec-tion with the plan; and

(bb) the bank does not net shareholders’ buy and sell orders, other than for programs


1Section 4(2), (5), and (6) of the Securities Act of 1933 was redesignated 4(a)(2), (5), and (6) by Pub. L. 112-106, title II, Sec. 201(b)(1), (c)(1), Apr. 5, 2012, 126 Stat. 314.

for odd- lot holders or plans registered with the Commission. (III) ISSUER PLANS.—The bank effects trans-

actions, as part of its transfer agency activities, in the securities of an issuer as part of a plan or pro-gram for the purchase or sale of that issuer’s shares, if—

(aa) the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connec-tion with the plan or program; and

(bb) the bank does not net shareholders’ buy and sell orders, other than for programs for odd- lot holders or plans registered with the Commission. (IV) PERMISSIBLE DELIVERY OF MATERIALS.—

The exception to being considered a broker for a bank engaged in activities described in subclauses (I), (II), and (III) will not be affected by delivery of written or electronic plan materials by a bank to employees of the issuer, shareholders of the issuer, or members of affinity groups of the issuer, so long as such materials are—

(aa) comparable in scope or nature to that permitted by the Commission as of the date of the enactment of the Gramm-Leach-Bliley Act; or

(bb) otherwise permitted by the Commis-sion.

(v) SWEEP ACCOUNTS.—The bank effects trans-actions as part of a program for the investment or re-investment of deposit funds into any no-load, open-end management investment company registered under the Investment Company Act of 1940 that holds itself out as a money market fund.

(vi) AFFILIATE TRANSACTIONS.—The bank effects transactions for the account of any affiliate of the bank (as defined in section 2 of the Bank Holding Company Act of 1956) other than—

(I) a registered broker or dealer; or (II) an affiliate that is engaged in merchant

banking, as described in section 4(k)(4)(H) of the Bank Holding Company Act of 1956. (vii) PRIVATE SECURITIES OFFERINGS.—The bank—

(I) effects sales as part of a primary offering of securities not involving a public offering, pursu-ant to section 3(b), 4(2), [1] or 4(5) [1] of the Securi-ties Act of 1933 or the rules and regulations issued thereunder;

(II) at any time after the date that is 1 year after the date of the enactment of the Gramm-


Leach- Bliley Act, is not affiliated with a broker or dealer that has been registered for more than 1 year in accordance with this Act, and engages in dealing, market making, or underwriting activi-ties, other than with respect to exempted securi-ties; and

(III) if the bank is not affiliated with a broker or dealer, does not effect any primary offering de-scribed in subclause (I) the aggregate amount of which exceeds 25 percent of the capital of the bank, except that the limitation of this subclause shall not apply with respect to any sale of govern-ment securities or municipal securities. (viii) SAFEKEEPING AND CUSTODY ACTIVITIES.—

(I) IN GENERAL.—The bank, as part of cus-tomary banking activities—

(aa) provides safekeeping or custody serv-ices with respect to securities, including the exercise of warrants and other rights on be-half of customers;

(bb) facilitates the transfer of funds or se-curities, as a custodian or a clearing agency, in connection with the clearance and settle-ment of its customers’ transactions in securi-ties;

(cc) effects securities lending or borrowing transactions with or on behalf of customers as part of services provided to customers pursu-ant to division (aa) or (bb) or invests cash col-lateral pledged in connection with such trans-actions;

(dd) holds securities pledged by a cus-tomer to another person or securities subject to purchase or resale agreements involving a customer, or facilitates the pledging or trans-fer of such securities by book entry or as oth-erwise provided under applicable law, if the bank maintains records separately identifying the securities and the customer; or

(ee) serves as a custodian or provider of other related administrative services to any individual retirement account, pension, retire-ment, profit sharing, bonus, thrift savings, in-centive, or other similar benefit plan. (II) EXCEPTION FOR CARRYING BROKER ACTIVI-

TIES.—The exception to being considered a broker for a bank engaged in activities described in sub-clause (I) shall not apply if the bank, in connec-tion with such activities, acts in the United States as a carrying broker (as such term, and different formulations thereof, are used in section 15(c)(3) of this title and the rules and regulations there-under) for any broker or dealer, unless such car-rying broker activities are engaged in with respect


2Section 15(e) was redesignated 15(f) by Pub. L. 111-203, title IX, Sec. 929X(c)(1), July 21, 2010, 124 Stat. 1870.

3Section 15(e) was redesignated 15(f) by Pub. L. 111-203, title IX, Sec. 929X(c)(1), July 21, 2010, 124 Stat. 1870.

to government securities (as defined in paragraph (42) of this subsection). (ix) IDENTIFIED BANKING PRODUCTS.—The bank ef-

fects transactions in identified banking products as de-fined in section 206 of the Gramm-Leach-Bliley Act.

(x) MUNICIPAL SECURITIES.—The bank effects transactions in municipal securities.

(xi) DE MINIMIS EXCEPTION.—The bank effects, other than in transactions referred to in clauses (i) through (x), not more than 500 transactions in securi-ties in any calendar year, and such transactions are not effected by an employee of the bank who is also an employee of a broker or dealer. (C) EXECUTION BY BROKER OR DEALER.—The exception

to being considered a broker for a bank engaged in activi-ties described in clauses (ii), (iv), and (viii) of subpara-graph (B) shall not apply if the activities described in such provisions result in the trade in the United States of any security that is a publicly traded security in the United States, unless—

(i) the bank directs such trade to a registered broker or dealer for execution;

(ii) the trade is a cross trade or other substan-tially similar trade of a security that—

(I) is made by the bank or between the bank and an affiliated fiduciary; and

(II) is not in contravention of fiduciary prin-ciples established under applicable Federal or State law; or (iii) the trade is conducted in some other manner

permitted under rules, regulations, or orders as the Commission may prescribe or issue. (D) FIDUCIARY CAPACITY.—For purposes of subpara-

graph (B)(ii), the term ‘‘fiduciary capacity’’ means—(i) in the capacity as trustee, executor, adminis-

trator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uni-form gift to minor act, or as an investment adviser if the bank receives a fee for its investment advice;

(ii) in any capacity in which the bank possesses investment discretion on behalf of another; or

(iii) in any other similar capacity. (E) EXCEPTION FOR ENTITIES SUBJECT TO SECTION

15(E) [2].— The term ‘‘broker’’ does not include a bank that—(i) was, on the day before the date of enactment

of the Gramm-Leach-Bliley Act, subject to section 15(e) [3]; and

(ii) is subject to such restrictions and require-ments as the Commission considers appropriate.


(F) JOINT RULEMAKING REQUIRED.—The Commission and the Board of Governors of the Federal Reserve System shall jointly adopt a single set of rules or regulations to implement the exceptions in subparagraph (B). (5) DEALER.—

(A) IN GENERAL.—The term ‘‘dealer’’ means any person engaged in the business of buying and selling securities (not including security-based swaps, other than security-based swaps with or for persons that are not eligible con-tract participants) for such person’s own account through a broker or otherwise.

(B) EXCEPTION FOR PERSON NOT ENGAGED IN THE BUSI-NESS OF DEALING.—The term ‘‘dealer’’ does not include a person that buys or sells securities (not including security-based swaps, other than security-based swaps with or for persons that are not eligible contract participants) for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business.

(C) EXCEPTION FOR CERTAIN BANK ACTIVITIES.—A bank shall not be considered to be a dealer because the bank en-gages in any of the following activities under the condi-tions described:

(i) PERMISSIBLE SECURITIES TRANSACTIONS.—The bank buys or sells—

(I) commercial paper, bankers acceptances, or commercial bills;

(II) exempted securities; (III) qualified Canadian government obliga-

tions as defined in section 5136 of the Revised Statutes of the United States, in conformity with section 15C of this title and the rules and regula-tions thereunder, or obligations of the North American Development Bank; or

(IV) any standardized, credit enhanced debt security issued by a foreign government pursuant to the March 1989 plan of then Secretary of the Treasury Brady, used by such foreign government to retire outstanding commercial bank loans. (ii) INVESTMENT, TRUSTEE, AND FIDUCIARY TRANS-

ACTIONS.— The bank buys or sells securities for in-vestment purposes—

(I) for the bank; or (II) for accounts for which the bank acts as a

trustee or fiduciary. (iii) ASSET-BACKED TRANSACTIONS.—The bank en-

gages in the issuance or sale to qualified investors, through a grantor trust or other separate entity, of se-curities backed by or representing an interest in notes, drafts, acceptances, loans, leases, receivables, other obligations (other than securities of which the bank is not the issuer), or pools of any such obligations pre-dominantly originated by—

(I) the bank;


4Section 2 of the Home Owners’ Loan Act was amended by Pub. L. 111-203, title III, Sec. 369(2)(C), July 21, 2010, 124 Stat. 1557, by redesignating pars. (4) and (5) as (2) and (3), respec-tively.

5The Internal Revenue Code of 1954 was redesignated as the Internal Revenue Code of 1986 by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095.

(II) an affiliate of any such bank other than a broker or dealer; or

(III) a syndicate of banks of which the bank is a member, if the obligations or pool of obligations consists of mortgage obligations or consumer-re-lated receivables. (iv) IDENTIFIED BANKING PRODUCTS.—The bank

buys or sells identified banking products, as defined in section 206 of the Gramm-Leach-Bliley Act.

(6) The term ‘‘bank’’ means (A) a banking institution orga-nized under the laws of the United States or a Federal savings association, as defined in section 2(5) [4] of the Home Owners’ Loan Act, (B) a member bank of the Federal Reserve System, (C) any other banking institution or savings association, as de-fined in section 2(4) [4] of the Home Owners’ Loan Act, whether incorporated or not, doing business under the laws of any State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency pursuant to the first section of Public Law 87-722 (12 U.S.C. 92a), and which is supervised and examined by State or Federal authority hav-ing supervision over banks or savings associations, and which is not operated for the purpose of evading the provisions of this title, and (D) a receiver, conservator, or other liquidating agent of any institution or firm included in clauses (A), (B), or (C) of this paragraph.

(7) The term ‘‘director’’ means any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated.

(8) The term ‘‘issuer’’ means any person who issues or pro-poses to issue any security; except that with respect to certifi-cates of deposit for securities, voting-trust certificates, or collateral- trust certificates, or with respect to certificates of in-terest or shares in an unincorporated investment trust not having a board of directors or of the fixed, restricted manage-ment, or unit type, the term ‘‘issuer’’ means the person or per-sons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; and except that with respect to equipment-trust certifi-cates or like securities, the term ‘‘issuer’’ means the person by whom the equipment or property is, or is to be, used.

(9) The term ‘‘person’’ means a natural person, company, government, or political subdivision, agency, or instrumentality of a government.

(10) The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture,


certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, strad-dle, option, or privilege entered into on a national securities ex-change relating to foreign currency, or in general, any instru-ment commonly known as a ‘‘security’’; or any certificate of in-terest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a ma-turity at the time of issuance of not exceeding nine months, ex-clusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

(11) The term ‘‘equity security’’ means any stock or similar security; or any security future on any such security; or any se-curity convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security which the Commission shall deem to be of simi-lar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security.

(12)(A) The term ‘‘exempted security’’ or ‘‘exempted securi-ties’’ includes—

(i) government securities, as defined in paragraph (42) of this subsection;

(ii) municipal securities, as defined in paragraph (29) of this subsection;

(iii) any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term ‘‘investment company’’ under section 3(c)(3) of the Investment Company Act of 1940;

(iv) any interest or participation in a single trust fund, or a collective trust fund maintained by a bank, or any se-curity arising out of a contract issued by an insurance company, which interest, participation, or security is issued in connection with a qualified plan as defined in subparagraph (C) of this paragraph;

(v) any security issued by or any interest or participa-tion in any pooled income fund, collective trust fund, col-lective investment fund, or similar fund that is excluded from the definition of an investment company under sec-tion 3(c)(10)(B) of the Investment Company Act of 1940;

(vi) solely for purposes of sections 12, 13, 14, and 16 of this title, any security issued by or any interest or par-ticipation in any church plan, company, or account that is excluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940; and



(vii) such other securities (which may include, among others, unregistered securities, the market in which is pre-dominantly intrastate) as the Commission may, by such rules and regulations as it deems consistent with the pub-lic interest and the protection of investors, either uncondi-tionally or upon specified terms and conditions or for stat-ed periods, exempt from the operation of any one or more provisions of this title which by their terms do not apply to an ‘‘exempted security’’ or to ‘‘exempted securities’’. (B)(i) Notwithstanding subparagraph (A)(i) of this para-

graph, government securities shall not be deemed to be ‘‘ex-empted securities’’ for the purposes of section 17A of this title.

(ii) Notwithstanding subparagraph (A)(ii) of this para-graph, municipal securities shall not be deemed to be ‘‘exempt-ed securities’’ for the purposes of sections 15 and 17A of this title.

(C) For purposes of subparagraph (A)(iv) of this paragraph, the term ‘‘qualified plan’’ means (i) a stock bonus, pension, or profit- sharing plan which meets the requirements for quali-fication under section 401 of the Internal Revenue Code of 1954, [5] (ii) an annuity plan which meets the requirements for the deduction of the employer’s contribution under section 404(a)(2) of such Code, (iii) a governmental plan as defined in section 414(d) of such Code which has been established by an employer for the exclusive benefit of its employees or their beneficiaries for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accu-mulated under such plan, if under such plan it is impossible, prior to the satisfaction of all liabilities with respect to such employees and their beneficiaries, for any part of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, or (iv) a church plan, company, or account that is excluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940, other than any plan described in clause (i), (ii), or (iii) of this subparagraph which (I) covers employees some or all of whom are employees within the meaning of section 401(c) of such Code, or (II) is a plan funded by an annuity contract described in section 403(b) of such Code.

(13) The terms ‘‘buy’’ and ‘‘purchase’’ each include any con-tract to buy, purchase, or otherwise acquire. For security fu-tures products, such term includes any contract, agreement, or transaction for future delivery. For security-based swaps, such terms include the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap, as the context may require.

(14) The terms ‘‘sale’’ and ‘‘sell’’ each include any contract to sell or otherwise dispose of. For security futures products, such term includes any contract, agreement, or transaction for


6The words ‘‘Philippine Islands’’ were deleted from the definition of the term ‘‘State’’ on the basis of Presidential Proclamation No. 2695, effective July 4, 1946 (11 F.R. 7517; 60 Stat. 1352), which granted Independence to the Philippine Islands.

future delivery. For security-based swaps, such terms include the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap, as the context may require.

(15) The term ‘‘Commission’’ means the Securities and Ex-change Commission established by section 4 of this title.

(16) The term ‘‘State’’ means any State of the United States, the District of Columbia, Puerto Rico, the Virgin Is-lands, or any other possession of the United States. [6]

(17) The term ‘‘interstate commerce’’ means trade, com-merce, transportation, or communication among the several States, or between any foreign country and any State, or be-tween any State and any place or ship outside thereof. The term also includes intrastate use of (A) any facility of a na-tional securities exchange or of a telephone or other interstate means of communication, or (B) any other interstate instru-mentality.

(18) The term ‘‘person associated with a broker or dealer’’ or ‘‘associated person of a broker or dealer’’ means any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, con-trolled by, or under common control with such broker or dealer, or any employee of such broker or dealer, except that any per-son associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the mean-ing of such term for purposes of section 15(b) of this title (other than paragraph (6) thereof).

(19) The terms ‘‘investment company,’’ ‘‘affiliated person,’’ ‘‘insurance company,’’ ‘‘separate account,’’ and ‘‘company’’ have the same meanings as in the Investment Company Act of 1940.

(20) The terms ‘‘investment adviser’’ and ‘‘underwriter’’ have the same meanings as in the Investment Advisers Act of 1940.

(21) The term ‘‘persons associated with a member’’ or ‘‘as-sociated person of a member’’ when used with respect to a member of a national securities exchange or registered securi-ties association means any partner, officer, director, or branch manager of such member (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such member, or any employee of such member.

(22)(A) The term ‘‘securities information processor’’ means any person engaged in the business of (i) collecting, processing, or preparing for distribution or publication, or assisting, par-ticipating in, or coordinating the distribution or publication of, information with respect to transactions in or quotations for any security (other than an exempted security) or (ii) distrib-uting or publishing (whether by means of a ticker tape, a com-munications network, a terminal display device, or otherwise)


on a current and continuing basis, information with respect to such transactions or quotations. The term ‘‘securities informa-tion processor’’ does not include any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation, any self- regulatory organization, any bank, broker, dealer, building and loan, savings and loan, or homestead association, or cooperative bank, if such bank, broker, dealer, association, or cooperative bank would be deemed to be a securities information processor solely by rea-son of functions performed by such institutions as part of cus-tomary banking, brokerage, dealing, association, or cooperative bank activities, or any common carrier, as defined in section 3 of the Communications Act of 1934, subject to the jurisdiction of the Federal Communications Commission or a State com-mission, as defined in section 3 of that Act, unless the Commis-sion determines that such carrier is engaged in the business of collecting, processing, or preparing for distribution or publica-tion, information with respect to transactions in or quotations for any security.

(B) The term ‘‘exclusive processor’’ means any securities information processor or self-regulatory organization which, di-rectly or indirectly, engages on an exclusive basis on behalf of any national securities exchange or registered securities asso-ciation, or any national securities exchange or registered secu-rities association which engages on an exclusive basis on its own behalf, in collecting, processing, or preparing for distribu-tion or publication any information with respect to (i) trans-actions or quotations on or effected or made by means of any facility of such exchange or (ii) quotations distributed or pub-lished by means of any electronic system operated or controlled by such association.

(23)(A) The term ‘‘clearing agency’’ means any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who pro-vides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who (i) acts as a custodian of securities in connection with a system for the cen-tral handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or (ii) otherwise permits or facilitates the settle-ment of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates.

(B) The term ‘‘clearing agency’’ does not include (i) any Federal Reserve bank, Federal home loan bank, or Federal land bank; (ii) any national securities exchange or registered securities association solely by reason of its providing facilities for comparison of data respecting the terms of settlement of se-curities transactions effected on such exchange or by means of any electronic system operated or controlled by such associa-


tion; (iii) any bank, broker, dealer, building and loan, savings and loan, or homestead association, or cooperative bank if such bank, broker, dealer, association, or cooperative bank would be deemed to be a clearing agency solely by reason of functions performed by such institution as part of customary banking, brokerage, dealing, association, or cooperative banking activi-ties, or solely by reason of acting on behalf of a clearing agency or a participant therein in connection with the furnishing by the clearing agency of services to its participants or the use of services of the clearing agency by its participants, unless the Commission, by rule, otherwise provides as necessary or appro-priate to assure the prompt and accurate clearance and settle-ment of securities transactions or to prevent evasion of this title; (iv) any life insurance company, its registered separate accounts, or a subsidiary of such insurance company solely by reason of functions commonly performed by such entities in connection with variable annuity contracts or variable life poli-cies issued by such insurance company or its separate ac-counts; (v) any registered open-end investment company or unit investment trust solely by reason of functions commonly performed by it in connection with shares in such registered open-end investment company or unit investment trust, or (vi) any person solely by reason of its performing functions de-scribed in paragraph 25(E) of this subsection.

(24) The term ‘‘participant’’ when used with respect to a clearing agency means any person who uses a clearing agency to clear or settle securities transactions or to transfer, pledge, lend, or hypothecate securities. Such term does not include a person whose only use of a clearing agency is (A) through an-other person who is a participant or (B) as a pledgee of securi-ties.

(25) The term ‘‘transfer agent’’ means any person who en-gages on behalf of an issuer of securities or on behalf of itself as an issuer of securities in (A) countersigning such securities upon issuance; (B) monitoring the issuance of such securities with a view to preventing unauthorized issuance, a function commonly performed by a person called a registrar; (C) reg-istering the transfer of such securities; (D) exchanging or con-verting such securities; or (E) transferring record ownership of securities by bookkeeping entry without physical issuance of securities certificates. The term ‘‘transfer agent’’ does not in-clude any insurance company or separate account which per-forms such functions solely with respect to variable annuity contracts or variable life policies which it issues or any reg-istered clearing agency which performs such functions solely with respect to options contracts which it issues.

(26) The term ‘‘self-regulatory organization’’ means any na-tional securities exchange, registered securities association, or registered clearing agency, or (solely for purposes of sections 19(b), 19(c), and 23(b) of this title) the Municipal Securities Rulemaking Board established by section 15B of this title.

(27) The term ‘‘rules of an exchange’’, ‘‘rules of an associa-tion’’, or ‘‘rules of a clearing agency’’ means the constitution, articles of incorporation, bylaws, and rules, or instruments cor-



responding to the foregoing, of an exchange, association of bro-kers and dealers, or clearing agency, respectively, and such of the stated policies, practices, and interpretations of such ex-change, association, or clearing agency as the Commission, by rule, may determine to be necessary or appropriate in the pub-lic interest or for the protection of investors to be deemed to be rules of such exchange, association, or clearing agency.

(28) The term ‘‘rules of a self-regulatory organization’’ means the rules of an exchange which is a national securities exchange, the rules of an association of brokers and dealers which is a registered securities association, the rules of a clear-ing agency which is a registered clearing agency, or the rules of the Municipal Securities Rulemaking Board.

(29) The term ‘‘municipal securities’’ means securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any po-litical subdivision thereof, or any municipal corporate instru-mentality of one or more States, or any security which is an industrial development bond (as defined in section 103(c)(2) of the Internal Revenue Code of 1954) [7] the interest on which is excludable from gross income under section 103(a)(1) of such Code if, by reason of the application of paragraph (4) or (6) of section 103(c) of such Code (determined as if paragraphs (4)(A), (5), and (7) were not included in such section 103(c)), para-graph (1) of such section 103(c) does not apply to such security.

(30) The term ‘‘municipal securities dealer’’ means any per-son (including a separately identifiable department or division of a bank) engaged in the business of buying and selling mu-nicipal securities for his own account, through a broker or oth-erwise, but does not include—

(A) any person insofar as he buys or sells such securi-ties for his own account, either individually or in some fi-duciary capacity, but not as a part of a regular business; or

(B) a bank, unless the bank is engaged in the business of buying and selling municipal securities for its own ac-count other than in a fiduciary capacity, through a broker or otherwise; Provided, however, That if the bank is en-gaged in such business through a separately identifiable department or division (as defined by the Municipal Secu-rities Rulemaking Board in accordance with section 15B(b)(2)(H) of this title), the department or division and not the bank itself shall be deemed to be the municipal se-curities dealer. (31) The term ‘‘municipal securities broker’’ means a

broker engaged in the business of effecting transactions in mu-nicipal securities for the account of others.

(32) The term ‘‘person associated with a municipal securi-ties dealer’’ when used with respect to a municipal securities dealer which is a bank or a division or department of a bank


means any person directly engaged in the management, direc-tion, supervision, or performance of any of the municipal secu-rities dealer’s activities with respect to municipal securities, and any person directly or indirectly controlling such activities or controlled by the municipal securities dealer in connection with such activities.

(33) The term ‘‘municipal securities investment portfolio’’ means all municipal securities held for investment and not for sale as part of a regular business by a municipal securities dealer or by a person, directly or indirectly, controlling, con-trolled by, or under common control with a municipal securi-ties dealer.

(34) The term ‘‘appropriate regulatory agency’’ means—(A) When used with respect to a municipal securities

dealer: (i) the Comptroller of the Currency, in the case of

a national bank, a subsidiary or a department or divi-sion of any such bank, a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit In-surance Act (12 U.S.C. 1813(b)(2))), the deposits of which are insured by the Federal Deposit Insurance Corporation, or a subsidiary or department or division of any such Federal savings association;

(ii) the Board of Governors of the Federal Reserve System, in the case of a State member bank of the Federal Reserve System, a subsidiary or a department or division thereof, a bank holding company, a sub-sidiary of a bank holding company which is a bank other than a bank specified in clause (i), (iii), or (iv) of this subparagraph, a subsidiary or a department or division of such subsidiary, or a savings and loan hold-ing company;

(iii) the Federal Deposit Insurance Corporation, in the case of a bank insured by the Federal Deposit In-surance Corporation (other than a member of the Fed-eral Reserve System), a subsidiary or department or division of any such bank, a State savings association (as defined in section 3(b)(3) of the Federal Deposit In-surance Act (12 U.S.C. 1813(b)(3))), the deposits of which are insured by the Federal Deposit Insurance Corporation, or a subsidiary or a department or divi-sion of any such State savings association; and

(iv) the Commission in the case of all other munic-ipal securities dealers. (B) When used with respect to a clearing agency or

transfer agent: (i) the Comptroller of the Currency, in the case of

a national bank, a subsidiary of any such bank, a Fed-eral savings association (as defined in section 3(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(2))), the deposits of which are insured by the Federal Deposit Insurance Corporation, or a sub-sidiary of any such Federal savings association;


8So in original. Probably should be followed by a comma. 9So in original. The ‘‘; and’’ probably should be a comma. 10So in original. Probably should be followed by ‘‘and’’.

(ii) the Board of Governors of the Federal Reserve System, in the case of a State member bank of the Federal Reserve System, a subsidiary thereof, a bank holding company, a subsidiary of a bank holding com-pany that is a bank other than a bank specified in clause (i) or (iii) of this subparagraph, or a savings and loan holding company;

(iii) the Federal Deposit Insurance Corporation, in the case of a bank insured by the Federal Deposit In-surance Corporation (other than a member of the Fed-eral Reserve System), a subsidiary of any such bank, a State savings association (as defined in section 3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3))), the deposits of which are insured by the Federal Deposit Insurance Corporation, or a sub-sidiary of any such State savings association; and

(iv) the Commission in the case of all other clear-ing agencies and transfer agents. (C) When used with respect to a participant or appli-

cant to become a participant in a clearing agency or a per-son requesting or having access to services offered by a clearing agency:

(i) the Comptroller of the Currency, in the case of a national bank or a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insur-ance Act (12 U.S.C. 1813(b)(2))), the deposits of which are insured by the Federal Deposit Insurance Corpora-tion [8] when the appropriate regulatory agency for such clearing agency is not the Commission;

(ii) the Board of Governors of the Federal Reserve System in the case of a State member bank of the Fed-eral Reserve System, a bank holding company, or a subsidiary of a bank holding company, a subsidiary of a bank holding company that is a bank other than a bank specified in clause (i) or (iii) of this subpara-graph, or a savings and loan holding company when the appropriate regulatory agency for such clearing agency is not the Commission;

(iii) the Federal Deposit Insurance Corporation, in the case of a bank insured by the Federal Deposit In-surance Corporation (other than a member of the Fed-eral Reserve System) or a State savings association (as defined in section 3(b)(3) of the Federal Deposit Insur-ance Act (12 U.S.C. 1813(b)(3))), the deposits of which are insured by the Federal Deposit Insurance Corpora-tion; and [9] when the appropriate regulatory agency for such clearing agency is not the Commission; [10]

(iv) the Commission in all other cases. (D) When used with respect to an institutional invest-

ment manager which is a bank the deposits of which are


11So in original. The semicolon probably should be a colon.

insured in accordance with the Federal Deposit Insurance Act:

(i) the Comptroller of the Currency, in the case of a national bank or a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insur-ance Act (12 U.S.C. 1813(b)(2))), the deposits of which are insured by the Federal Deposit Insurance Corpora-tion;

(ii) the Board of Governors of the Federal Reserve System, in the case of any other member bank of the Federal Reserve System; and

(iii) the Federal Deposit Insurance Corporation, in the case of any other insured bank or a State savings association (as defined in section 3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3))), the de-posits of which are insured by the Federal Deposit In-surance Corporation. (E) When used with respect to a national securities ex-

change or registered securities association, member there-of, person associated with a member thereof, applicant to become a member thereof or to become associated with a member thereof, or person requesting or having access to services offered by such exchange or association or member thereof, or the Municipal Securities Rulemaking Board, the Commission.

(F) When used with respect to a person exercising in-vestment discretion with respect to an account; [11]

(i) the Comptroller of the Currency, in the case of a national bank or a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insur-ance Act (12 U.S.C. 1813(b)(2))), the deposits of which are insured by the Federal Deposit Insurance Corpora-tion;

(ii) the Board of Governors of the Federal Reserve System in the case of any other member bank of the Federal Reserve System;

(iii) the Federal Deposit Insurance Corporation, in the case of any other bank the deposits of which are insured in accordance with the Federal Deposit Insur-ance Act or a State savings association (as defined in section 3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3))), the deposits of which are in-sured by the Federal Deposit Insurance Corporation; and

(iv) the Commission in the case of all other such persons. (G) When used with respect to a government securities

broker or government securities dealer, or person associ-ated with a government securities broker or government securities dealer:

(i) the Comptroller of the Currency, in the case of a national bank, a Federal savings association (as de-


fined in section 3(b)(2) of the Federal Deposit Insur-ance Act), the deposits of which are insured by the Federal Deposit Insurance Corporation, or a Federal branch or Federal agency of a foreign bank (as such terms are used in the International Banking Act of 1978);

(ii) the Board of Governors of the Federal Reserve System, in the case of a State member bank of the Federal Reserve System, a foreign bank, an uninsured State branch or State agency of a foreign bank, a com-mercial lending company owned or controlled by a for-eign bank (as such terms are used in the International Banking Act of 1978), or a corporation organized or having an agreement with the Board of Governors of the Federal Reserve System pursuant to section 25 or section 25A of the Federal Reserve Act;

(iii) the Federal Deposit Insurance Corporation, in the case of a bank insured by the Federal Deposit In-surance Corporation (other than a member of the Fed-eral Reserve System or a Federal savings bank), a State savings association (as defined in section 3(b)(3) of the Federal Deposit Insurance Act), the deposits of which are insured by the Federal Deposit Insurance Corporation, or an insured State branch of a foreign bank (as such terms are used in the International Banking Act of 1978); and

(iv) the Commission, in the case of all other gov-ernment securities brokers and government securities dealers. (H) When used with respect to an institution described

in subparagraph (D), (F), or (G) of section 2(c)(2), or held under section 4(f), of the Bank Holding Company Act of 1956—

(i) the Comptroller of the Currency, in the case of a national bank;

(ii) the Board of Governors of the Federal Reserve System, in the case of a State member bank of the Federal Reserve System or any corporation chartered under section 25A of the Federal Reserve Act;

(iii) the Federal Deposit Insurance Corporation, in the case of any other bank the deposits of which are insured in accordance with the Federal Deposit Insur-ance Act; or

(iv) the Commission in the case of all other such institutions.

As used in this paragraph, the terms ‘‘bank holding company’’ and ‘‘subsidiary of a bank holding company’’ have the mean-ings given them in section 2 of the Bank Holding Company Act of 1956. As used in this paragraph, the term ‘‘savings and loan holding company’’ has the same meaning as in section 10(a) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)).

(35) A person exercises ‘‘investment discretion’’ with re-spect to an account if, directly or indirectly, such person (A) is authorized to determine what securities or other property shall


12Margin so in law.

be purchased or sold by or for the account, (B) makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions, or (C) other-wise exercises such influence with respect to the purchase and sale of securities or other property by or for the account as the Commission, by rule, determines, in the public interest or for the protection of investors, should be subject to the operation of the provisions of this title and rules and regulations there-under.

(36) A class of persons or markets is subject to ‘‘equal reg-ulation’’ if no member of the class has a competitive advantage over any other member thereof resulting from a disparity in their regulation under this title which the Commission deter-mines is unfair and not necessary or appropriate in further-ance of the purposes of this title.

(37) The term ‘‘records’’ means accounts, correspondence, memorandums, tapes, discs, papers, books, and other docu-ments or transcribed information of any type, whether ex-pressed in ordinary or machine language.

(38) The term ‘‘market maker’’ means any specialist per-mitted to act as a dealer, any dealer acting in the capacity of block positioner, and any dealer who, with respect to a secu-rity, holds himself out (by entering quotations in an inter-deal-er communications system or otherwise) as being willing to buy and sell such security for his own account on a regular or con-tinuous basis.

(39) A person is subject to a ‘‘statutory disqualification’’ with respect to membership or participation in, or association with a member of, a self-regulatory organization, if such per-son—

(A) has been and is expelled or suspended from mem-bership or participation in, or barred or suspended from being associated with a member of, any self-regulatory or-ganization, foreign equivalent of a self-regulatory organiza-tion, foreign or international securities exchange, contract market designated pursuant to section 5 of the Commodity Exchange Act (7 U.S.C. 7), or any substantially equivalent foreign statute or regulation, or futures association reg-istered under section 17 of such Act (7 U.S.C. 21), or any substantially equivalent foreign statute or regulation, or has been and is denied trading privileges on any such con-tract market or foreign equivalent; (B) [12] is subject to—

(i) an order of the Commission, other appropriate reg-ulatory agency, or foreign financial regulatory authority—

(I) denying, suspending for a period not exceeding 12 months, or revoking his registration as a broker, dealer, municipal securities dealer, government securi-ties broker, government securities dealer, security-based swap dealer, or major security-based swap par-ticipant or limiting his activities as a foreign person


performing a function substantially equivalent to any of the above; or

(II) barring or suspending for a period not exceed-ing 12 months his being associated with a broker, dealer, municipal securities dealer, security-based swap dealer, major security-based swap participant, government securities broker, government securities dealer, or foreign person performing a function sub-stantially equivalent to any of the above; (ii) an order of the Commodity Futures Trading Com-

mission denying, suspending, or revoking his registration under the Commodity Exchange Act (7 U.S.C. 1 et seq.); or

(iii) an order by a foreign financial regulatory author-ity denying, suspending, or revoking the person’s authority to engage in transactions in contracts of sale of a com-modity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof;

(C) by his conduct while associated with a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, or major security-based swap participant, or while associated with an entity or person required to be reg-istered under the Commodity Exchange Act, has been found to be a cause of any effective suspension, expulsion, or order of the character described in subparagraph (A) or (B) of this paragraph, and in entering such a suspension, expulsion, or order, the Commission, an appropriate regu-latory agency, or any such self-regulatory organization shall have jurisdiction to find whether or not any person was a cause thereof;

(D) by his conduct while associated with any broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, major security-based swap participant, or any other entity engaged in transactions in securities, or while asso-ciated with an entity engaged in transactions in contracts of sale of a commodity for future delivery or other instru-ments traded on or subject to the rules of a contract mar-ket, board of trade, or foreign equivalent thereof, has been found to be a cause of any effective suspension, expulsion, or order by a foreign or international securities exchange or foreign financial regulatory authority empowered by a foreign government to administer or enforce its laws relat-ing to financial transactions as described in subparagraph (A) or (B) of this paragraph;

(E) has associated with him any person who is known, or in the exercise of reasonable care should be known, to him to be a person described by subparagraph (A), (B), (C), or (D) of this paragraph; or

(F) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title,


has been convicted of any offense specified in subpara-graph (B) of such paragraph (4) or any other felony within ten years of the date of the filing of an application for membership or participation in, or to become associated with a member of, such self- regulatory organization, is en-joined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4), has willfully made or caused to be made in any application for member-ship or participation in, or to become associated with a member of, a self-regulatory organization, report required to be filed with a self-regulatory organization, or pro-ceeding before a self-regulatory organization, any state-ment which was at the time, and in the light of the cir-cumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to be stated therein. (40) The term ‘‘financial responsibility rules’’ means the

rules and regulations of the Commission or the rules and regu-lations prescribed by any self-regulatory organization relating to financial responsibility and related practices which are des-ignated by the Commission, by rule or regulation, to be finan-cial responsibility rules.

(41) The term ‘‘mortgage related security’’ means a secu-rity that meets standards of credit-worthiness as established by the Commission, and either:

(A) represents ownership of one or more promissory notes or certificates of interest or participation in such notes (including any rights designed to assure servicing of, or the receipt or timeliness of receipt by the holders of such notes, certificates, or participations of amounts pay-able under, such notes, certificates, or participations), which notes:

(i) are directly secured by a first lien on a single parcel of real estate, including stock allocated to a dwelling unit in a residential cooperative housing cor-poration, upon which is located a dwelling or mixed residential and commercial structure, on a residential manufactured home as defined in section 603(6) of the National Manufactured Housing Construction and Safety Standards Act of 1974, whether such manufac-tured home is considered real or personal property under the laws of the State in which it is to be located, or on one or more parcels of real estate upon which is located one or more commercial structures; and

(ii) were originated by a savings and loan associa-tion, savings bank, commercial bank, credit union, in-surance company, or similar institution which is su-pervised and examined by a Federal or State author-ity, or by a mortgage approved by the Secretary of Housing and Urban Development pursuant to sections 203 and 211 of the National Housing Act, or, where such notes involve a lien on the manufactured home, by any such institution or by any financial institution


13So in law. Probably should be ‘‘evidenced’’.

approved for insurance by the Secretary of Housing and Urban Development pursuant to section 2 of the National Housing Act; or (B) is secured by one or more promissory notes or cer-

tificates of interest or participations in such notes (with or without recourse to the issuer thereof) and, by its terms, provides for payments of principal in relation to payments, or reasonable projections of payments, on notes meeting the requirements of subparagraphs (A) (i) and (ii) or cer-tificates of interest or participations in promissory notes meeting such requirements.

For the purpose of this paragraph, the term ‘‘promissory note’’, when used in connection with a manufactured home, shall also include a loan, advance, or credit sale as evidence [13] by a re-tail installment sales contract or other instrument.

(42) The term ‘‘government securities’’ means—(A) securities which are direct obligations of, or obliga-

tions guaranteed as to principal or interest by, the United States;

(B) securities which are issued or guaranteed by the Tennessee Valley Authority or by corporations in which the United States has a direct or indirect interest and which are designated by the Secretary of the Treasury for exemption as necessary or appropriate in the public inter-est or for the protection of investors;

(C) securities issued or guaranteed as to principal or interest by any corporation the securities of which are des-ignated, by statute specifically naming such corporation, to constitute exempt securities within the meaning of the laws administered by the Commission;

(D) for purposes of sections 15C and 17A, any put, call, straddle, option, or privilege on a security described in subparagraph (A), (B), or (C) other than a put, call, straddle, option, or privilege—

(i) that is traded on one or more national securi-ties exchanges; or

(ii) for which quotations are disseminated through an automated quotation system operated by a reg-istered securities association; or (E) for purposes of sections 15, 15C, and 17A as ap-

plied to a bank, a qualified Canadian government obliga-tion as defined in section 5136 of the Revised Statutes of the United States. (43) The term ‘‘government securities broker’’ means any

person regularly engaged in the business of effecting trans-actions in government securities for the account of others, but does not include—

(A) any corporation the securities of which are govern-ment securities under subparagraph (B) or (C) of para-graph (42) of this subsection; or

(B) any person registered with the Commodity Futures Trading Commission, any contract market designated by


the Commodity Futures Trading Commission, such con-tract market’s affiliated clearing organization, or any floor trader on such contract market, solely because such person effects transactions in government securities that the Com-mission, after consultation with the Commodity Futures Trading Commission, has determined by rule or order to be incidental to such person’s futures-related business. (44) The term ‘‘government securities dealer’’ means any

person engaged in the business of buying and selling govern-ment securities for his own account, through a broker or other-wise, but does not include—

(A) any person insofar as he buys or sells such securi-ties for his own account, either individually or in some fi-duciary capacity, but not as a part of a regular business;

(B) any corporation the securities of which are govern-ment securities under subparagraph (B) or (C) of para-graph (42) of this subsection;

(C) any bank, unless the bank is engaged in the busi-ness of buying and selling government securities for its own account other than in a fiduciary capacity, through a broker or otherwise; or

(D) any person registered with the Commodity Fu-tures Trading Commission, any contract market des-ignated by the Commodity Futures Trading Commission, such contract market’s affiliated clearing organization, or any floor trader on such contract market, solely because such person effects transactions in government securities that the Commission, after consultation with the Com-modity Futures Trading Commission, has determined by rule or order to be incidental to such person’s futures-re-lated business. (45) The term ‘‘person associated with a government secu-

rities broker or government securities dealer’’ means any part-ner, officer, director, or branch manager of such government securities broker or government securities dealer (or any per-son occupying a similar status or performing similar functions), and any other employee of such government securities broker or government securities dealer who is engaged in the manage-ment, direction, supervision, or performance of any activities relating to government securities, and any person directly or indirectly controlling, controlled by, or under common control with such government securities broker or government securi-ties dealer.

(46) The term ‘‘financial institution’’ means—(A) a bank (as defined in paragraph (6) of this sub-

section); (B) a foreign bank (as such term is used in the Inter-

national Banking Act of 1978); and (C) a savings association (as defined in section 3(b) of

the Federal Deposit Insurance Act) the deposits of which are insured by the Federal Deposit Insurance Corporation. (47) The term ‘‘securities laws’’ means the Securities Act of

1933 (15 U.S.C. 78a et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), the Sarbanes-Oxley Act of 2002,


the Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the Investment Advisers Act of 1940 (15 U.S.C. 80b et seq.), and the Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa et seq.).

(48) The term ‘‘registered broker or dealer’’ means a broker or dealer registered or required to register pursuant to section 15 or 15B of this title, except that in paragraph (3) of this sub-section and sections 6 and 15A the term means such a broker or dealer and a government securities broker or government securities dealer registered or required to register pursuant to section 15C(a)(1)(A) of this title.

(49) The terms ‘‘person associated with a transfer agent’’ and ‘‘associated person of a transfer agent’’ mean any person (except an employee whose functions are solely clerical or min-isterial) directly engaged in the management, direction, super-vision, or performance of any of the transfer agent’s activities with respect to transfer agent functions, and any person di-rectly or indirectly controlling such activities or controlled by the transfer agent in connection with such activities.

(50) The term ‘‘foreign securities authority’’ means any for-eign government, or any governmental body or regulatory orga-nization empowered by a foreign government to administer or enforce its laws as they relate to securities matters.

(51)(A) The term ‘‘penny stock’’ means any equity security other than a security that is—

(i) registered or approved for registration and traded on a national securities exchange that meets such criteria as the Commission shall prescribe by rule or regulation for purposes of this paragraph;

(ii) authorized for quotation on an automated quotation system sponsored by a registered securities asso-ciation, if such system (I) was established and in operation before January 1, 1990, and (II) meets such criteria as the Commission shall prescribe by rule or regulation for pur-poses of this paragraph;

(iii) issued by an investment company registered under the Investment Company Act of 1940;

(iv) excluded, on the basis of exceeding a minimum price, net tangible assets of the issuer, or other relevant criteria, from the definition of such term by rule or regula-tion which the Commission shall prescribe for purposes of this paragraph; or

(v) exempted, in whole or in part, conditionally or un-conditionally, from the definition of such term by rule, reg-ulation, or order prescribed by the Commission. (B) The Commission may, by rule, regulation, or order,

designate any equity security or class of equity securities de-scribed in clause (i) or (ii) of subparagraph (A) as within the meaning of the term ‘‘penny stock’’ if such security or class of securities is traded other than on a national securities ex-change or through an automated quotation system described in clause (ii) of subparagraph (A).


(C) In exercising its authority under this paragraph to pre-scribe rules, regulations, and orders, the Commission shall de-termine that such rule, regulation, or order is consistent with the public interest and the protection of investors.

(52) The term ‘‘foreign financial regulatory authority’’ means any (A) foreign securities authority, (B) other govern-mental body or foreign equivalent of a self-regulatory organiza-tion empowered by a foreign government to administer or en-force its laws relating to the regulation of fiduciaries, trusts, commercial lending, insurance, trading in contracts of sale of a commodity for future delivery, or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent, or other financial activities, or (C) mem-bership organization a function of which is to regulate partici-pation of its members in activities listed above.

(53)(A) The term ‘‘small business related security’’ means a security that meets standards of credit-worthiness as estab-lished by the Commission, and either—

(i) represents an interest in 1 or more promissory notes or leases of personal property evidencing the obliga-tion of a small business concern and originated by an in-sured depository institution, insured credit union, insur-ance company, or similar institution which is supervised and examined by a Federal or State authority, or a finance company or leasing company; or

(ii) is secured by an interest in 1 or more promissory notes or leases of personal property (with or without re-course to the issuer or lessee) and provides for payments of principal in relation to payments, or reasonable projec-tions of payments, on notes or leases described in clause (i). (B) For purposes of this paragraph—

(i) an ‘‘interest in a promissory note or a lease of per-sonal property’’ includes ownership rights, certificates of interest or participation in such notes or leases, and rights designed to assure servicing of such notes or leases, or the receipt or timely receipt of amounts payable under such notes or leases;

(ii) the term ‘‘small business concern’’ means a busi-ness that meets the criteria for a small business concern established by the Small Business Administration under section 3(a) of the Small Business Act;

(iii) the term ‘‘insured depository institution’’ has the same meaning as in section 3 of the Federal Deposit Insur-ance Act; and

(iv) the term ‘‘insured credit union’’ has the same meaning as in section 101 of the Federal Credit Union Act. (54) QUALIFIED INVESTOR.—

(A) DEFINITION.—Except as provided in subparagraph (B), for purposes of this title, the term ‘‘qualified investor’’ means—

(i) any investment company registered with the Commission under section 8 of the Investment Com-pany Act of 1940;


(ii) any issuer eligible for an exclusion from the definition of investment company pursuant to section 3(c)(7) of the Investment Company Act of 1940;

(iii) any bank (as defined in paragraph (6) of this subsection), savings association (as defined in section 3(b) of the Federal Deposit Insurance Act), broker, dealer, insurance company (as defined in section 2(a)(13) of the Securities Act of 1933), or business de-velopment company (as defined in section 2(a)(48) of the Investment Company Act of 1940);

(iv) any small business investment company li-censed by the United States Small Business Adminis-tration under section 301 (c) or (d) of the Small Busi-ness Investment Act of 1958;

(v) any State sponsored employee benefit plan, or any other employee benefit plan, within the meaning of the Employee Retirement Income Security Act of 1974, other than an individual retirement account, if the investment decisions are made by a plan fiduciary, as defined in section 3(21) of that Act, which is either a bank, savings and loan association, insurance com-pany, or registered investment adviser;

(vi) any trust whose purchases of securities are di-rected by a person described in clauses (i) through (v) of this subparagraph;

(vii) any market intermediary exempt under sec-tion 3(c)(2) of the Investment Company Act of 1940;

(viii) any associated person of a broker or dealer other than a natural person;

(ix) any foreign bank (as defined in section 1(b)(7) of the International Banking Act of 1978);

(x) the government of any foreign country; (xi) any corporation, company, or partnership that

owns and invests on a discretionary basis, not less than $25,000,000 in investments;

(xii) any natural person who owns and invests on a discretionary basis, not less than $25,000,000 in in-vestments;

(xiii) any government or political subdivision, agency, or instrumentality of a government who owns and invests on a discretionary basis not less than $50,000,000 in investments; or

(xiv) any multinational or supranational entity or any agency or instrumentality thereof. (B) ALTERED THRESHOLDS FOR ASSET-BACKED SECURI-

TIES AND LOAN PARTICIPATIONS.—For purposes of section 3(a)(5)(C)(iii) of this title and section 206(a)(5) of the Gramm-Leach-Bliley Act, the term ‘‘qualified investor’’ has the meaning given such term by subparagraph (A) of this paragraph except that clauses (xi) and (xii) shall be ap-plied by substituting ‘‘$10,000,000’’ for ‘‘$25,000,000’’.

(C) ADDITIONAL AUTHORITY.—The Commission may, by rule or order, define a ‘‘qualified investor’’ as any other person, taking into consideration such factors as the finan-


cial sophistication of the person, net worth, and knowledge and experience in financial matters. (55)(A) The term ‘‘security future’’ means a contract of sale

for future delivery of a single security or of a narrow-based se-curity index, including any interest therein or based on the value thereof, except an exempted security under section 3(a)(12) of this title as in effect on the date of the enactment of the Futures Trading Act of 1982 (other than any municipal security as defined in section 3(a)(29) as in effect on the date of the enactment of the Futures Trading Act of 1982). The term ‘‘security future’’ does not include any agreement, contract, or transaction excluded from the Commodity Exchange Act under section 2(c), 2(d), 2(f ), or 2(g) of the Commodity Exchange Act (as in effect on the date of the enactment of the Commodity Futures Modernization Act of 2000) or title IV of the Com-modity Futures Modernization Act of 2000.

(B) The term ‘‘narrow-based security index’’ means an index—

(i) that has 9 or fewer component securities; (ii) in which a component security comprises more

than 30 percent of the index’s weighting; (iii) in which the five highest weighted component se-

curities in the aggregate comprise more than 60 percent of the index’s weighting; or

(iv) in which the lowest weighted component securities comprising, in the aggregate, 25 percent of the index’s weighting have an aggregate dollar value of average daily trading volume of less than $50,000,000 (or in the case of an index with 15 or more component securities, $30,000,000), except that if there are two or more securi-ties with equal weighting that could be included in the cal-culation of the lowest weighted component securities com-prising, in the aggregate, 25 percent of the index’s weighting, such securities shall be ranked from lowest to highest dollar value of average daily trading volume and shall be included in the calculation based on their ranking starting with the lowest ranked security. (C) Notwithstanding subparagraph (B), an index is not a

narrow- based security index if—(i)(I) it has at least nine component securities; (II) no component security comprises more than 30

percent of the index’s weighting; and (III) each component security is—

(aa) registered pursuant to section 12 of the Secu-rities Exchange Act of 1934;

(bb) one of 750 securities with the largest market capitalization; and

(cc) one of 675 securities with the largest dollar value of average daily trading volume; (ii) a board of trade was designated as a contract mar-

ket by the Commodity Futures Trading Commission with respect to a contract of sale for future delivery on the index, before the date of the enactment of the Commodity Futures Modernization Act of 2000;


(iii)(I) a contract of sale for future delivery on the index traded on a designated contract market or registered derivatives transaction execution facility for at least 30 days as a contract of sale for future delivery on an index that was not a narrow-based security index; and

(II) it has been a narrow-based security index for no more than 45 business days over 3 consecutive calendar months;

(iv) a contract of sale for future delivery on the index is traded on or subject to the rules of a foreign board of trade and meets such requirements as are jointly estab-lished by rule or regulation by the Commission and the Commodity Futures Trading Commission;

(v) no more than 18 months have passed since the date of the enactment of the Commodity Futures Mod-ernization Act of 2000 and—

(I) it is traded on or subject to the rules of a for-eign board of trade;

(II) the offer and sale in the United States of a contract of sale for future delivery on the index was authorized before the date of the enactment of the Commodity Futures Modernization Act of 2000; and

(III) the conditions of such authorization continue to be met; or (vi) a contract of sale for future delivery on the index

is traded on or subject to the rules of a board of trade and meets such requirements as are jointly established by rule, regulation, or order by the Commission and the Com-modity Futures Trading Commission. (D) Within 1 year after the enactment of the Commodity

Futures Modernization Act of 2000, the Commission and the Commodity Futures Trading Commission jointly shall adopt rules or regulations that set forth the requirements under clause (iv) of subparagraph (C).

(E) An index that is a narrow-based security index solely because it was a narrow-based security index for more than 45 business days over 3 consecutive calendar months pursuant to clause (iii) of subparagraph (C) shall not be a narrow-based se-curity index for the 3 following calendar months.

(F) For purposes of subparagraphs (B) and (C) of this para-graph—

(i) the dollar value of average daily trading volume and the market capitalization shall be calculated as of the preceding 6 full calendar months; and

(ii) the Commission and the Commodity Futures Trad-ing Commission shall, by rule or regulation, jointly specify the method to be used to determine market capitalization and dollar value of average daily trading volume. (56) The term ‘‘security futures product’’ means a security

future or any put, call, straddle, option, or privilege on any se-curity future.

(57)(A) The term ‘‘margin’’, when used with respect to a se-curity futures product, means the amount, type, and form of collateral required to secure any extension or maintenance of


credit, or the amount, type, and form of collateral required as a performance bond related to the purchase, sale, or carrying of a security futures product.

(B) The terms ‘‘margin level’’ and ‘‘level of margin’’, when used with respect to a security futures product, mean the amount of margin required to secure any extension or mainte-nance of credit, or the amount of margin required as a per-formance bond related to the purchase, sale, or carrying of a security futures product.

(C) The terms ‘‘higher margin level’’ and ‘‘higher level of margin’’, when used with respect to a security futures product, mean a margin level established by a national securities ex-change registered pursuant to section 6(g) that is higher than the minimum amount established and in effect pursuant to section 7(c)(2)(B).

(58) AUDIT COMMITTEE.—The term ‘‘audit committee’’ means—

(A) a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial report-ing processes of the issuer and audits of the financial statements of the issuer; and

(B) if no such committee exists with respect to an issuer, the entire board of directors of the issuer. (59) REGISTERED PUBLIC ACCOUNTING FIRM.—The term

‘‘registered public accounting firm’’ has the same meaning as in section 2 of the Sarbanes-Oxley Act of 2002.

(60) CREDIT RATING.—The term ‘‘credit rating’’ means an assessment of the creditworthiness of an obligor as an entity or with respect to specific securities or money market instru-ments.

(61) CREDIT RATING AGENCY.—The term ‘‘credit rating agency’’ means any person—

(A) engaged in the business of issuing credit ratings on the Internet or through another readily accessible means, for free or for a reasonable fee, but does not in-clude a commercial credit reporting company;

(B) employing either a quantitative or qualitative model, or both, to determine credit ratings; and

(C) receiving fees from either issuers, investors, or other market participants, or a combination thereof. (62) NATIONALLY RECOGNIZED STATISTICAL RATING ORGANI-

ZATION.— The term ‘‘nationally recognized statistical rating or-ganization’’ means a credit rating agency that—

(A) issues credit ratings certified by qualified institu-tional buyers, in accordance with section 15E(a)(1)(B)(ix), with respect to—

(i) financial institutions, brokers, or dealers; (ii) insurance companies; (iii) corporate issuers; (iv) issuers of asset-backed securities (as that

term is defined in section 1101(c) of part 229 of title 17, Code of Federal Regulations, as in effect on the date of enactment of this paragraph);


(v) issuers of government securities, municipal se-curities, or securities issued by a foreign government; or

(vi) a combination of one or more categories of ob-ligors described in any of clauses (i) through (v); and (B) is registered under section 15E.

(63) PERSON ASSOCIATED WITH A NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION.—The term ‘‘person associ-ated with’’ a nationally recognized statistical rating organiza-tion means any partner, officer, director, or branch manager of a nationally recognized statistical rating organization (or any person occupying a similar status or performing similar func-tions), any person directly or indirectly controlling, controlled by, or under common control with a nationally recognized sta-tistical rating organization, or any employee of a nationally recognized statistical rating organization.

(64) QUALIFIED INSTITUTIONAL BUYER.—The term ‘‘quali-fied institutional buyer’’ has the meaning given such term in section 230.144A(a) of title 17, Code of Federal Regulations, or any successor thereto.

(65) ELIGIBLE CONTRACT PARTICIPANT.—The term ‘‘eligible contract participant’’ has the same meaning as in section 1a of the Commodity Exchange Act (7 U.S.C. 1a).

(66) MAJOR SWAP PARTICIPANT.—The term ‘‘major swap participant’’ has the same meaning as in section 1a of the Commodity Exchange Act (7 U.S.C. 1a).

(67) MAJOR SECURITY-BASED SWAP PARTICIPANT.—(A) IN GENERAL.—The term ‘‘major security-based

swap participant’’ means any person—(i) who is not a security-based swap dealer; and (ii)(I) who maintains a substantial position in se-

curity-based swaps for any of the major security-based swap categories, as such categories are determined by the Commission, excluding both positions held for hedging or mitigating commercial risk and positions maintained by any employee benefit plan (or any con-tract held by such a plan) as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement In-come Security Act of 1974 (29 U.S.C. 1002) for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan;

(II) whose outstanding security-based swaps cre-ate substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets; or

(III) that is a financial entity that—(aa) is highly leveraged relative to the amount

of capital such entity holds and that is not subject to capital requirements established by an appro-priate Federal banking agency; and

(bb) maintains a substantial position in out-standing security-based swaps in any major


security- based swap category, as such categories are determined by the Commission.

(B) DEFINITION OF SUBSTANTIAL POSITION.—For pur-poses of subparagraph (A), the Commission shall define, by rule or regulation, the term ‘‘substantial position’’ at the threshold that the Commission determines to be prudent for the effective monitoring, management, and oversight of entities that are systemically important or can signifi-cantly impact the financial system of the United States. In setting the definition under this subparagraph, the Com-mission shall consider the person’s relative position in uncleared as opposed to cleared security-based swaps and may take into consideration the value and quality of collat-eral held against counterparty exposures.

(C) SCOPE OF DESIGNATION.—For purposes of subpara-graph (A), a person may be designated as a major security-based swap participant for 1 or more categories of security-based swaps without being classified as a major security-based swap participant for all classes of security-based swaps. (68) SECURITY-BASED SWAP.—

(A) IN GENERAL.—Except as provided in subparagraph (B), the term ‘‘security-based swap’’ means any agreement, contract, or transaction that—

(i) is a swap, as that term is defined under section 1a of the Commodity Exchange Act (without regard to paragraph (47)(B)(x) of such section); and

(ii) is based on—(I) an index that is a narrow-based security

index, including any interest therein or on the value thereof;

(II) a single security or loan, including any in-terest therein or on the value thereof; or

(III) the occurrence, nonoccurrence, or extent of the occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow- based security index, provided that such event directly affects the financial statements, fi-nancial condition, or financial obligations of the issuer.

(B) RULE OF CONSTRUCTION REGARDING MASTER AGREE-MENTS.— The term ‘‘security-based swap’’ shall be con-strued to include a master agreement that provides for an agreement, contract, or transaction that is a security-based swap pursuant to subparagraph (A), together with all sup-plements to any such master agreement, without regard to whether the master agreement contains an agreement, contract, or transaction that is not a security-based swap pursuant to subparagraph (A), except that the master agreement shall be considered to be a security-based swap only with respect to each agreement, contract, or trans-action under the master agreement that is a security-based swap pursuant to subparagraph (A).


(C) EXCLUSIONS.—The term ‘‘security-based swap’’ does not include any agreement, contract, or transaction that meets the definition of a security-based swap only be-cause such agreement, contract, or transaction references, is based upon, or settles through the transfer, delivery, or receipt of an exempted security under paragraph (12), as in effect on the date of enactment of the Futures Trading Act of 1982 (other than any municipal security as defined in paragraph (29) as in effect on the date of enactment of the Futures Trading Act of 1982), unless such agreement, contract, or transaction is of the character of, or is com-monly known in the trade as, a put, call, or other option.

(D) MIXED SWAP.—The term ‘‘security-based swap’’ in-cludes any agreement, contract, or transaction that is as described in subparagraph (A) and also is based on the value of 1 or more interest or other rates, currencies, com-modities, instruments of indebtedness, indices, quan-titative measures, other financial or economic interest or property of any kind (other than a single security or a nar-row-based security index), or the occurrence, non-occur-rence, or the extent of the occurrence of an event or contin-gency associated with a potential financial, economic, or commercial consequence (other than an event described in subparagraph (A)(ii)(III)).

(E) RULE OF CONSTRUCTION REGARDING USE OF THE TERM INDEX.—The term ‘‘index’’ means an index or group of securities, including any interest therein or based on the value thereof. (69) SWAP.—The term ‘‘swap’’ has the same meaning as in

section 1a of the Commodity Exchange Act (7 U.S.C. 1a). (70) PERSON ASSOCIATED WITH A SECURITY-BASED SWAP

DEALER OR MAJOR SECURITY-BASED SWAP PARTICIPANT.—(A) IN GENERAL.—The term ‘‘person associated with a

security-based swap dealer or major security-based swap participant’’ or ‘‘associated person of a security-based swap dealer or major security-based swap participant’’ means—

(i) any partner, officer, director, or branch man-ager of such security-based swap dealer or major secu-rity-based swap participant (or any person occupying a similar status or performing similar functions);

(ii) any person directly or indirectly controlling, controlled by, or under common control with such security- based swap dealer or major security-based swap participant; or

(iii) any employee of such security-based swap dealer or major security-based swap participant. (B) EXCLUSION.—Other than for purposes of section

15F(l)(2), the term ‘‘person associated with a security-based swap dealer or major security-based swap partici-pant’’ or ‘‘associated person of a security-based swap dealer or major security-based swap participant’’ does not include any person associated with a security-based swap dealer or major security- based swap participant whose functions are solely clerical or ministerial.


(71) SECURITY-BASED SWAP DEALER.—(A) IN GENERAL.—The term ‘‘security-based swap deal-

er’’ means any person who—(i) holds themself out as a dealer in security-based

swaps; (ii) makes a market in security-based swaps; (iii) regularly enters into security-based swaps

with counterparties as an ordinary course of business for its own account; or

(iv) engages in any activity causing it to be com-monly known in the trade as a dealer or market maker in security-based swaps. (B) DESIGNATION BY TYPE OR CLASS.—A person may be

designated as a security-based swap dealer for a single type or single class or category of security-based swap or activities and considered not to be a security-based swap dealer for other types, classes, or categories of security-based swaps or activities.

(C) EXCEPTION.—The term ‘‘security-based swap deal-er’’ does not include a person that enters into security-based swaps for such person’s own account, either individ-ually or in a fiduciary capacity, but not as a part of regular business.

(D) DE MINIMIS EXCEPTION.—The Commission shall ex-empt from designation as a security-based swap dealer an entity that engages in a de minimis quantity of security-based swap dealing in connection with transactions with or on behalf of its customers. The Commission shall promul-gate regulations to establish factors with respect to the making of any determination to exempt. (72) APPROPRIATE FEDERAL BANKING AGENCY.—The term

‘‘appropriate Federal banking agency’’ has the same meaning as in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)).

(73) BOARD.—The term ‘‘Board’’ means the Board of Gov-ernors of the Federal Reserve System.

(74) PRUDENTIAL REGULATOR.—The term ‘‘prudential regu-lator’’ has the same meaning as in section 1a of the Commodity Exchange Act (7 U.S.C. 1a).

(75) SECURITY-BASED SWAP DATA REPOSITORY.—The term ‘‘security-based swap data repository’’ means any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, se-curity-based swaps entered into by third parties for the pur-pose of providing a centralized recordkeeping facility for secu-rity-based swaps.

(76) SWAP DEALER.—The term ‘‘swap dealer’’ has the same meaning as in section 1a of the Commodity Exchange Act (7 U.S.C. 1a).

(77) SECURITY-BASED SWAP EXECUTION FACILITY.—The term ‘‘security-based swap execution facility’’ means a trading sys-tem or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system,


14Two pars. (80) have been enacted.

through any means of interstate commerce, including any trad-ing facility, that—

(A) facilitates the execution of security-based swaps between persons; and

(B) is not a national securities exchange. (78) SECURITY-BASED SWAP AGREEMENT.—

(A) IN GENERAL.—For purposes of sections 9, 10, 16, 20, and 21A of this Act, and section 17 of the Securities Act of 1933 (15 U.S.C. 77q), the term ‘‘security-based swap agreement’’ means a swap agreement as defined in section 206A of the Gramm- Leach-Bliley Act (15 U.S.C. 78c note) of which a material term is based on the price, yield, value, or volatility of any security or any group or index of securities, or any interest therein.

(B) EXCLUSIONS.—The term ‘‘security-based swap agreement’’ does not include any security-based swap. (79) ASSET-BACKED SECURITY.—The term ‘‘asset-backed se-

curity’’—(A) means a fixed-income or other security

collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or un-secured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including—

(i) a collateralized mortgage obligation; (ii) a collateralized debt obligation; (iii) a collateralized bond obligation; (iv) a collateralized debt obligation of asset-backed

securities; (v) a collateralized debt obligation of collateralized

debt obligations; and (vi) a security that the Commission, by rule, deter-

mines to be an asset-backed security for purposes of this section; and (B) does not include a security issued by a finance sub-

sidiary held by the parent company or a company con-trolled by the parent company, if none of the securities issued by the finance subsidiary are held by an entity that is not controlled by the parent company. (80) [14] EMERGING GROWTH COMPANY.—The term ‘‘emerg-

ing growth company’’ means an issuer that had total annual gross revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Con-sumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of—

(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000


15Probably should read ‘‘4(a)(6)’’. 16Probably should read ‘‘77d(a)(6)’’.

(as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bu-reau of Labor Statistics, setting the threshold to the near-est 1,000,000) or more;

(B) the last day of the fiscal year of the issuer fol-lowing the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an ef-fective registration statement under the Securities Act of 1933;

(C) the date on which such issuer has, during the pre-vious 3-year period, issued more than $1,000,000,000 in non- convertible debt; or

(D) the date on which such issuer is deemed to be a ‘‘large accelerated filer’’, as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto. (80) [14] FUNDING PORTAL.—The term ‘‘funding portal’’

means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of oth-ers, solely pursuant to section 4(6) [15] of the Securities Act of 1933 (15 U.S.C. 77d(6) [16]), that does not—

(A) offer investment advice or recommendations; (B) solicit purchases, sales, or offers to buy the securi-

ties offered or displayed on its website or portal; (C) compensate employees, agents, or other persons for

such solicitation or based on the sale of securities dis-played or referenced on its website or portal;

(D) hold, manage, possess, or otherwise handle inves-tor funds or securities; or

(E) engage in such other activities as the Commission, by rule, determines appropriate.

(b) The Commission and the Board of Governors of the Federal Reserve System, as to matters within their respective jurisdictions, shall have power by rules and regulations to define technical, trade, accounting, and other terms used in this title, consistently with the provisions and purposes of this title.

(c) No provision of this title shall apply to, or be deemed to in-clude, any executive department or independent establishment of the United States, or any lending agency which is wholly owned, directly or indirectly, by the United States, or any officer, agent, or employee of any such department, establishment, or agency, acting in the course of his official duty as such, unless such provision makes specific reference to such department, establishment, or agency.

(d) No issuer of municipal securities or officer or employee thereof acting in the course of his official duties as such shall be deemed to be a ‘‘broker’’, ‘‘dealer’’, or ‘‘municipal securities dealer’’ solely by reason of buying, selling, or effecting transactions in the issuer’s securities.

(e) CHARITABLE ORGANIZATIONS.—


(1) EXEMPTION.—Notwithstanding any other provision of this title, but subject to paragraph (2) of this subsection, a charitable organization, as defined in section 3(c)(10)(D) of the Investment Company Act of 1940, or any trustee, director, offi-cer, employee, or volunteer of such a charitable organization acting within the scope of such person’s employment or duties with such organization, shall not be deemed to be a ‘‘broker’’, ‘‘dealer’’, ‘‘municipal securities broker’’, ‘‘municipal securities dealer’’, ‘‘government securities broker’’, or ‘‘government securi-ties dealer’’ for purposes of this title solely because such orga-nization or person buys, holds, sells, or trades in securities for its own account in its capacity as trustee or administrator of, or otherwise on behalf of or for the account of—

(A) such a charitable organization; (B) a fund that is excluded from the definition of an

investment company under section 3(c)(10)(B) of the In-vestment Company Act of 1940; or

(C) a trust or other donative instrument described in section 3(c)(10)(B) of the Investment Company Act of 1940, or the settlors (or potential settlors) or beneficiaries of any such trust or other instrument. (2) LIMITATION ON COMPENSATION.—The exemption pro-

vided under paragraph (1) shall not be available to any chari-table organization, or any trustee, director, officer, employee, or volunteer of such a charitable organization, unless each per-son who, on or after 90 days after the date of enactment of this subsection, solicits donations on behalf of such charitable orga-nization from any donor to a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the Investment Company Act of 1940, is either a volunteer or is engaged in the overall fund raising activities of a chari-table organization and receives no commission or other special compensation based on the number or the value of donations collected for the fund. (f) CONSIDERATION OF PROMOTION OF EFFICIENCY, COMPETI-

TION, AND CAPITAL FORMATION.—Whenever pursuant to this title the Commission is engaged in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote effi-ciency, competition, and capital formation.

(g) CHURCH PLANS.—No church plan described in section 414(e) of the Internal Revenue Code of 1986, no person or entity eligible to establish and maintain such a plan under the Internal Revenue Code of 1986, no company or account that is excluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940, and no trustee, di-rector, officer or employee of or volunteer for such plan, company, account, person, or entity, acting within the scope of that person’s employment or activities with respect to such plan, shall be deemed to be a ‘‘broker’’, ‘‘dealer’’, ‘‘municipal securities broker’’, ‘‘municipal securities dealer’’, ‘‘government securities broker’’, ‘‘government se-


curities dealer’’, ‘‘clearing agency’’, or ‘‘transfer agent’’ for purposes of this title—

(1) solely because such plan, company, person, or entity buys, holds, sells, trades in, or transfers securities or acts as an intermediary in making payments in connection with trans-actions in securities for its own account in its capacity as trust-ee or administrator of, or otherwise on behalf of, or for the ac-count of, any church plan, company, or account that is ex-cluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940; and

(2) if no such person or entity receives a commission or other transaction-related sales compensation in connection with any activities conducted in reliance on the exemption pro-vided by this subsection. (h) LIMITED EXEMPTION FOR FUNDING PORTALS.—

(1) IN GENERAL.—The Commission shall, by rule, exempt, conditionally or unconditionally, a registered funding portal from the requirement to register as a broker or dealer under section 15(a)(1), provided that such funding portal—

(A) remains subject to the examination, enforcement, and other rulemaking authority of the Commission;

(B) is a member of a national securities association registered under section 15A; and

(C) is subject to such other requirements under this title as the Commission determines appropriate under such rule. (2) NATIONAL SECURITIES ASSOCIATION MEMBERSHIP.—For

purposes of sections 15(b)(8) and 15A, the term ‘‘broker or deal-er’’ includes a funding portal and the term ‘‘registered broker or dealer’’ includes a registered funding portal, except to the extent that the Commission, by rule, determines otherwise, provided that a national securities association shall only exam-ine for and enforce against a registered funding portal rules of such national securities association written specifically for reg-istered funding portals.

(June 6, 1934, ch. 404, title I, Sec. 3, 48 Stat. 882; Aug. 23, 1935, ch. 614, Sec. 203(a), 49 Stat. 704; Proc. No. 2695, eff. July 4, 1946, 11 F.R. 7517, 60 Stat. 1352; June 25, 1959, Pub. L. 86-70, Sec. 12(b), 73 Stat. 143; July 12, 1960, Pub. L. 86-624, Sec. 7(b), 74 Stat. 412; Aug. 20, 1964, Pub. L. 88-467, Sec. 2, 78 Stat. 565; Aug. 10, 1970, Pub. L. 91-373, title IV, Sec. 401(b), 84 Stat. 718; Dec. 14, 1970, Pub. L. 91-547, Sec. 28(a), (b), 84 Stat. 1435; Dec. 22, 1970, Pub. L. 91-567, Sec. 6(b), 84 Stat. 1499; June 4, 1975, Pub. L. 94-29, Sec. 3, 89 Stat. 97; May 21, 1978, Pub. L. 95-283, Sec. 16, 92 Stat. 274; Oct. 21, 1980, Pub. L. 96-477, title VII, Sec. 702, 94 Stat. 2295; Oct. 13, 1982, Pub. L. 97-303, Sec. 2, 96 Stat. 1409; Aug. 10, 1984, Pub. L. 98-376, Sec. 6(a), 98 Stat. 1265; Oct. 3, 1984, Pub. L. 98-440, title I, Sec. 101, 98 Stat. 1689; Oct. 22, 1986, Pub. L. 99-514, Sec. 2, 100 Stat. 2095; Oct. 28, 1986, Pub. L. 99-571, title I, Sec. 102(a)-(d), 100 Stat. 3214-3216; Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 301-306, 101 Stat. 1253, 1254; Nov. 19, 1988, Pub. L. 100-704, Sec. 6(a), 102 Stat. 4681; Aug. 9, 1989, Pub. L. 101-73, title VII, Sec. 744(u)(1), 103 Stat. 441; Oct. 15, 1990, Pub.

41 Sec. 3ASECURITIES EXCHANGE ACT OF 1934

L. 101-429, title V, Sec. 503, 104 Stat. 952; Nov. 15, 1990, Pub. L. 101-550, title II, Sec. 203(b), 204, 104 Stat. 2717, 2718; Dec. 17, 1993, Pub. L. 103-202, title I, Sec. 106(b)(2)(A), 109(a), 107 Stat. 2350, 2352; Sept. 23, 1994, Pub. L. 103-325, title II, Sec. 202, title III, Sec. 347(a), 108 Stat. 2198, 2241; Dec. 8, 1995, Pub. L. 104-62, Sec. 4(a), (b), 109 Stat. 684; Oct. 11, 1996, Pub. L. 104-290, title I, Sec. 106(b), title V, Sec. 508(c), 110 Stat. 3424, 3447; Nov. 3, 1998, Pub. L. 105-353, title III, Sec. 301(b)(1)-(4), 112 Stat. 3235, 3236; Nov. 12, 1999, Pub. L. 106-102, title II, Secs. 201, 202, 207, 208, 221(b), 231(b)(1), 113 Stat. 1385, 1390, 1394, 1395, 1401, 1406; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 201], 114 Stat. 2763, 2763A-413; Pub. L. 107-204, Sec. 2(b), title II, Sec. 205(a), title VI, Sec. 604(c)(1)(A), July 30, 2002, 116 Stat. 749, 773, 796; Pub. L. 108-359, Sec. 1(c)(1), Oct. 25, 2004 118 Stat. 1666; Pub. L. 108-386, Sec. 8(f)(1)-(3), Oct. 30, 2004, 118 Stat. 2232; Pub. L. 108-447, div. H, title V, Sec. 520(1), Dec. 8, 2004, 118 Stat. 3267; Pub. L. 109-291, Sec. 3(a), Sept. 29, 2006, 120 Stat. 1328; Pub. L. 109-351, title I, Sec. 101(a)(1), title IV, Sec. 401(a)(1), (2), Oct. 13, 2006, 120 Stat. 1968, 1971, 1972; Pub. L. 111-203, title III, Sec. 376(1), title VII, Sec. 761(a), title IX, Secs. 932(b), 939(e), 941(a), 944(b), 985(b)(2), 986(a)(1), July 21, 2010, 124 Stat. 1566, 1754, 1883, 1886, 1890, 1898, 1933, 1935; Pub. L. 112-106, title I, Sec. 101(b), title III, Sec. 304(a)(1), (b), Apr. 5, 2012, 126 Stat. 307, 321, 322.)

SEC. 3A. SWAP AGREEMENTS.

(a) [Reserved] (b) SECURITY-BASED SWAP AGREEMENTS.—

(1) The definition of ‘‘security’’ in section 3(a)(10) of this title does not include any security-based swap agreement.

(2) The Commission is prohibited from registering, or re-quiring, recommending, or suggesting, the registration under this title of any security-based swap agreement. If the Commis-sion becomes aware that a registrant has filed a registration application with respect to such a swap agreement, the Com-mission shall promptly so notify the registrant. Any such reg-istration with respect to such a swap agreement shall be void and of no force or effect.

(3) Except as provided in section 16(a) with respect to re-porting requirements, the Commission is prohibited from—

(A) promulgating, interpreting, or enforcing rules; or (B) issuing orders of general applicability; under this

title in a manner that imposes or specifies reporting or rec-ordkeeping requirements, procedures, or standards as pro-phylactic measures against fraud, manipulation, or insider trading with respect to any security-based swap agree-ment. (4) References in this title to the ‘‘purchase’’ or ‘‘sale’’ of a

security-based swap agreement shall be deemed to mean the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap agreement, as the context may require.

42Sec. 3B SECURITIES EXCHANGE ACT OF 1934

(June 6, 1934, ch. 404, title I, Sec. 3A, as added Pub. L. 106-554, Sec. 1(a)(5) [title III, Sec. 303(a)], Dec. 21, 2000, 114 Stat. 2763, 2763A-452; Pub. L. 111-203, title VII, Sec. 761(d)(1), July 21, 2010, 124 Stat. 1760.)

SEC. 3B. SECURITIES-RELATED DERIVATIVES.

(a) Any agreement, contract, or transaction (or class thereof) that is exempted by the Commodity Futures Trading Commission pursuant to section 4(c)(1) of the Commodity Exchange Act (7 U.S.C. 6(c)(1)) with the condition that the Commission exercise con-current jurisdiction over such agreement, contract, or transaction (or class thereof) shall be deemed a security for purposes of the se-curities laws.

(b) With respect to any agreement, contract, or transaction (or class thereof) that is exempted by the Commodity Futures Trading Commission pursuant to section 4(c)(1) of the Commodity Exchange Act (7 U.S.C. 6(c)(1)) with the condition that the Commission exer-cise concurrent jurisdiction over such agreement, contract, or trans-action (or class thereof), references in the securities laws to the ‘‘purchase’’ or ‘‘sale’’ of a security shall be deemed to include the execution, termination (prior to its scheduled maturity date), as-signment, exchange, or similar transfer or conveyance of, or extin-guishing of rights or obligations under such agreement, contract, or transaction, as the context may require.

(June 6, 1934, ch. 404, title I, Sec. 3B, as added Pub. L. 111-203, title VII, Sec. 717(b), July 21, 2010, 124 Stat. 1651.)

SEC. 3C. CLEARING FOR SECURITY-BASED SWAPS.

(a) IN GENERAL.—(1) STANDARD FOR CLEARING.—It shall be unlawful for any

person to engage in a security-based swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration under this Act if the security-based swap is required to be cleared.

(2) OPEN ACCESS.—The rules of a clearing agency described in paragraph (1) shall—

(A) prescribe that all security-based swaps submitted to the clearing agency with the same terms and conditions are economically equivalent within the clearing agency and may be offset with each other within the clearing agency; and

(B) provide for non-discriminatory clearing of a secu-rity-based swap executed bilaterally or on or through the rules of an unaffiliated national securities exchange or se-curity-based swap execution facility.

(b) COMMISSION REVIEW.—(1) COMMISSION-INITIATED REVIEW.—

(A) The Commission on an ongoing basis shall review each security-based swap, or any group, category, type, or class of security-based swaps to make a determination that

43 Sec. 3CSECURITIES EXCHANGE ACT OF 1934

such security-based swap, or group, category, type, or class of security-based swaps should be required to be cleared.

(B) The Commission shall provide at least a 30-day public comment period regarding any determination under subparagraph (A). (2) SWAP SUBMISSIONS.—

(A) A clearing agency shall submit to the Commission each security-based swap, or any group, category, type, or class of security-based swaps that it plans to accept for clearing and provide notice to its members (in a manner to be determined by the Commission) of such submission.

(B) Any security-based swap or group, category, type, or class of security-based swaps listed for clearing by a clearing agency as of the date of enactment of this sub-section shall be considered submitted to the Commission.

(C) The Commission shall—(i) make available to the public any submission re-

ceived under subparagraphs (A) and (B); (ii) review each submission made under subpara-

graphs (A) and (B), and determine whether the secu-rity-based swap, or group, category, type, or class of security-based swaps, described in the submission is required to be cleared; and

(iii) provide at least a 30-day public comment pe-riod regarding its determination whether the clearing requirement under subsection (a)(1) shall apply to the submission.

(3) DEADLINE.—The Commission shall make its determina-tion under paragraph (2)(C) not later than 90 days after receiv-ing a submission made under paragraphs (2)(A) and (2)(B), un-less the submitting clearing agency agrees to an extension for the time limitation established under this paragraph.

(4) DETERMINATION.—(A) In reviewing a submission made under paragraph

(2), the Commission shall review whether the submission is consistent with section 17A.

(B) In reviewing a security-based swap, group of secu-rity-based swaps or class of security-based swaps pursuant to paragraph (1) or a submission made under paragraph (2), the Commission shall take into account the following factors:

(i) The existence of significant outstanding no-tional exposures, trading liquidity and adequate pric-ing data.

(ii) The availability of rule framework, capacity, operational expertise and resources, and credit sup-port infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded.

(iii) The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the clearing agency available to clear the contract.

44Sec. 3C SECURITIES EXCHANGE ACT OF 1934

(iv) The effect on competition, including appro-priate fees and charges applied to clearing.

(v) The existence of reasonable legal certainty in the event of the insolvency of the relevant clearing agency or 1 or more of its clearing members with re-gard to the treatment of customer and security-based swap counterparty positions, funds, and property. (C) In making a determination under subsection (b)(1)

or paragraph (2)(C) that the clearing requirement shall apply, the Commission may require such terms and condi-tions to the requirement as the Commission determines to be appropriate. (5) RULES.—Not later than 1 year after the date of the en-

actment of this section, the Commission shall adopt rules for a clearing agency’s submission for review, pursuant to this sub-section, of a security-based swap, or a group, category, type, or class of security-based swaps, that it seeks to accept for clear-ing. Nothing in this paragraph limits the Commission from making a determination under paragraph (2)(C) for security-based swaps described in paragraph (2)(B). (c) STAY OF CLEARING REQUIREMENT.—

(1) IN GENERAL.—After making a determination pursuant to subsection (b)(2), the Commission, on application of a counterparty to a security-based swap or on its own initiative, may stay the clearing requirement of subsection (a)(1) until the Commission completes a review of the terms of the security-based swap (or the group, category, type, or class of security-based swaps) and the clearing arrangement.

(2) DEADLINE.—The Commission shall complete a review undertaken pursuant to paragraph (1) not later than 90 days after issuance of the stay, unless the clearing agency that clears the security-based swap, or group, category, type, or class of security-based swaps, agrees to an extension of the time limitation established under this paragraph.

(3) DETERMINATION.—Upon completion of the review un-dertaken pursuant to paragraph (1), the Commission may—

(A) determine, unconditionally or subject to such terms and conditions as the Commission determines to be appropriate, that the security-based swap, or group, cat-egory, type, or class of security-based swaps, must be cleared pursuant to this subsection if it finds that such clearing is consistent with subsection (b)(4); or

(B) determine that the clearing requirement of sub-section (a)(1) shall not apply to the security-based swap, or group, category, type, or class of security-based swaps. (4) RULES.—Not later than 1 year after the date of the en-

actment of this section, the Commission shall adopt rules for reviewing, pursuant to this subsection, a clearing agency’s clearing of a security-based swap, or a group, category, type, or class of security-based swaps, that it has accepted for clearing. (d) PREVENTION OF EVASION.—

(1) IN GENERAL.—The Commission shall prescribe rules under this section (and issue interpretations of rules prescribed under this section), as determined by the Commission to be


necessary to prevent evasions of the mandatory clearing re-quirements under this Act.

(2) DUTY OF COMMISSION TO INVESTIGATE AND TAKE CER-TAIN ACTIONS.—To the extent the Commission finds that a par-ticular security-based swap or any group, category, type, or class of security-based swaps that would otherwise be subject to mandatory clearing but no clearing agency has listed the se-curity-based swap or the group, category, type, or class of secu-rity-based swaps for clearing, the Commission shall—

(A) investigate the relevant facts and circumstances; (B) within 30 days issue a public report containing the

results of the investigation; and (C) take such actions as the Commission determines to

be necessary and in the public interest, which may include requiring the retaining of adequate margin or capital by parties to the security-based swap or the group, category, type, or class of security-based swaps. (3) EFFECT ON AUTHORITY.—Nothing in this subsection—

(A) authorizes the Commission to adopt rules requir-ing a clearing agency to list for clearing a security-based swap or any group, category, type, or class of security-based swaps if the clearing of the security-based swap or the group, category, type, or class of security-based swaps would threaten the financial integrity of the clearing agen-cy; and

(B) affects the authority of the Commission to enforce the open access provisions of subsection (a)(2) with respect to a security-based swap or the group, category, type, or class of security-based swaps that is listed for clearing by a clearing agency.

(e) REPORTING TRANSITION RULES.—Rules adopted by the Com-mission under this section shall provide for the reporting of data, as follows:

(1) Security-based swaps entered into before the date of the enactment of this section shall be reported to a registered security-based swap data repository or the Commission no later than 180 days after the effective date of this section.

(2) Security-based swaps entered into on or after such date of enactment shall be reported to a registered security-based swap data repository or the Commission no later than the later of—

(A) 90 days after such effective date; or (B) such other time after entering into the security-

based swap as the Commission may prescribe by rule or regulation.

(f) CLEARING TRANSITION RULES.—(1) Security-based swaps entered into before the date of

the enactment of this section are exempt from the clearing re-quirements of this subsection if reported pursuant to sub-section (e)(1).

(2) Security-based swaps entered into before application of the clearing requirement pursuant to this section are exempt from the clearing requirements of this section if reported pur-suant to subsection (e)(2).


17So in original. Probably should be ‘‘80b-2(a)’’.

(g) EXCEPTIONS.—(1) IN GENERAL.—The requirements of subsection (a)(1)

shall not apply to a security-based swap if 1 of the counterparties to the security-based swap—

(A) is not a financial entity; (B) is using security-based swaps to hedge or mitigate

commercial risk; and (C) notifies the Commission, in a manner set forth by

the Commission, how it generally meets its financial obli-gations associated with entering into non-cleared security-based swaps. (2) OPTION TO CLEAR.—The application of the clearing ex-

ception in paragraph (1) is solely at the discretion of the counterparty to the security-based swap that meets the condi-tions of subparagraphs (A) through (C) of paragraph (1).

(3) FINANCIAL ENTITY DEFINITION.—(A) IN GENERAL.—For the purposes of this subsection,

the term ‘‘financial entity’’ means—(i) a swap dealer; (ii) a security-based swap dealer; (iii) a major swap participant; (iv) a major security-based swap participant; (v) a commodity pool as defined in section 1a(10)

of the Commodity Exchange Act; (vi) a private fund as defined in section 202(a) of

the Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a) [17]);

(vii) an employee benefit plan as defined in para-graphs (3) and (32) of section 3 of the Employee Re-tirement Income Security Act of 1974 (29 U.S.C. 1002);

(viii) a person predominantly engaged in activities that are in the business of banking or financial in na-ture, as defined in section 4(k) of the Bank Holding Company Act of 1956. (B) EXCLUSION.—The Commission shall consider

whether to exempt small banks, savings associations, farm credit system institutions, and credit unions, including—

(i) depository institutions with total assets of $10,000,000,000 or less;

(ii) farm credit system institutions with total as-sets of $10,000,000,000 or less; or

(iii) credit unions with total assets of $10,000,000,000 or less.

(4) TREATMENT OF AFFILIATES.—(A) IN GENERAL.—An affiliate of a person that quali-

fies for an exception under this subsection (including affil-iate entities predominantly engaged in providing financing for the purchase of the merchandise or manufactured goods of the person) may qualify for the exception only if the affiliate, acting on behalf of the person and as an agent, uses the security-based swap to hedge or mitigate


the commercial risk of the person or other affiliate of the person that is not a financial entity.

(B) PROHIBITION RELATING TO CERTAIN AFFILIATES.—The exception in subparagraph (A) shall not apply if the affiliate is—

(i) a swap dealer; (ii) a security-based swap dealer; (iii) a major swap participant; (iv) a major security-based swap participant; (v) an issuer that would be an investment com-

pany, as defined in section 3 of the Investment Com-pany Act of 1940 (15 U.S.C. 80a-3), but for paragraph (1) or (7) of subsection (c) of that Act (15 U.S.C. 80a-3(c));

(vi) a commodity pool; or (vii) a bank holding company with over

$50,000,000,000 in consolidated assets. (C) TRANSITION RULE FOR AFFILIATES.—An affiliate,

subsidiary, or a wholly owned entity of a person that quali-fies for an exception under subparagraph (A) and is pre-dominantly engaged in providing financing for the pur-chase or lease of merchandise or manufactured goods of the person shall be exempt from the margin requirement described in section 15F(e) and the clearing requirement described in subsection (a) with regard to security-based swaps entered into to mitigate the risk of the financing ac-tivities for not less than a 2-year period beginning on the date of enactment of this subparagraph. (5) ELECTION OF COUNTERPARTY.—

(A) SECURITY-BASED SWAPS REQUIRED TO BE CLEARED.—With respect to any security-based swap that is subject to the mandatory clearing requirement under sub-section (a) and entered into by a security-based swap deal-er or a major security-based swap participant with a counterparty that is not a swap dealer, major swap partici-pant, security-based swap dealer, or major security-based swap participant, the counterparty shall have the sole right to select the clearing agency at which the security-based swap will be cleared.

(B) SECURITY-BASED SWAPS NOT REQUIRED TO BE CLEARED.— With respect to any security-based swap that is not subject to the mandatory clearing requirement under subsection (a) and entered into by a security-based swap dealer or a major security-based swap participant with a counterparty that is not a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant, the counterparty—

(i) may elect to require clearing of the security- based swap; and

(ii) shall have the sole right to select the clearing agency at which the security-based swap will be cleared.

(6) ABUSE OF EXCEPTION.—The Commission may prescribe such rules or issue interpretations of the rules as the Commis-


sion determines to be necessary to prevent abuse of the excep-tions described in this subsection. The Commission may also request information from those persons claiming the clearing exception as necessary to prevent abuse of the exceptions de-scribed in this subsection. (h) TRADE EXECUTION.—

(1) IN GENERAL.—With respect to transactions involving se-curity-based swaps subject to the clearing requirement of sub-section (a)(1), counterparties shall—

(A) execute the transaction on an exchange; or (B) execute the transaction on a security-based swap

execution facility registered under section 3D or a security- based swap execution facility that is exempt from registra-tion under section 3D(e). (2) EXCEPTION.—The requirements of subparagraphs (A)

and (B) of paragraph (1) shall not apply if no exchange or secu-rity-based swap execution facility makes the security-based swap available to trade or for security-based swap transactions subject to the clearing exception under subsection (g). (i) BOARD APPROVAL.—Exemptions from the requirements of

this section to clear a security-based swap or execute a security-based swap through a national securities exchange or security-based swap execution facility shall be available to a counterparty that is an issuer of securities that are registered under section 12 or that is required to file reports pursuant to section 15(d), only if an appropriate committee of the issuer’s board or governing body has reviewed and approved the issuer’s decision to enter into secu-rity-based swaps that are subject to such exemptions.

(j) DESIGNATION OF CHIEF COMPLIANCE OFFICER.—(1) IN GENERAL.—Each registered clearing agency shall

designate an individual to serve as a chief compliance officer. (2) DUTIES.—The chief compliance officer shall—

(A) report directly to the board or to the senior officer of the clearing agency;

(B) in consultation with its board, a body performing a function similar thereto, or the senior officer of the reg-istered clearing agency, resolve any conflicts of interest that may arise;

(C) be responsible for administering each policy and procedure that is required to be established pursuant to this section;

(D) ensure compliance with this title (including regula-tions issued under this title) relating to agreements, con-tracts, or transactions, including each rule prescribed by the Commission under this section;

(E) establish procedures for the remediation of non-compliance issues identified by the compliance officer through any—

(i) compliance office review; (ii) look-back; (iii) internal or external audit finding; (iv) self-reported error; or (v) validated complaint; and

49 Sec. 3DSECURITIES EXCHANGE ACT OF 1934

(F) establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. (3) ANNUAL REPORTS.—

(A) IN GENERAL.—In accordance with rules prescribed by the Commission, the chief compliance officer shall an-nually prepare and sign a report that contains a descrip-tion of—

(i) the compliance of the registered clearing agen-cy or security-based swap execution facility of the com-pliance officer with respect to this title (including reg-ulations under this title); and

(ii) each policy and procedure of the registered clearing agency of the compliance officer (including the code of ethics and conflict of interest policies of the registered clearing agency). (B) REQUIREMENTS.—A compliance report under sub-

paragraph (A) shall—(i) accompany each appropriate financial report of

the registered clearing agency that is required to be furnished to the Commission pursuant to this section; and

(ii) include a certification that, under penalty of law, the compliance report is accurate and complete.

(June 6, 1934, ch. 404, title I, Sec. 3C, as added Pub. L. 111-203, title VII, Sec. 763(a), July 21, 2010, 124 Stat. 1762.)

SEC. 3D. SECURITY-BASED SWAP EXECUTION FACILITIES.

(a) REGISTRATION.—(1) IN GENERAL.—No person may operate a facility for the

trading or processing of security-based swaps, unless the facil-ity is registered as a security-based swap execution facility or as a national securities exchange under this section.

(2) DUAL REGISTRATION.—Any person that is registered as a security-based swap execution facility under this section shall register with the Commission regardless of whether the person also is registered with the Commodity Futures Trading Commission as a swap execution facility. (b) TRADING AND TRADE PROCESSING.—A security-based swap

execution facility that is registered under subsection (a) may—(1) make available for trading any security-based swap;

and (2) facilitate trade processing of any security-based swap.

(c) IDENTIFICATION OF FACILITY USED TO TRADE SECURITY-BASED SWAPS BY NATIONAL SECURITIES EXCHANGES.—A national securities exchange shall, to the extent that the exchange also op-erates a security-based swap execution facility and uses the same electronic trade execution system for listing and executing trades of security-based swaps on or through the exchange and the facil-ity, identify whether electronic trading of such security-based swaps is taking place on or through the national securities ex-change or the security-based swap execution facility.

50Sec. 3D SECURITIES EXCHANGE ACT OF 1934

(d) CORE PRINCIPLES FOR SECURITY-BASED SWAP EXECUTION FACILITIES.—

(1) COMPLIANCE WITH CORE PRINCIPLES.—(A) IN GENERAL.—To be registered, and maintain reg-

istration, as a security-based swap execution facility, the security-based swap execution facility shall comply with—

(i) the core principles described in this subsection; and

(ii) any requirement that the Commission may im-pose by rule or regulation. (B) REASONABLE DISCRETION OF SECURITY-BASED SWAP

EXECUTION FACILITY.—Unless otherwise determined by the Commission, by rule or regulation, a security-based swap execution facility described in subparagraph (A) shall have reasonable discretion in establishing the manner in which it complies with the core principles described in this sub-section. (2) COMPLIANCE WITH RULES.—A security-based swap exe-

cution facility shall—(A) establish and enforce compliance with any rule es-

tablished by such security-based swap execution facility, including—

(i) the terms and conditions of the security-based swaps traded or processed on or through the facility; and

(ii) any limitation on access to the facility; (B) establish and enforce trading, trade processing,

and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, in-cluding means—

(i) to provide market participants with impartial access to the market; and

(ii) to capture information that may be used in es-tablishing whether rule violations have occurred; and (C) establish rules governing the operation of the facil-

ity, including rules specifying trading procedures to be used in entering and executing orders traded or posted on the facility, including block trades. (3) SECURITY-BASED SWAPS NOT READILY SUSCEPTIBLE TO

MANIPULATION.—The security-based swap execution facility shall permit trading only in security-based swaps that are not readily susceptible to manipulation.

(4) MONITORING OF TRADING AND TRADE PROCESSING.—The security-based swap execution facility shall—

(A) establish and enforce rules or terms and conditions defining, or specifications detailing—

(i) trading procedures to be used in entering and executing orders traded on or through the facilities of the security-based swap execution facility; and

(ii) procedures for trade processing of security- based swaps on or through the facilities of the security- based swap execution facility; and (B) monitor trading in security-based swaps to prevent

manipulation, price distortion, and disruptions of the deliv-


ery or cash settlement process through surveillance, com-pliance, and disciplinary practices and procedures, includ-ing methods for conducting real-time monitoring of trading and comprehensive and accurate trade reconstructions. (5) ABILITY TO OBTAIN INFORMATION.—The security-based

swap execution facility shall—(A) establish and enforce rules that will allow the fa-

cility to obtain any necessary information to perform any of the functions described in this subsection;

(B) provide the information to the Commission on re-quest; and

(C) have the capacity to carry out such international information-sharing agreements as the Commission may require. (6) FINANCIAL INTEGRITY OF TRANSACTIONS.—The security-

based swap execution facility shall establish and enforce rules and procedures for ensuring the financial integrity of security-based swaps entered on or through the facilities of the secu-rity-based swap execution facility, including the clearance and settlement of security-based swaps pursuant to section 3C(a)(1).

(7) EMERGENCY AUTHORITY.—The security-based swap exe-cution facility shall adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, as is necessary and appropriate, including the au-thority to liquidate or transfer open positions in any security-based swap or to suspend or curtail trading in a security-based swap.

(8) TIMELY PUBLICATION OF TRADING INFORMATION.—(A) IN GENERAL.—The security-based swap execution

facility shall make public timely information on price, trading volume, and other trading data on security-based swaps to the extent prescribed by the Commission.

(B) CAPACITY OF SECURITY-BASED SWAP EXECUTION FA-CILITY.— The security-based swap execution facility shall be required to have the capacity to electronically capture and transmit and disseminate trade information with re-spect to transactions executed on or through the facility. (9) RECORDKEEPING AND REPORTING.—

(A) IN GENERAL.—A security-based swap execution fa-cility shall—

(i) maintain records of all activities relating to the business of the facility, including a complete audit trail, in a form and manner acceptable to the Commis-sion for a period of 5 years; and

(ii) report to the Commission, in a form and man-ner acceptable to the Commission, such information as the Commission determines to be necessary or appro-priate for the Commission to perform the duties of the Commission under this title. (B) REQUIREMENTS.—The Commission shall adopt data

collection and reporting requirements for security-based swap execution facilities that are comparable to cor-


18So in original. Probably should be ‘‘take’’.

responding requirements for clearing agencies and secu-rity-based swap data repositories. (10) ANTITRUST CONSIDERATIONS.—Unless necessary or ap-

propriate to achieve the purposes of this title, the security-based swap execution facility shall not—

(A) adopt any rules or taking [18] any actions that re-sult in any unreasonable restraint of trade; or

(B) impose any material anticompetitive burden on trading or clearing. (11) CONFLICTS OF INTEREST.—The security-based swap

execution facility shall—(A) establish and enforce rules to minimize conflicts of

interest in its decision-making process; and (B) establish a process for resolving the conflicts of in-

terest. (12) FINANCIAL RESOURCES.—

(A) IN GENERAL.—The security-based swap execution facility shall have adequate financial, operational, and managerial resources to discharge each responsibility of the security-based swap execution facility, as determined by the Commission.

(B) DETERMINATION OF RESOURCE ADEQUACY.—The fi-nancial resources of a security-based swap execution facil-ity shall be considered to be adequate if the value of the financial resources—

(i) enables the organization to meet its financial obligations to its members and participants notwith-standing a default by the member or participant cre-ating the largest financial exposure for that organiza-tion in extreme but plausible market conditions; and

(ii) exceeds the total amount that would enable the security-based swap execution facility to cover the operating costs of the security-based swap execution facility for a 1-year period, as calculated on a rolling basis.

(13) SYSTEM SAFEGUARDS.—The security-based swap execu-tion facility shall—

(A) establish and maintain a program of risk analysis and oversight to identify and minimize sources of oper-ational risk, through the development of appropriate con-trols and procedures, and automated systems, that—

(i) are reliable and secure; and (ii) have adequate scalable capacity;

(B) establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allow for—

(i) the timely recovery and resumption of oper-ations; and

(ii) the fulfillment of the responsibilities and obli-gations of the security-based swap execution facility; and


19So in original.

(C) periodically conduct tests to verify that the backup resources of the security-based swap execution facility are sufficient to ensure continued—

(i) order processing and trade matching; (ii) price reporting; (iii) market surveillance; and (iv) maintenance of a comprehensive and accurate

audit trail. (14) DESIGNATION OF CHIEF COMPLIANCE OFFICER.—

(A) IN GENERAL.—Each security-based swap execution facility shall designate an individual to serve as a chief compliance officer.

(B) DUTIES.—The chief compliance officer shall—(i) report directly to the board or to the senior offi-

cer of the facility; (ii) review compliance with the core principles in

this subsection; (iii) in consultation with the board of the facility,

a body performing a function similar to that of a board, or the senior officer of the facility, resolve any conflicts of interest that may arise;

(iv) be responsible for establishing and admin-istering the policies and procedures required to be es-tablished pursuant to this section;

(v) ensure compliance with this title and the rules and regulations issued under this title, including rules prescribed by the Commission pursuant to this sec-tion;

(vi) establish procedures for the remediation of noncompliance issues found during—

(I) compliance office reviews; (II) look backs; (III) internal or external audit findings; (IV) self-reported errors; or (V) through validated complaints; and

(vii) establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. (C) ANNUAL REPORTS.—

(i) IN GENERAL.—In accordance with rules pre-scribed by the Commission, the chief compliance offi-cer shall annually prepare and sign a report that con-tains a description of—

(I) the compliance of the security-based swap execution facility with this title; and

(II) the policies and procedures, including the code of ethics and conflict of interest policies, of the security-based security-based [19] swap execu-tion facility. (ii) REQUIREMENTS.—The chief compliance officer

shall—

54Sec. 3E SECURITIES EXCHANGE ACT OF 1934

20So in original. Probably should be ‘‘through’’.

(I) submit each report described in clause (i) with the appropriate financial report of the security- based swap execution facility that is re-quired to be submitted to the Commission pursu-ant to this section; and

(II) include in the report a certification that, under penalty of law, the report is accurate and complete.

(e) EXEMPTIONS.—The Commission may exempt, conditionally or unconditionally, a security-based swap execution facility from registration under this section if the Commission finds that the fa-cility is subject to comparable, comprehensive supervision and reg-ulation on a consolidated basis by the Commodity Futures Trading Commission.

(f) RULES.—The Commission shall prescribe rules governing the regulation of security-based swap execution facilities under this section.

(June 6, 1934, ch. 404, title I, Sec. 3D, as added Pub. L. 111-203, title VII, Sec. 763(c), July 21, 2010, 124 Stat. 1769.)

SEC. 3E. SEGREGATION OF ASSETS HELD AS COLLATERAL IN SECU-RITY-BASED SWAP TRANSACTIONS.

(a) REGISTRATION REQUIREMENT.—It shall be unlawful for any person to accept any money, securities, or property (or to extend any credit in lieu of money, securities, or property) from, for, or on behalf of a security-based swaps customer to margin, guarantee, or secure a security-based swap cleared by or through a clearing agen-cy (including money, securities, or property accruing to the cus-tomer as the result of such a security-based swap), unless the per-son shall have registered under this title with the Commission as a broker, dealer, or security-based swap dealer, and the registra-tion shall not have expired nor been suspended nor revoked.

(b) CLEARED SECURITY-BASED SWAPS.—(1) SEGREGATION REQUIRED.—A broker, dealer, or security-

based swap dealer shall treat and deal with all money, securi-ties, and property of any security-based swaps customer re-ceived to margin, guarantee, or secure a security-based swap cleared by or though [20] a clearing agency (including money, securities, or property accruing to the security-based swaps customer as the result of such a security-based swap) as be-longing to the security-based swaps customer.

(2) COMMINGLING PROHIBITED.—Money, securities, and property of a security-based swaps customer described in para-graph (1) shall be separately accounted for and shall not be commingled with the funds of the broker, dealer, or security-based swap dealer or be used to margin, secure, or guarantee any trades or contracts of any security-based swaps customer or person other than the person for whom the same are held. (c) EXCEPTIONS.—

(1) USE OF FUNDS.—

55 Sec. 3ESECURITIES EXCHANGE ACT OF 1934

(A) IN GENERAL.—Notwithstanding subsection (b), money, securities, and property of a security-based swaps customer of a broker, dealer, or security-based swap dealer described in subsection (b) may, for convenience, be com-mingled and deposited in the same 1 or more accounts with any bank or trust company or with a clearing agency.

(B) WITHDRAWAL.—Notwithstanding subsection (b), such share of the money, securities, and property described in subparagraph (A) as in the normal course of business shall be necessary to margin, guarantee, secure, transfer, adjust, or settle a cleared security-based swap with a clearing agency, or with any member of the clearing agen-cy, may be withdrawn and applied to such purposes, in-cluding the payment of commissions, brokerage, interest, taxes, storage, and other charges, lawfully accruing in con-nection with the cleared security-based swap. (2) COMMISSION ACTION.—Notwithstanding subsection (b),

in accordance with such terms and conditions as the Commis-sion may prescribe by rule, regulation, or order, any money, se-curities, or property of the security-based swaps customer of a broker, dealer, or security-based swap dealer described in sub-section (b) may be commingled and deposited as provided in this section with any other money, securities, or property re-ceived by the broker, dealer, or security-based swap dealer and required by the Commission to be separately accounted for and treated and dealt with as belonging to the security-based swaps customer of the broker, dealer, or security-based swap dealer. (d) PERMITTED INVESTMENTS.—Money described in subsection

(b) may be invested in obligations of the United States, in general obligations of any State or of any political subdivision of a State, and in obligations fully guaranteed as to principal and interest by the United States, or in any other investment that the Commission may by rule or regulation prescribe, and such investments shall be made in accordance with such rules and regulations and subject to such conditions as the Commission may prescribe.

(e) PROHIBITION.—It shall be unlawful for any person, includ-ing any clearing agency and any depository institution, that has re-ceived any money, securities, or property for deposit in a separate account or accounts as provided in subsection (b) to hold, dispose of, or use any such money, securities, or property as belonging to the depositing broker, dealer, or security-based swap dealer or any person other than the swaps customer of the broker, dealer, or se-curity-based swap dealer.

(f) SEGREGATION REQUIREMENTS FOR UNCLEARED SECURITY-BASED SWAPS.—

(1) SEGREGATION OF ASSETS HELD AS COLLATERAL IN UNCLEARED SECURITY-BASED SWAP TRANSACTIONS.—

(A) NOTIFICATION.—A security-based swap dealer or major security-based swap participant shall be required to notify the counterparty of the security-based swap dealer or major security-based swap participant at the beginning of a security-based swap transaction that the counterparty has the right to require segregation of the funds of other


property supplied to margin, guarantee, or secure the obli-gations of the counterparty.

(B) SEGREGATION AND MAINTENANCE OF FUNDS.—At the request of a counterparty to a security-based swap that provides funds or other property to a security-based swap dealer or major security-based swap participant to margin, guarantee, or secure the obligations of the counterparty, the security-based swap dealer or major security-based swap participant shall—

(i) segregate the funds or other property for the benefit of the counterparty; and

(ii) in accordance with such rules and regulations as the Commission may promulgate, maintain the funds or other property in a segregated account sepa-rate from the assets and other interests of the secu-rity-based swap dealer or major security-based swap participant.

(2) APPLICABILITY.—The requirements described in para-graph (1) shall—

(A) apply only to a security-based swap between a counterparty and a security-based swap dealer or major se-curity-based swap participant that is not submitted for clearing to a clearing agency; and

(B)(i) not apply to variation margin payments; or (ii) not preclude any commercial arrangement regard-

ing—(I) the investment of segregated funds or other

property that may only be invested in such invest-ments as the Commission may permit by rule or regu-lation; and

(II) the related allocation of gains and losses re-sulting from any investment of the segregated funds or other property.

(3) USE OF INDEPENDENT THIRD-PARTY CUSTODIANS.—The segregated account described in paragraph (1) shall be—

(A) carried by an independent third-party custodian; and

(B) designated as a segregated account for and on be-half of the counterparty. (4) REPORTING REQUIREMENT.—If the counterparty does

not choose to require segregation of the funds or other property supplied to margin, guarantee, or secure the obligations of the counterparty, the security-based swap dealer or major security- based swap participant shall report to the counterparty of the security-based swap dealer or major security-based swap par-ticipant on a quarterly basis that the back office procedures of the security-based swap dealer or major security-based swap participant relating to margin and collateral requirements are in compliance with the agreement of the counterparties. (g) BANKRUPTCY.—A security-based swap, as defined in section

3(a)(68) shall be considered to be a security as such term is used in section 101(53A)(B) and subchapter III of title 11, United States


21So in original.

Code. [21] An account that holds a security-based swap, other than a portfolio margining account referred to in section 15(c)(3)(C) shall be considered to be a securities account, as that term is defined in section 741 of title 11, United States Code. The definitions of the terms ‘‘purchase’’ and ‘‘sale’’ in section 3(a)(13) and (14) shall be ap-plied to the terms ‘‘purchase’’ and ‘‘sale’’, as used in section 741 of title 11, United States Code. The term ‘‘customer’’, as defined in section 741 of title 11, United States Code, excludes any person, to the extent that such person has a claim based on any open repur-chase agreement, open reverse repurchase agreement, stock bor-rowed agreement, non-cleared option, or non-cleared security-based swap except to the extent of any margin delivered to or by the cus-tomer with respect to which there is a customer protection require-ment under section 15(c)(3) or a segregation requirement.

(June 6, 1934, ch. 404, title I, Sec. 3E, as added Pub. L. 111-203, title VII, Sec. 763(d), July 21, 2010, 124 Stat. 1774.)

SECURITIES AND EXCHANGE COMMISSION

SEC. 4. (a) There is hereby established a Securities and Ex-change Commission (hereinafter referred to as the ‘‘Commission’’) to be composed of five commissioners to be appointed by the Presi-dent by and with the advice and consent of the Senate. Not more than three of such commissioners shall be members of the same po-litical party, and in making appointments members of different po-litical parties shall be appointed alternately as nearly as may be practicable. No commissioner shall engage in any other business, vocation, or employment than that of serving as commissioner, nor shall any commissioner participate, directly or indirectly, in any stock-market operations or transactions of a character subject to regulation by the Commission pursuant to this title. Each commis-sioner shall hold office for a term of five years and until his suc-cessor is appointed and has qualified, except that he shall not so continue to serve beyond the expiration of the next session of Con-gress subsequent to the expiration of said fixed term of office, and except (1) any commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which his predecessor was appointed shall be appointed for the remainder of such term, and (2) the terms of office of the commissioners first taking office after the enactment of this title shall expire as designated by the Presi-dent at the time of nomination, one at the end of one year, one at the end of two years, one at the end of three years, one at the end of four years, and one at the end of five years, after the date of the enactment of this title.

(b) APPOINTMENT AND COMPENSATION OF STAFF AND LEASING AUTHORITY.—

(1) APPOINTMENT AND COMPENSATION.—The Commission shall appoint and compensate officers, attorneys, economists, examiners, and other employees in accordance with section 4802 of title 5, United States Code.


22So in law. Probably should be ‘‘Notwithstanding’’.

(2) REPORTING OF INFORMATION.—In establishing and ad-justing schedules of compensation and benefits for officers, at-torneys, economists, examiners, and other employees of the Commission under applicable provisions of law, the Commis-sion shall inform the heads of the agencies referred to under section 1206 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 1833b) and Congress of such compensation and benefits and shall seek to maintain comparability with such agencies regarding compensation and benefits.

(3) LEASING AUTHORITY.—Nothwithstanding [22] any other provision of law, the Commission is authorized to enter directly into leases for real property for office, meeting, storage, and such other space as is necessary to carry out its functions, and shall be exempt from any General Services Administration space management regulations or directives. (c) Notwithstanding any other provision of law, in accordance

with regulations which the Commission shall prescribe to prevent conflicts of interest, the Commission may accept payment and re-imbursement, in cash or in kind, from non-Federal agencies, orga-nizations, and individuals for travel, subsistence, and other nec-essary expenses incurred by Commission members and employees in attending meetings and conferences concerning the functions or activities of the Commission. Any payment or reimbursement ac-cepted shall be credited to the appropriated funds of the Commis-sion. The amount of travel, subsistence, and other necessary ex-penses for members and employees paid or reimbursed under this subsection may exceed per diem amounts established in official travel regulations, but the Commission may include in its regula-tions under this subsection a limitation on such amounts.

(d) Notwithstanding any other provision of law, former employ-ers of participants in the Commission’s professional fellows pro-grams may pay such participants their actual expenses for reloca-tion to Washington, District of Columbia, to facilitate their partici-pation in such programs, and program participants may accept such payments.

(e) Notwithstanding any other provision of law, whenever any fee is required to be paid to the Commission pursuant to any provi-sion of the securities laws or any other law, the Commission may provide by rule that such fee shall be paid in a manner other than in cash and the Commission may also specify the time that such fee shall be determined and paid relative to the filing of any state-ment or document with the Commission.

(f) REIMBURSEMENT OF EXPENSES FOR ASSISTING FOREIGN SE-CURITIES AUTHORITIES.—Notwithstanding any other provision of law, the Commission may accept payment and reimbursement, in cash or in kind, from a foreign securities authority, or made on be-half of such authority, for necessary expenses incurred by the Com-mission, its members, and employees in carrying out any investiga-tion pursuant to section 21(a)(2) of this title or in providing any other assistance to a foreign securities authority. Any payment or


reimbursement accepted shall be considered a reimbursement to the appropriated funds of the Commission.

(g) OFFICE OF THE INVESTOR ADVOCATE.—(1) OFFICE ESTABLISHED.—There is established within the

Commission the Office of the Investor Advocate (in this sub-section referred to as the ‘‘Office’’).

(2) INVESTOR ADVOCATE.—(A) IN GENERAL.—The head of the Office shall be the

Investor Advocate, who shall—(i) report directly to the Chairman; and (ii) be appointed by the Chairman, in consultation

with the Commission, from among individuals having experience in advocating for the interests of investors in securities and investor protection issues, from the perspective of investors. (B) COMPENSATION.—The annual rate of pay for the

Investor Advocate shall be equal to the highest rate of an-nual pay for other senior executives who report to the Chairman of the Commission.

(C) LIMITATION ON SERVICE.—An individual who serves as the Investor Advocate may not be employed by the Commission—

(i) during the 2-year period ending on the date of appointment as Investor Advocate; or

(ii) during the 5-year period beginning on the date on which the person ceases to serve as the Investor Advocate.

(3) STAFF OF OFFICE.—The Investor Advocate, after con-sultation with the Chairman of the Commission, may retain or employ independent counsel, research staff, and service staff, as the Investor Advocate deems necessary to carry out the functions, powers, and duties of the Office.

(4) FUNCTIONS OF THE INVESTOR ADVOCATE.—The Investor Advocate shall—

(A) assist retail investors in resolving significant prob-lems such investors may have with the Commission or with self-regulatory organizations;

(B) identify areas in which investors would benefit from changes in the regulations of the Commission or the rules of self-regulatory organizations;

(C) identify problems that investors have with finan-cial service providers and investment products;

(D) analyze the potential impact on investors of—(i) proposed regulations of the Commission; and (ii) proposed rules of self-regulatory organizations

registered under this title; and (E) to the extent practicable, propose to the Commis-

sion changes in the regulations or orders of the Commis-sion and to Congress any legislative, administrative, or personnel changes that may be appropriate to mitigate problems identified under this paragraph and to promote the interests of investors. (5) ACCESS TO DOCUMENTS.—The Commission shall ensure

that the Investor Advocate has full access to the documents of


the Commission and any self-regulatory organization, as nec-essary to carry out the functions of the Office.

(6) ANNUAL REPORTS.—(A) REPORT ON OBJECTIVES.—

(i) IN GENERAL.—Not later than June 30 of each year after 2010, the Investor Advocate shall submit to the Committee on Banking, Housing, and Urban Af-fairs of the Senate and the Committee on Financial Services of the House of Representatives a report on the objectives of the Investor Advocate for the fol-lowing fiscal year.

(ii) CONTENTS.—Each report required under clause (i) shall contain full and substantive analysis and ex-planation. (B) REPORT ON ACTIVITIES.—

(i) IN GENERAL.—Not later than December 31 of each year after 2010, the Investor Advocate shall sub-mit to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Fi-nancial Services of the House of Representatives a re-port on the activities of the Investor Advocate during the immediately preceding fiscal year.

(ii) CONTENTS.—Each report required under clause (i) shall include—

(I) appropriate statistical information and full and substantive analysis;

(II) information on steps that the Investor Ad-vocate has taken during the reporting period to improve investor services and the responsiveness of the Commission and self-regulatory organiza-tions to investor concerns;

(III) a summary of the most serious problems encountered by investors during the reporting pe-riod;

(IV) an inventory of the items described in subclause (III) that includes—

(aa) identification of any action taken by the Commission or the self-regulatory organi-zation and the result of such action;

(bb) the length of time that each item has remained on such inventory; and

(cc) for items on which no action has been taken, the reasons for inaction, and an identi-fication of any official who is responsible for such action; (V) recommendations for such administrative

and legislative actions as may be appropriate to resolve problems encountered by investors; and

(VI) any other information, as determined ap-propriate by the Investor Advocate. (iii) INDEPENDENCE.—Each report required under

this paragraph shall be provided directly to the Com-mittees listed in clause (i) without any prior review or comment from the Commission, any commissioner,


23So in original. Probably should be ‘‘(2)(A)(ii),’’.

any other officer or employee of the Commission, or the Office of Management and Budget.

(iv) CONFIDENTIALITY.—No report required under clause (i) may contain confidential information.

(7) REGULATIONS.—The Commission shall, by regulation, establish procedures requiring a formal response to all rec-ommendations submitted to the Commission by the Investor Advocate, not later than 3 months after the date of such sub-mission.

(8) OMBUDSMAN.—(A) APPOINTMENT.—Not later than 180 days after the

date on which the first Investor Advocate is appointed under paragraph (2)(A)(i), [23] the Investor Advocate shall appoint an Ombudsman, who shall report directly to the Investor Advocate.

(B) DUTIES.—The Ombudsman appointed under sub-paragraph (A) shall—

(i) act as a liaison between the Commission and any retail investor in resolving problems that retail in-vestors may have with the Commission or with self-regulatory organizations;

(ii) review and make recommendations regarding policies and procedures to encourage persons to present questions to the Investor Advocate regarding compliance with the securities laws; and

(iii) establish safeguards to maintain the confiden-tiality of communications between the persons de-scribed in clause (ii) and the Ombudsman. (C) LIMITATION.—In carrying out the duties of the Om-

budsman under subparagraph (B), the Ombudsman shall utilize personnel of the Commission to the extent prac-ticable. Nothing in this paragraph shall be construed as replacing, altering, or diminishing the activities of any om-budsman or similar office of any other agency.

(D) REPORT.—The Ombudsman shall submit a semi-annual report to the Investor Advocate that describes the activities and evaluates the effectiveness of the Ombuds-man during the preceding year. The Investor Advocate shall include the reports required under this section in the reports required to be submitted by the Inspector Advocate under paragraph (6).

(h) EXAMINERS.—(1) DIVISION OF TRADING AND MARKETS.—The Division of

Trading and Markets of the Commission, or any successor or-ganizational unit, shall have a staff of examiners who shall—

(A) perform compliance inspections and examinations of entities under the jurisdiction of that Division; and

(B) report to the Director of that Division. (2) DIVISION OF INVESTMENT MANAGEMENT.—The Division

of Investment Management of the Commission, or any suc-cessor organizational unit, shall have a staff of examiners who shall—


(A) perform compliance inspections and examinations of entities under the jurisdiction of that Division; and

(B) report to the Director of that Division. (i) SECURITIES AND EXCHANGE COMMISSION RESERVE FUND.—

(1) RESERVE FUND ESTABLISHED.—There is established in the Treasury of the United States a separate fund, to be known as the ‘‘Securities and Exchange Commission Reserve Fund’’ (referred to in this subsection as the ‘‘Reserve Fund’’).

(2) RESERVE FUND AMOUNTS.—(A) IN GENERAL.—Except as provided in subparagraph

(B), any registration fees collected by the Commission under section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)) or section 24(f) of the Investment Company Act of 1940 (15 U.S.C. 80a-24(f)) shall be deposited into the Re-serve Fund.

(B) LIMITATIONS.—For any 1 fiscal year—(i) the amount deposited in the Fund may not ex-

ceed $50,000,000; and (ii) the balance in the Fund may not exceed

$100,000,000. (C) EXCESS FEES.—Any amounts in excess of the limi-

tations described in subparagraph (B) that the Commis-sion collects from registration fees under section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)) or section 24(f) of the Investment Company Act of 1940 (15 U.S.C. 80a-24(f)) shall be deposited in the General Fund of the Treasury of the United States and shall not be available for obligation by the Commission. (3) USE OF AMOUNTS IN RESERVE FUND.—The Commission

may obligate amounts in the Reserve Fund, not to exceed a total of $100,000,000 in any 1 fiscal year, as the Commission determines is necessary to carry out the functions of the Com-mission. Any amounts in the reserve fund shall remain avail-able until expended. Not later than 10 days after the date on which the Commission obligates amounts under this para-graph, the Commission shall notify Congress of the date, amount, and purpose of the obligation.

(4) RULE OF CONSTRUCTION.—Amounts collected and depos-ited in the Reserve Fund shall not be construed to be Govern-ment funds or appropriated monies and shall not be subject to apportionment for the purpose of chapter 15 of title 31, United States Code, or under any other authority.

(June 6, 1934, ch. 404, title I, Sec. 4, 48 Stat. 885; Oct. 28, 1949, ch. 782, title XI, Sec. 1106(a), 63 Stat. 972; July 12, 1960, Pub. L. 86-619, Sec. 3, 74 Stat. 408; Sept. 13, 1960, Pub. L. 86-771, 74 Stat. 913; Aug. 14, 1964, Pub. L. 88-426, title III, Sec. 305(20), 78 Stat. 425; June 6, 1983, Pub. L. 98-38, Sec. 1, 97 Stat. 205; Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 307, 101 Stat. 1254; Nov. 15, 1990, Pub. L. 101-550, title I, Sec. 103, title II, Sec. 207, 104 Stat. 2713, 2721; Oct. 11, 1996, Pub. L. 104-290, title IV, Sec. 406, 110 Stat. 3444; Nov. 3, 1998, Pub. L. 105-353, title II, Sec. 203, 112 Stat. 3234; Jan. 16, 2002, Pub. L. 107-123, Sec. 8(d)(2), 115 Stat. 2399;

63 Sec. 4BSECURITIES EXCHANGE ACT OF 1934

Pub. L. 111-203, title IX, Secs. 915, 919D, 965, 991(e)(1), July 21, 2010, 124 Stat. 1830, 1911, 1954.)

DELEGATION OF FUNCTIONS BY COMMISSION

SEC. 4A. (a) In addition to its existing authority, the Securities and Exchange Commission shall have the authority to delegate, by published order or rule, any of its functions to a division of the Commission, an individual Commissioner, an administrative law judge, or an employee or employee board, including functions with respect to hearing, determining, ordering, certifying, reporting, or otherwise acting as to any work, business, or matter. Nothing in this section shall be deemed to supersede the provisions of section 556(b) of title 5, or to authorize the delegation of the function of rulemaking as defined in subchapter II of chapter 5 title 5, United States Code, with reference to general rules as distinguished from rules of particular applicability, or of the making of any rule pursu-ant to section 19(c) of this title.

(b) With respect to the delegation of any of its functions, as provided in subsection (a) of this section, the Commission shall re-tain a discretionary right to review the action of any such division of the Commission, individual Commissioner, administrative law judge, employee, or employee board, upon its own initiative or upon petition of a party to or intervenor in such action, within such time and in such manner as the Commission by rule shall prescribe. The vote of one member of the Commission shall be sufficient to bring any such action before the Commission for review. A person or party shall be entitled to review by the Commission if he or it is adversely affected by action at a delegated level which (1) denies any request for action pursuant to section 8(a) or section 8(c) of the Securities Act of 1933 or the first sentence of section 12(d) of this title; (2) suspends trading in a security pursuant to section 12(k) of this title; or (3) is pursuant to any provision of this title in a case of adjudication, as defined in section 551 of title 5, United States Code, not required by this title to be determined on the record after notice and opportunity for hearing (except to the extent there is in-volved a matter described in section 554(a) (1) through (6) of such title 5).

(c) If the right to exercise such review is declined, or if no such review is sought within the time stated in the rules promulgated by the Commission, then the action of any such division of the Commission, individual Commissioner, administrative law judge, employee, or employee board, shall, for all purposes, including ap-peal or review thereof, be deemed the action of the Commission.

(June 6, 1934, ch. 404, title I, Sec. 4A, as added Pub. L. 100-181, title III, Sec. 308(a), Dec. 4, 1987, 101 Stat. 1254.)

TRANSFER OF FUNCTIONS WITH RESPECT TO ASSIGNMENT OF PERSONNEL TO CHAIRMAN

SEC. 4B. In addition to the functions transferred by the provi-sions of Reorganization Plan Numbered 10 of 1950 (64 Stat. 1265),


there are hereby transferred from the Commission to the Chairman of the Commission the functions of the Commission with respect to the assignment of Commission personnel, including Commissioners, to perform such functions as may have been delegated by the Com-mission to the Commission personnel, including Commissioners, pursuant to section 4A of this title.

(June 6, 1934, ch. 404, title I, Sec. 4B, as added Pub. L. 100-181, title III, Sec. 308(a), Dec. 4, 1987, 101 Stat. 1255.)

SEC. 4C. APPEARANCE AND PRACTICE BEFORE THE COMMISSION.

(a) AUTHORITY TO CENSURE.—The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person is found by the Commission, after notice and opportunity for hearing in the matter—

(1) not to possess the requisite qualifications to represent others;

(2) to be lacking in character or integrity, or to have en-gaged in unethical or improper professional conduct; or

(3) to have willfully violated, or willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations issued thereunder. (b) DEFINITION.—With respect to any registered public account-

ing firm or associated person, for purposes of this section, the term ‘‘improper professional conduct’’ means—

(1) intentional or knowing conduct, including reckless con-duct, that results in a violation of applicable professional standards; and

(2) negligent conduct in the form of—(A) a single instance of highly unreasonable conduct

that results in a violation of applicable professional stand-ards in circumstances in which the registered public ac-counting firm or associated person knows, or should know, that heightened scrutiny is warranted; or

(B) repeated instances of unreasonable conduct, each resulting in a violation of applicable professional stand-ards, that indicate a lack of competence to practice before the Commission.

(June 6, 1934, ch. 404, title I, Sec. 4C, as added Pub. L. 107-204, title VI, Sec. 602, July 30, 2002, 116 Stat. 794.)

SEC. 4D. ADDITIONAL DUTIES OF INSPECTOR GENERAL.

(a) SUGGESTION SUBMISSIONS BY COMMISSION EMPLOYEES.—(1) HOTLINE ESTABLISHED.—The Inspector General of the

Commission shall establish and maintain a telephone hotline or other electronic means for the receipt of—

(A) suggestions by employees of the Commission for improvements in the work efficiency, effectiveness, and productivity, and the use of the resources, of the Commis-sion; and


24So in original. Probably should be ‘‘provides’’.

(B) allegations by employees of the Commission of waste, abuse, misconduct, or mismanagement within the Commission. (2) CONFIDENTIALITY.—The Inspector General shall main-

tain as confidential—(A) the identity of any individual who provides infor-

mation by the means established under paragraph (1), un-less the individual requests otherwise, in writing; and

(B) at the request of any such individual, any specific information provided by the individual.

(b) CONSIDERATION OF REPORTS.—The Inspector General shall consider any suggestions or allegations received by the means es-tablished under subsection (a)(1), and shall recommend appropriate action in relation to such suggestions or allegations.

(c) RECOGNITION.—The Inspector General may recognize any employee who makes a suggestion under subsection (a)(1) (or by other means) that would or does—

(1) increase the work efficiency, effectiveness, or produc-tivity of the Commission; or

(2) reduce waste, abuse, misconduct, or mismanagement within the Commission. (d) REPORT.—The Inspector General of the Commission shall

submit to Congress an annual report containing a description of—(1) the nature, number, and potential benefits of any sug-

gestions received under subsection (a); (2) the nature, number, and seriousness of any allegations

received under subsection (a); (3) any recommendations made or actions taken by the In-

spector General in response to substantiated allegations re-ceived under subsection (a); and

(4) any action the Commission has taken in response to suggestions or allegations received under subsection (a). (e) FUNDING.—The activities of the Inspector General under

this subsection shall be funded by the Securities and Exchange Commission Investor Protection Fund established under section 21F.

(June 6, 1934, ch. 404, title I, Sec. 4D, as added Pub. L. 111-203, title IX, Sec. 966, July 21, 2010, 124 Stat. 1912.)

SEC. 4E. DEADLINE FOR COMPLETING ENFORCEMENT INVESTIGA-TIONS AND COMPLIANCE EXAMINATIONS AND INSPEC-TIONS.

(a) ENFORCEMENT INVESTIGATIONS.—(1) IN GENERAL.—Not later than 180 days after the date on

which Commission staff provide [24] a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Di-vision of Enforcement of its intent to not file an action.

(2) EXCEPTIONS FOR CERTAIN COMPLEX ACTIONS.—Notwith-standing paragraph (1), if the Director of the Division of En-forcement of the Commission or the Director’s designee deter-


mines that a particular enforcement investigation is suffi-ciently complex such that a determination regarding the filing of an action against a person cannot be completed within the deadline specified in paragraph (1), the Director of the Division of Enforcement of the Commission or the Director’s designee may, after providing notice to the Chairman of the Commis-sion, extend such deadline as needed for one additional 180-day period. If after the additional 180-day period the Director of the Division of Enforcement of the Commission or the Direc-tor’s designee determines that a particular enforcement inves-tigation is sufficiently complex such that a determination re-garding the filing of an action against a person cannot be com-pleted within the additional 180-day period, the Director of the Division of Enforcement of the Commission or the Director’s designee may, after providing notice to and receiving approval of the Commission, extend such deadline as needed for one or more additional successive 180-day periods. (b) COMPLIANCE EXAMINATIONS AND INSPECTIONS.—

(1) IN GENERAL.—Not later than 180 days after the date on which Commission staff completes the on-site portion of its compliance examination or inspection or receives all records re-quested from the entity being examined or inspected, which-ever is later, Commission staff shall provide the entity being examined or inspected with written notification indicating ei-ther that the examination or inspection has concluded, has con-cluded without findings, or that the staff requests the entity undertake corrective action.

(2) EXCEPTION FOR CERTAIN COMPLEX ACTIONS.—Notwith-standing paragraph (1), if the head of any division or office within the Commission responsible for compliance examina-tions and inspections or his designee determines that a par-ticular compliance examination or inspection is sufficiently complex such that a determination regarding concluding the examination or inspection, or regarding the staff requests the entity undertake corrective action, cannot be completed within the deadline specified in paragraph (1), the head of any divi-sion or office within the Commission responsible for compliance examinations and inspections or his designee may, after pro-viding notice to the Chairman of the Commission, extend such deadline as needed for one additional 180-day period.

(June 6, 1934, ch. 404, title I, Sec. 4E, as added Pub. L. 111-203, title IX, Sec. 929U, July 21, 2010, 124 Stat. 1867.)

TRANSACTIONS ON UNREGISTERED EXCHANGES

SEC. 5. It shall be unlawful for any broker, dealer, or exchange, directly or indirectly, to make use of the mails or any means or in-strumentality of interstate commerce for the purpose of using any facility of an exchange within or subject to the jurisdiction of the United States to effect any transaction in a security, or to report any such transaction, unless such exchange (1) is registered as a national securities exchange under section 6 of this title, or (2) is exempted from such registration upon application by the exchange


because, in the opinion of the Commission, by reason of the limited volume of transactions effected on such exchange, it is not prac-ticable and not necessary or appropriate in the public interest or for the protection of investors to require such registration.


NATIONAL SECURITIES EXCHANGES

SEC. 6. (a) An exchange may be registered as a national securi-ties exchange under the terms and conditions hereinafter provided in this section and in accordance with the provisions of section 19(a) of this title, by filing with the Commission an application for registration in such form as the Commission, by rule, may pre-scribe containing the rules of the exchange and such other informa-tion and documents as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(b) An exchange shall not be registered as a national securities exchange unless the Commission determines that—

(1) Such exchange is so organized and has the capacity to be able to carry out the purposes of this title and to comply, and (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of this title) to enforce compliance by its members and persons associated with its members, with the provisions of this title, the rules and regulations there-under, and the rules of the exchange.

(2) Subject to the provisions of subsection (c) of this sec-tion, the rules of the exchange provide that any registered broker or dealer or natural person associated with a registered broker or dealer may become a member of such exchange and any person may become associated with a member thereof.

(3) The rules of the exchange assure a fair representation of its members in the selection of its directors and administra-tion of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associ-ated with a member of the exchange, broker, or dealer.

(4) The rules of the exchange provide for the equitable allo-cation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities.

(5) The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, set-tling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and per-fect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimi-nation between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this title mat-ters not related to the purposes of this title or the administra-tion of the exchange.


(6) The rules of the exchange provide that (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of this title) its members and persons associated with its members shall be appropriately disciplined for violation of the provisions of this title, the rules or regulations thereunder, or the rules of the exchange, by expulsion, suspension, limita-tion of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction.

(7) The rules of the exchange are in accordance with the provisions of subsection (d) of this section, and in general, pro-vide a fair procedure for the disciplining of members and per-sons associated with members, the denial of membership to any person seeking membership therein, the barring of any person from becoming associated with a member thereof, and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof.

(8) The rules of the exchange do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this title.

(9)(A) The rules of the exchange prohibit the listing of any security issued in a limited partnership rollup transaction (as such term is defined in paragraphs (4) and (5) of section 14(h)), unless such transaction was conducted in accordance with pro-cedures designed to protect the rights of limited partners, in-cluding—

(i) the right of dissenting limited partners to one of the following:

(I) an appraisal and compensation; (II) retention of a security under substantially the

same terms and conditions as the original issue; (III) approval of the limited partnership rollup

transaction by not less than 75 percent of the out-standing securities of each of the participating limited partnerships;

(IV) the use of a committee of limited partners that is independent, as determined in accordance with rules prescribed by the exchange, of the general part-ner or sponsor, that has been approved by a majority of the outstanding units of each of the participating limited partnerships, and that has such authority as is necessary to protect the interest of limited partners, including the authority to hire independent advisors, to negotiate with the general partner or sponsor on be-half of the limited partners, and to make a rec-ommendation to the limited partners with respect to the proposed transaction; or

(V) other comparable rights that are prescribed by rule by the exchange and that are designed to protect dissenting limited partners; (ii) the right not to have their voting power unfairly

reduced or abridged;


28Subsection (k) of section 17 was redesignated subsec. (j) by Pub. L. 111-203, title VI, Sec. 617(a)(2), July 21, 2010, 124 Stat. 1616.

(iii) the right not to bear an unfair portion of the costs of a proposed limited partnership rollup transaction that is rejected; and

(iv) restrictions on the conversion of contingent inter-ests or fees into non-contingent interests or fees and re-strictions on the receipt of a non-contingent equity interest in exchange for fees for services which have not yet been provided. (B) As used in this paragraph, the term ‘‘dissenting limited

partner’’ means a person who, on the date on which soliciting material is mailed to investors, is a holder of a beneficial inter-est in a limited partnership that is the subject of a limited partnership rollup transaction, and who casts a vote against the transaction and complies with procedures established by the exchange, except that for purposes of an exchange or ten-der offer, such person shall file an objection in writing under the rules of the exchange during the period during which the offer is outstanding.

(10)(A) The rules of the exchange prohibit any member that is not the beneficial owner of a security registered under section 12 from granting a proxy to vote the security in connec-tion with a shareholder vote described in subparagraph (B), unless the beneficial owner of the security has instructed the member to vote the proxy in accordance with the voting in-structions of the beneficial owner.

(B) A shareholder vote described in this subparagraph is a shareholder vote with respect to the election of a member of the board of directors of an issuer, executive compensation, or any other significant matter, as determined by the Commis-sion, by rule, and does not include a vote with respect to the uncontested election of a member of the board of directors of any investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80b-1 [25] et seq.).

(C) Nothing in this paragraph shall be construed to pro-hibit a national securities exchange from prohibiting a member that is not the beneficial owner of a security registered under section 12 from granting a proxy to vote the security in connec-tion with a shareholder vote not described in subparagraph (A). (c)(1) A national securities exchange shall deny membership to

(A) any person, other than a natural person, which is not a reg-istered broker or dealer or (B) any natural person who is not, or is not associated with, a registered broker or dealer.

(2) A national securities exchange may, and in cases in which the Commission, by order, directs as necessary or appropriate in the public interest or for the protection of investors shall, deny membership to any registered broker or dealer or natural person associated with a registered broker or dealer, and bar from becom-ing associated with a member any person, who is subject to a statu-tory disqualification. A national securities exchange shall file notice with the Commission not less than thirty days prior to admitting


any person to membership or permitting any person to become as-sociated with a member, if the exchange knew, or in the exercise of reasonable care should have known, that such person was sub-ject to a statutory disqualification. The notice shall be in such form and contain such information as the Commission, by rule, may pre-scribe as necessary or appropriate in the public interest or for the protection of investors.

(3)(A) A national securities exchange may deny membership to, or condition the membership of, a registered broker or dealer if (i) such broker or dealer does not meet such standards of financial re-sponsibility or operational capability or such broker or dealer or any natural person associated with such broker or dealer does not meet such standards of training, experience, and competence as are prescribed by the rules of the exchange or (ii) such broker or dealer or person associated with such broker or dealer has engaged and there is a reasonable likelihood he may again engage in acts or practices inconsistent with just and equitable principles of trade. A national securities exchange may examine and verify the qualifica-tions of an applicant to become a member and the natural persons associated with such an applicant in accordance with procedures established by the rules of the exchange.

(B) A national securities exchange may bar a natural person from becoming a member or associated with a member, or condition the membership of a natural person or association of a natural per-son with a member, if such natural person (i) does not meet such standards of training, experience, and competence as are prescribed by the rules of the exchange or (ii) has engaged and there is a rea-sonable likelihood he may again engage in acts or practices incon-sistent with just and equitable principles of trade. A national secu-rities exchange may examine and verify the qualifications of an ap-plicant to become a person associated with a member in accordance with procedures established by the rules of the exchange and re-quire any person associated with a member, or any class of such persons, to be registered with the exchange in accordance with pro-cedures so established.

(C) A national securities exchange may bar any person from becoming associated with a member if such person does not agree (i) to supply the exchange with such information with respect to its relationship and dealings with the member as may be specified in the rules of the exchange and (ii) to permit the examination of its books and records to verify the accuracy of any information so sup-plied.

(4) A national securities exchange may limit (A) the number of members of the exchange and (B) the number of members and des-ignated representatives of members permitted to effect transactions on the floor of the exchange without the services of another person acting as broker: Provided, however, That no national securities ex-change shall have the authority to decrease the number of member-ships in such exchange, or the number of members and designated representatives of members permitted to effect transactions on the floor of such exchange without the services of another person acting as broker, below such number in effect on May 1, 1975, or the date such exchange was registered with the Commission, whichever is later: And provided further, That the Commission, in accordance


with the provisions of section 19(c) of this title, may amend the rules of any national securities exchange to increase (but not to de-crease) or to remove any limitation on the number of memberships in such exchange or the number of members or designated rep-resentatives of members permitted to effect transactions on the floor of the exchange without the services of another person acting as broker, if the Commission finds that such limitation imposes a burden on competition not necessary or appropriate in furtherance of the purposes of this title.

(d)(1) In any proceeding by a national securities exchange to determine whether a member or person associated with a member should be disciplined (other than a summary proceeding pursuant to paragraph (3) of this subsection), the exchange shall bring spe-cific charges, notify such member or person of, and give him an op-portunity to defend against, such charges, and keep a record. A de-termination by the exchange to impose a disciplinary sanction shall be supported by a statement setting forth—

(A) any act or practice in which such member or person as-sociated with a member has been found to have engaged, or which such member or person has been found to have omitted;

(B) the specific provision of this title, the rules or regula-tions thereunder, or the rules of the exchange which any such act or practice, or omission to act, is deemed to violate; and

(C) the sanction imposed and the reasons therefor. (2) In any proceeding by a national securities exchange to de-

termine whether a person shall be denied membership, barred from becoming associated with a member, or prohibited or limited with respect to access to services offered by the exchange or a member thereof (other than a summary proceeding pursuant to paragraph (3) of this subsection), the exchange shall notify such person of, and give him an opportunity to be heard upon, the specific grounds for denial, bar, or prohibition or limitation under consideration and keep a record. A determination by the exchange to deny member-ship, bar a person from becoming associated with a member, or prohibit or limit a person with respect to access to services offered by the exchange or a member thereof shall be supported by a state-ment setting forth the specific grounds on which the denial, bar, or prohibition or limitation is based.

(3) A national securities exchange may summarily (A) suspend a member or person associated with a member who has been and is expelled or suspended from any self-regulatory organization or barred or suspended from being associated with a member of any self-regulatory organization, (B) suspend a member who is in such financial or operating difficulty that the exchange determines and so notifies the Commission that the member cannot be permitted to continue to do business as a member with safety to investors, creditors, other members, or the exchange, or (C) limit or prohibit any person with respect to access to services offered by the ex-change if subparagraph (A) or (B) of this paragraph is applicable to such person or, in the case of a person who is not a member, if the exchange determines that such person does not meet the qualification requirements or other prerequisites for such access and such person cannot be permitted to continue to have such ac-cess with safety to investors, creditors, members, or the exchange.


Any person aggrieved by any such summary action shall be promptly afforded an opportunity for a hearing by the exchange in accordance with the provisions of paragraph (1) or (2) of this sub-section. The Commission, by order, may stay any such summary action on its own motion or upon application by any person ag-grieved thereby, if the Commission determines summarily or after notice and opportunity for hearing (which hearing may consist sole-ly of the submission of affidavits or presentation of oral arguments) that such stay is consistent with the public interest and the protec-tion of investors.

(e)(1) On and after the date of enactment of the Securities Acts Amendments of 1975, no national securities exchange may impose any schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by its members: Provided, however, That until May 1, 1976, the preceding provisions of this paragraph shall not prohibit any such exchange from imposing or fixing any sched-ule of commissions, allowances, discounts, or other fees to be charged by its members for acting as broker on the floor of the ex-change or as odd-lot dealer: And provided further, That the Com-mission, in accordance with the provisions of section 19(b) of this title as modified by the provisions of paragraph (3) of this sub-section, may—

(A) permit a national securities exchange, by rule, to im-pose a reasonable schedule or fix reasonable rates of commis-sions, allowances, discounts, or other fees to be charged by its members for effecting transactions on such exchange prior to November 1, 1976, if the Commission finds that such schedule or fixed rates of commissions, allowances, discounts, or other fees are in the public interest; and

(B) permit a national securities exchange, by rule, to im-pose a schedule or fix rates of commissions, allowances, dis-counts, or other fees to be charged by its members for effecting transactions on such exchange after November 1, 1976, if the Commission finds that such schedule or fixed rates of commis-sions, allowances, discounts, or other fees (i) are reasonable in relation to the costs of providing the service for which such fees are charged (and the Commission publishes the standards employed in adjudging reasonableness) and (ii) do not impose any burden on competition not necessary or appropriate in fur-therance of the purposes of this title, taking into consideration the competitive effects of permitting such schedule or fixed rates weighed against the competitive effects of other lawful actions which the Commission is authorized to take under this title. (2) Notwithstanding the provisions of section 19(c) of this title,

the Commission, by rule, may abrogate any exchange rule which imposes a schedule or fixes rates of commissions, allowances, dis-counts, or other fees, if the Commission determines that such schedule or fixed rates are no longer reasonable, in the public in-terest, or necessary to accomplish the purposes of this title.

(3)(A) Before approving or disapproving any proposed rule change submitted by a national securities exchange which would impose a schedule or fix rates of commissions, allowances, dis-counts, or other fees to be charged by its members for effecting


25So in original. Probably should be ‘‘80a-1’’. 26So in law. Probably should be clause (i).

transactions on such exchange, the Commission shall afford inter-ested persons (i) an opportunity for oral presentation of data, views, and arguments and (ii) with respect to any such rule con-cerning transactions effected after November 1, 1976, if the Com-mission determines there are disputed issues of material fact, to present such rebuttal submissions and to conduct (or have con-ducted under subparagraph (B) of this paragraph) such cross-exam-ination as the Commission determines to be appropriate and re-quired for full disclosure and proper resolution of such disputed issues of material fact.

(B) The Commission shall prescribe rules and make rulings concerning any proceeding in accordance with subparagraph (A) of this paragraph designed to avoid unnecessary costs or delay. Such rules or rulings may (i) impose reasonable time limits on each in-terested person’s oral presentations, and (ii) require any cross-ex-amination to which a person may be entitled under subparagraph (A) of this paragraph to be conducted by the Commission on behalf of that person in such manner as the Commission determines to be appropriate and required for full disclosure and proper resolution of disputed issues of material fact.

(C)(i) If any class of persons, the members of which are entitled to conduct (or have conducted) cross-examination under subpara-graphs (A) and (B) of this paragraph and which have, in the view of the Commission, the same or similar interests in the proceeding, cannot agree upon a single representative of such interests for pur-poses of cross-examination, the Commission may make rules and rulings specifying the manner in which such interests shall be rep-resented and such cross- examination conducted.

(ii) No member of any class of persons with respect to which the Commission has specified the manner in which its interests shall be represented pursuant to clause (i) of this subparagraph shall be denied, pursuant to such clause (i), the opportunity to con-duct (or have conducted) cross-examination as to issues affecting his particular interests if he satisfies the Commission that he has made a reasonable and good faith effort to reach agreement upon group representation and there are substantial and relevant issues which would not be presented adequately by group representation.

(D) A transcript shall be kept of any oral presentation and cross- examination.

(E) In addition to the bases specified in subsection 25(a), a re-viewing Court may set aside an order of the Commission under sec-tion 19(b) approving an exchange rule imposing a schedule or fixing rates of commissions, allowances, discounts, or other fees, if the Court finds—

(1) [26] a Commission determination under subparagraph (A) of this paragraph that an interested person is not entitled to conduct cross-examination or make rebuttal submissions, or

(2) [27] a Commission rule or ruling under subparagraph (B) of this paragraph limiting the petitioner’s cross-examina-tion or rebuttal submissions,


has precluded full disclosure and proper resolution of disputed issues of material fact which were necessary for fair determination by the Commission.

(f) The Commission, by rule or order, as it deems necessary or appropriate in the public interest and for the protection of inves-tors, to maintain fair and orderly markets, or to assure equal regu-lation, may require—

(1) any person not a member or a designated representa-tive of a member of a national securities exchange effecting transactions on such exchange without the services of another person acting as a broker, or

(2) any broker or dealer not a member of a national securi-ties exchange effecting transactions on such exchange on a reg-ular basis,

to comply with such rules of such exchange as the Commission may specify.

(g) NOTICE REGISTRATION OF SECURITY FUTURES PRODUCT EX-CHANGES.—

(1) REGISTRATION REQUIRED.—An exchange that lists or trades security futures products may register as a national se-curities exchange solely for the purposes of trading security fu-tures products if—

(A) the exchange is a board of trade, as that term is defined by the Commodity Exchange Act (7 U.S.C. 1a(2)), that has been designated a contract market by the Com-modity Futures Trading Commission and such designation is not suspended by order of the Commodity Futures Trad-ing Commission; and

(B) such exchange does not serve as a market place for transactions in securities other than—

(i) security futures products; or (ii) futures on exempted securities or groups or in-

dexes of securities or options thereon that have been authorized under section 2(a)(1)(C) of the Commodity Exchange Act.

(2) REGISTRATION BY NOTICE FILING.—(A) FORM AND CONTENT.—An exchange required to

register only because such exchange lists or trades security futures products may register for purposes of this section by filing with the Commission a written notice in such form as the Commission, by rule, may prescribe containing the rules of the exchange and such other information and documents concerning such exchange, comparable to the information and documents required for national securities exchanges under section 6(a), as the Commission, by rule, may prescribe as necessary or appropriate in the public in-terest or for the protection of investors. If such exchange has filed documents with the Commodity Futures Trading Commission, to the extent that such documents contain in-formation satisfying the Commission’s informational re-quirements, copies of such documents may be filed with the Commission in lieu of the required written notice.

(B) IMMEDIATE EFFECTIVENESS.—Such registration shall be effective contemporaneously with the submission


27So in law. Probably should be clause (ii).

of notice, in written or electronic form, to the Commission, except that such registration shall not be effective if such registration would be subject to suspension or revocation.

(C) TERMINATION.—Such registration shall be termi-nated immediately if any of the conditions for registration set forth in this subsection are no longer satisfied. (3) PUBLIC AVAILABILITY.—The Commission shall promptly

publish in the Federal Register an acknowledgment of receipt of all notices the Commission receives under this subsection and shall make all such notices available to the public.

(4) EXEMPTION OF EXCHANGES FROM SPECIFIED PROVI-SIONS.—

(A) TRANSACTION EXEMPTIONS.—An exchange that is registered under paragraph (1) of this subsection shall be exempt from, and shall not be required to enforce compli-ance by its members with, and its members shall not, sole-ly with respect to those transactions effected on such ex-change in security futures products, be required to comply with, the following provisions of this title and the rules thereunder:

(i) Subsections (b)(2), (b)(3), (b)(4), (b)(7), (b)(9), (c), (d), and (e) of this section.

(ii) Section 8. (iii) Section 11. (iv) Subsections (d), (f), and (k) [28] of section 17. (v) Subsections (a), (f ), and (h) of section 19.

(B) RULE CHANGE EXEMPTIONS.—An exchange that registered under paragraph (1) of this subsection shall also be exempt from submitting proposed rule changes pursu-ant to section 19(b) of this title, except that—

(i) such exchange shall file proposed rule changes related to higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, or decimal pricing for security futures products, sales practices for security futures products for persons who effect transactions in security futures products, or rules ef-fectuating such exchange’s obligation to enforce the se-curities laws pursuant to section 19(b)(7);

(ii) such exchange shall file pursuant to sections 19(b)(1) and 19(b)(2) proposed rule changes related to margin, except for changes resulting in higher margin levels; and

(iii) such exchange shall file pursuant to section 19(b)(1) proposed rule changes that have been abro-gated by the Commission pursuant to section 19(b)(7)(C).

(5) TRADING IN SECURITY FUTURES PRODUCTS.—(A) IN GENERAL.—Subject to subparagraph (B), it shall

be unlawful for any person to execute or trade a security futures product until the later of—

(i) 1 year after the date of the enactment of the Commodity Futures Modernization Act of 2000; or


(ii) such date that a futures association registered under section 17 of the Commodity Exchange Act has met the requirements set forth in section 15A(k)(2) of this title. (B) PRINCIPAL-TO-PRINCIPAL TRANSACTIONS.—Notwith-

standing subparagraph (A), a person may execute or trade a security futures product transaction if—

(i) the transaction is entered into—(I) on a principal-to-principal basis between

parties trading for their own accounts or as de-scribed in section 1a(18)(B)(ii) of the Commodity Exchange Act; and

(II) only between eligible contract participants (as defined in subparagraphs (A), (B)(ii), and (C) of such section 1a(18)) at the time at which the persons enter into the agreement, contract, or transaction; and (ii) the transaction is entered into on or after the

later of—(I) 8 months after the date of the enactment

of the Commodity Futures Modernization Act of 2000; or

(II) such date that a futures association reg-istered under section 17 of the Commodity Ex-change Act has met the requirements set forth in section 15A(k)(2) of this title.

(h) TRADING IN SECURITY FUTURES PRODUCTS.—(1) TRADING ON EXCHANGE OR ASSOCIATION REQUIRED.— It

shall be unlawful for any person to effect transactions in secu-rity futures products that are not listed on a national securities exchange or a national securities association registered pursu-ant to section 15A(a).

(2) LISTING STANDARDS REQUIRED.—Except as otherwise provided in paragraph (7), a national securities exchange or a national securities association registered pursuant to section 15A(a) may trade only security futures products that (A) con-form with listing standards that such exchange or association files with the Commission under section 19(b) and (B) meet the criteria specified in section 2(a)(1)(D)(i) of the Commodity Ex-change Act.

(3) REQUIREMENTS FOR LISTING STANDARDS AND CONDI-TIONS FOR TRADING.—Such listing standards shall—

(A) except as otherwise provided in a rule, regulation, or order issued pursuant to paragraph (4), require that any security underlying the security future, including each component security of a narrow-based security index, be registered pursuant to section 12 of this title;

(B) require that if the security futures product is not cash settled, the market on which the security futures product is traded have arrangements in place with a reg-istered clearing agency for the payment and delivery of the securities underlying the security futures product;

(C) be no less restrictive than comparable listing standards for options traded on a national securities ex-


change or national securities association registered pursu-ant to section 15A(a) of this title;

(D) except as otherwise provided in a rule, regulation, or order issued pursuant to paragraph (4), require that the security future be based upon common stock and such other equity securities as the Commission and the Com-modity Futures Trading Commission jointly determine ap-propriate;

(E) require that the security futures product is cleared by a clearing agency that has in place provisions for linked and coordinated clearing with other clearing agencies that clear security futures products, which permits the security futures product to be purchased on one market and offset on another market that trades such product;

(F) require that only a broker or dealer subject to suitability rules comparable to those of a national securities association registered pursuant to section 15A(a) effect transactions in the security futures product;

(G) require that the security futures product be subject to the prohibition against dual trading in section 4j of the Commodity Exchange Act (7 U.S.C. 6j) and the rules and regulations thereunder or the provisions of section 11(a) of this title and the rules and regulations thereunder, except to the extent otherwise permitted under this title and the rules and regulations thereunder;

(H) require that trading in the security futures prod-uct not be readily susceptible to manipulation of the price of such security futures product, nor to causing or being used in the manipulation of the price of any underlying se-curity, option on such security, or option on a group or index including such securities;

(I) require that procedures be in place for coordinated surveillance among the market on which the security fu-tures product is traded, any market on which any security underlying the security futures product is traded, and other markets on which any related security is traded to detect manipulation and insider trading;

(J) require that the market on which the security fu-tures product is traded has in place audit trails necessary or appropriate to facilitate the coordinated surveillance re-quired in subparagraph (I);

(K) require that the market on which the security fu-tures product is traded has in place procedures to coordi-nate trading halts between such market and any market on which any security underlying the security futures product is traded and other markets on which any related security is traded; and

(L) require that the margin requirements for a secu-rity futures product comply with the regulations prescribed pursuant to section 7(c)(2)(B), except that nothing in this subparagraph shall be construed to prevent a national se-curities exchange or national securities association from requiring higher margin levels for a security futures prod-


uct when it deems such action to be necessary or appro-priate. (4) AUTHORITY TO MODIFY CERTAIN LISTING STANDARD RE-

QUIREMENTS.—(A) AUTHORITY TO MODIFY.—The Commission and the

Commodity Futures Trading Commission, by rule, regula-tion, or order, may jointly modify the listing standard re-quirements specified in subparagraph (A) or (D) of para-graph (3) to the extent such modification fosters the devel-opment of fair and orderly markets in security futures products, is necessary or appropriate in the public interest, and is consistent with the protection of investors.

(B) AUTHORITY TO GRANT EXEMPTIONS.—The Commis-sion and the Commodity Futures Trading Commission, by order, may jointly exempt any person from compliance with the listing standard requirement specified in sub-paragraph (E) of paragraph (3) to the extent such exemp-tion fosters the development of fair and orderly markets in security futures products, is necessary or appropriate in the public interest, and is consistent with the protection of investors. (5) REQUIREMENTS FOR OTHER PERSONS TRADING SECURITY

FUTURE PRODUCTS.—It shall be unlawful for any person (other than a national securities exchange or a national securities as-sociation registered pursuant to section 15A(a)) to constitute, maintain, or provide a marketplace or facilities for bringing to-gether purchasers and sellers of security future products or to otherwise perform with respect to security future products the functions commonly performed by a stock exchange as that term is generally understood, unless a national securities asso-ciation registered pursuant to section 15A(a) or a national se-curities exchange of which such person is a member—

(A) has in place procedures for coordinated surveil-lance among such person, the market trading the securi-ties underlying the security future products, and other markets trading related securities to detect manipulation and insider trading;

(B) has rules to require audit trails necessary or ap-propriate to facilitate the coordinated surveillance required in subparagraph (A); and

(C) has rules to require such person to coordinate trading halts with markets trading the securities under-lying the security future products and other markets trad-ing related securities. (6) DEFERRAL OF OPTIONS ON SECURITY FUTURES TRAD-

ING.—No person shall offer to enter into, enter into, or confirm the execution of any put, call, straddle, option, or privilege on a security future, except that, after 3 years after the date of the enactment of this subsection, the Commission and the Commodity Futures Trading Commission may by order jointly determine to permit trading of puts, calls, straddles, options, or privileges on any security future authorized to be traded under the provisions of this Act and the Commodity Exchange Act.


(7) DEFERRAL OF LINKED AND COORDINATED CLEARING.—(A) Notwithstanding paragraph (2), until the compli-

ance date, a national securities exchange or national secu-rities association registered pursuant to section 15A(a) may trade a security futures product that does not—

(i) conform with any listing standard promulgated to meet the requirement specified in subparagraph (E) of paragraph (3); or

(ii) meet the criterion specified in section 2(a)(1)(D)(i)(IV) of the Commodity Exchange Act. (B) The Commission and the Commodity Futures

Trading Commission shall jointly publish in the Federal Register a notice of the compliance date no later than 165 days before the compliance date.

(C) For purposes of this paragraph, the term ‘‘compli-ance date’’ means the later of—

(i) 180 days after the end of the first full calendar month period in which the average aggregate com-parable share volume for all security futures products based on single equity securities traded on all national securities exchanges, any national securities associa-tions registered pursuant to section 15A(a), and all other persons equals or exceeds 10 percent of the aver-age aggregate comparable share volume of options on single equity securities traded on all national securi-ties exchanges and any national securities associations registered pursuant to section 15A(a); or

(ii) 2 years after the date on which trading in any security futures product commences under this title.

(i) Consistent with this title, each national securities exchange registered pursuant to subsection (a) of this section shall issue such rules as are necessary to avoid duplicative or conflicting rules ap-plicable to any broker or dealer registered with the Commission pursuant to section 15(b) (except paragraph (11) thereof ), that is also registered with the Commodity Futures Trading Commission pursuant to section 4f(a) of the Commodity Exchange Act (except paragraph (2) thereof ), with respect to the application of—

(1) rules of such national securities exchange of the type specified in section 15(c)(3)(B) involving security futures prod-ucts; and

(2) similar rules of national securities exchanges registered pursuant to section 6(g) and national securities associations registered pursuant to section 15A(k) involving security futures products. (j) PROCEDURES AND RULES FOR SECURITY FUTURE PROD-

UCTS.—A national securities exchange registered pursuant to sub-section (a) shall implement the procedures specified in section 6(h)(5)(A) of this title and adopt the rules specified in subpara-graphs (B) and (C) of section 6(h)(5) of this title not later than 8 months after the date of receipt of a request from an alternative trading system for such implementation and rules.

(k)(1) To the extent necessary or appropriate in the public in-terest, to promote fair competition, and consistent with the pro-motion of market efficiency, innovation, and expansion of invest-


ment opportunities, the protection of investors, and the mainte-nance of fair and orderly markets, the Commission and the Com-modity Futures Trading Commission shall jointly issue such rules, regulations, or orders as are necessary and appropriate to permit the offer and sale of a security futures product traded on or subject to the rules of a foreign board of trade to United States persons.

(2) The rules, regulations, or orders adopted under paragraph (1) shall take into account, as appropriate, the nature and size of the markets that the securities underlying the security futures product reflect.

(l) SECURITY-BASED SWAPS.—It shall be unlawful for any per-son to effect a transaction in a security-based swap with or for a person that is not an eligible contract participant, unless such transaction is effected on a national securities exchange registered pursuant to subsection (b).

(June 6, 1934, ch. 404, title I, Sec. 6, 48 Stat. 885; Pub. L. 94-29, Sec. 4, June 4, 1975, 89 Stat. 104; Pub. L. 100-181, title III, Sec. 309-312, Dec. 4, 1987, 101 Stat. 1255; Pub. L. 103-202, title III, Sec. 303(b), Dec. 17, 1993, 107 Stat. 2365; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 202(a), 206(a), (i), (k)(2), (l)], Dec. 21, 2000, 114 Stat. 2763, 2763A-416, 2763A-426, 2763A-433, 2763A-434; Pub. L. 111-203, title VII, Secs. 721(e)(8), 734(b)(2), 763(e), title IX, Sec. 957, July 21, 2010, 124 Stat. 1671, 1718, 1777, 1906.)

MARGIN REQUIREMENTS

SEC. 7. (a) For the purpose of preventing the excessive use of credit for the purchase or carrying of securities, the Board of Gov-ernors of the Federal Reserve System shall, prior to the effective date of this section and from time to time thereafter, prescribe rules and regulations with respect to the amount of credit that may be initially extended and subsequently maintained on any security (other than an exempted security or a security futures product). For the initial extension of credit, such rules and regulations shall be based upon the following standard: An amount not greater than whichever is the higher of—

(1) 55 per centum of the current market price of the secu-rity, or

(2) 100 per centum of the lowest market price of the secu-rity during the preceding thirty-six calendar months, but not more than 75 per centum of the current market price.

Such rules and regulations may make appropriate provision with respect to the carrying of undermargined accounts for limited peri-ods and under specified conditions; the withdrawal of funds or se-curities; the substitution or additional purchases of securities; the transfer of accounts from one lender to another; special or different margin requirements for delayed deliveries, short sales, arbitrage transactions, and securities to which paragraph (2) of this sub-section does not apply; the bases and the methods to be used in cal-culating loans, and margins and market prices; and similar admin-istrative adjustments and details. For the purposes of paragraph (2) of this subsection until July 1, 1936, the lowest price at which a security has sold on or after July 1, 1933, shall be considered as


the lowest price at which such security has sold during the pre-ceding thirty-six calendar months.

(b) Notwithstanding the provisions of subsection (a) of this sec-tion, the Board of Governors of the Federal Reserve System, may, from time to time, with respect to all or specified securities or transactions, or classes of securities, or classes of transactions, by such rules and regulations (1) prescribe such lower margin require-ments for the initial extension or maintenance of credit as it deems necessary or appropriate for the accommodation of commerce and industry, having due regard to the general credit situation of the country, and (2) prescribe such higher margin requirements for the initial extension or maintenance of credit as it may deem necessary or appropriate to prevent the excessive use of credit to finance transactions in securities.

(c) UNLAWFUL CREDIT EXTENSION TO CUSTOMERS.—(1) PROHIBITION.—It shall be unlawful for any member of

a national securities exchange or any broker or dealer, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer—

(A) on any security (other than an exempted security), except as provided in paragraph (2), in contravention of the rules and regulations which the Board of Governors of the Federal Reserve System (hereafter in this section re-ferred to as the ‘‘Board’’) shall prescribe under subsections (a) and (b); or

(B) without collateral or on any collateral other than securities, except in accordance with such rules and regu-lations as the Board may prescribe—

(i) to permit under specified conditions and for a limited period any such member, broker, or dealer to maintain a credit initially extended in conformity with the rules and regulations of the Board; and

(ii) to permit the extension or maintenance of credit in cases where the extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of evading or circumventing the provi-sions of subparagraph (A).

(2) MARGIN REGULATIONS.—(A) COMPLIANCE WITH MARGIN RULES REQUIRED.—It

shall be unlawful for any broker, dealer, or member of a national securities exchange to, directly or indirectly, ex-tend or maintain credit to or for, or collect margin from any customer on, any security futures product unless such activities comply with the regulations—

(i) which the Board shall prescribe pursuant to subparagraph (B); or

(ii) if the Board determines to delegate the author-ity to prescribe such regulations, which the Commis-sion and the Commodity Futures Trading Commission shall jointly prescribe pursuant to subparagraph (B).

If the Board delegates the authority to prescribe such reg-ulations under clause (ii) and the Commission and the Commodity Futures Trading Commission have not jointly prescribed such regulations within a reasonable period of


time after the date of such delegation, the Board shall pre-scribe such regulations pursuant to subparagraph (B).

(B) CRITERIA FOR ISSUANCE OF RULES.—The Board shall prescribe, or, if the authority is delegated pursuant to subparagraph (A)(ii), the Commission and the Com-modity Futures Trading Commission shall jointly pre-scribe, such regulations to establish margin requirements, including the establishment of levels of margin (initial and maintenance) for security futures products under such terms, and at such levels, as the Board deems appropriate, or as the Commission and the Commodity Futures Trading Commission jointly deem appropriate—

(i) to preserve the financial integrity of markets trading security futures products;

(ii) to prevent systemic risk; (iii) to require that—

(I) the margin requirements for a security fu-ture product be consistent with the margin re-quirements for comparable option contracts traded on any exchange registered pursuant to section 6(a) of this title; and

(II) initial and maintenance margin levels for a security future product not be lower than the lowest level of margin, exclusive of premium, re-quired for any comparable option contract traded on any exchange registered pursuant to section 6(a) of this title, other than an option on a secu-rity future;

except that nothing in this subparagraph shall be con-strued to prevent a national securities exchange or na-tional securities association from requiring higher margin levels for a security future product when it deems such action to be necessary or appropriate; and

(iv) to ensure that the margin requirements (other than levels of margin), including the type, form, and use of collateral for security futures products, are and remain consistent with the requirements established by the Board, pursuant to subparagraphs (A) and (B) of paragraph (1).

(3) EXCEPTION.—This subsection and the rules and regula-tions issued under this subsection shall not apply to any credit extended, maintained, or arranged by a member of a national securities exchange or a broker or dealer to or for a member of a national securities exchange or a registered broker or deal-er—

(A) a substantial portion of whose business consists of transactions with persons other than brokers or dealers; or

(B) to finance its activities as a market maker or an underwriter;

except that the Board may impose such rules and regulations, in whole or in part, on any credit otherwise exempted by this paragraph if the Board determines that such action is nec-essary or appropriate in the public interest or for the protec-tion of investors.


(d) UNLAWFUL CREDIT EXTENSION IN VIOLATION OF RULES AND REGULATIONS; EXCEPTIONS TO APPLICATION OF RULES, ETC.—

(1) PROHIBITION.—It shall be unlawful for any person not subject to subsection (c) to extend or maintain credit or to ar-range for the extension or maintenance of credit for the pur-pose of purchasing or carrying any security, in contravention of such rules and regulations as the Board shall prescribe to prevent the excessive use of credit for the purchasing or car-rying of or trading in securities in circumvention of the other provisions of this section. Such rules and regulations may im-pose upon all loans made for the purpose of purchasing or car-rying securities limitations similar to those imposed upon members, brokers, or dealers by subsection (c) and the rules and regulations thereunder.

(2) EXCEPTIONS.—This subsection and the rules and regu-lations issued under this subsection shall not apply to any credit extended, maintained, or arranged—

(A) by a person not in the ordinary course of business; (B) on an exempted security; (C) to or for a member of a national securities ex-

change or a registered broker or dealer—(i) a substantial portion of whose business consists

of transactions with persons other than brokers or dealers; or

(ii) to finance its activities as a market maker or an underwriter; (D) by a bank on a security other than an equity secu-

rity; or (E) as the Board shall, by such rules, regulations, or

orders as it may deem necessary or appropriate in the pub-lic interest or for the protection of investors, exempt, either unconditionally or upon specified terms and conditions or for stated periods, from the operation of this subsection and the rules and regulations thereunder. (3) BOARD AUTHORITY.—The Board may impose such rules

and regulations, in whole or in part, on any credit otherwise exempted by subparagraph (C) if it determines that such ac-tion is necessary or appropriate in the public interest or for the protection of investors. (e) The provisions of this section or the rules and regulations

thereunder shall not apply on or before July 1, 1937, to any loan or extension of credit made prior to the enactment of this title or to the maintenance, renewal, or extension of any such loan or cred-it, except to the extent that the Federal Reserve Board may by rules and regulations prescribe as necessary to prevent the cir-cumvention of the provisions of this section or the rules and regula-tions thereunder by means of withdrawals of funds or securities, substitutions of securities, or additional purchases or by any other device.

(f)(1) It is unlawful for any United States person, or any for-eign person controlled by a United States person or acting on be-half of or in conjunction with such person, to obtain, receive, or enjoy the beneficial use of a loan or other extension of credit from any lender (without regard to whether the lender’s office or place


of business is in a State or the transaction occurred in whole or in part within a State) for the purpose of (A) purchasing or carrying United States securities, or (B) purchasing or carrying within the United States of any other securities, if, under this section or rules and regulations prescribed thereunder, the loan or other credit transaction is prohibited or would be prohibited if it had been made or the transaction had otherwise occurred in a lender’s office or other place of business in a State.

(2) For the purposes of this subsection—(A) The term ‘‘United States person’’ includes a person

which is organized or exists under the laws of any State or, in the case of a natural person, a citizen or resident of the United States; a domestic estate; or a trust in which one or more of the foregoing persons has a cumulative direct or indirect bene-ficial interest in excess of 50 per centum of the value of the trust.

(B) The term ‘‘United States security’’ means a security (other than an exempted security) issued by a person incor-porated under the laws of any State, or whose principal place of business is within a State.

(C) The term ‘‘foreign person controlled by a United States person’’ includes any noncorporate entity in which United States persons directly or indirectly have more than a 50 per centum beneficial interest, and any corporation in which one or more United States persons, directly or indirectly, own stock possessing more than 50 per centum of the total combined vot-ing power of all classes of stock entitled to vote, or more than 50 per centum of the total value of shares of all classes of stock. (3) The Board of Governors of the Federal Reserve System

may, in its discretion and with due regard for the purposes of this section, by rule or regulation exempt any class of United States persons or foreign persons controlled by a United States person from the application of this subsection.

(g) Subject to such rules and regulations as the Board of Gov-ernors of the Federal Reserve System may adopt in the public in-terest and for the protection of investors, no member of a national securities exchange or broker or dealer shall be deemed to have ex-tended or maintained credit or arranged for the extension or main-tenance of credit for the purpose of purchasing a security, within the meaning of this section, by reason of a bona fide agreement for delayed delivery of a mortgage related security or a small business related security against full payment of the purchase price thereof upon such delivery within one hundred and eighty days after the purchase, or within such shorter period as the Board of Governors of the Federal Reserve System may prescribe by rule or regulation.

(June 6, 1934, ch. 404, title I, Sec. 7, 48 Stat. 886; Aug. 23, 1935, ch. 614, Sec. 203(a), 49 Stat. 704; Pub. L. 90-437, July 29, 1968, 82 Stat. 452; Pub. L. 91-508, title III, Sec. 301(a), Oct. 26, 1970, 84 Stat. 1124; Pub. L. 98-440, title I, Sec. 102, Oct. 3, 1984, 98 Stat. 1690; Pub. L. 103-325, title II, Sec. 203, Sept. 23, 1994, 108 Stat. 2199; Pub. L. 104-290, title I, Sec. 104(a), Oct. 11, 1996, 110 Stat. 3422; Pub. L. 105-353, title III, Sec. 301(b)(5), (6), Nov. 3,


1998, 112 Stat. 3236; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 206(b)], Dec. 21, 2000, 114 Stat. 2763, 2763A-429; Pub. L. 111-203, title IX, Sec. 929, July 21, 2010, 124 Stat. 1852.)

RESTRICTIONS ON BORROWING BY MEMBERS, BROKERS, AND DEALERS

SEC. 8. It shall be unlawful for any registered broker or dealer, member of a national securities exchange, or broker or dealer who transacts a business in securities through the medium of any mem-ber of a national securities exchange, directly or indirectly—

(a) In contravention of such rules and regulations as the Com-mission shall prescribe for the protection of investors to hypoth-ecate or arrange for the hypothecation of any securities carried for the account of any customer under circumstances (1) that will per-mit the commingling of his securities without his written consent with the securities of any other customer, (2) that will permit such securities to be commingled with the securities of any person other than a bona fide customer, or (3) that will permit such securities to be hypothecated, or subjected to any lien or claim of the pledgee, for a sum in excess of the aggregate indebtedness of such cus-tomers in respect of such securities.

(b) To lend or arrange for the lending of any securities carried for the account of any customer without the written consent of such customer or in contravention of such rules and regulations as the Commission shall prescribe for the protection of investors.

(June 6, 1934, ch. 404, title I, Sec. 8, 48 Stat. 888; Aug. 23, 1935, ch. 614, Sec. 203(a), 49 Stat. 704; Pub. L. 94-29, Sec. 5, June 4, 1975, 89 Stat. 109; Pub. L. 98-440, title I, Sec. 103, Oct. 3, 1984, 98 Stat. 1690; Pub. L. 103-325, title II, Sec. 204, Sept. 23, 1994, 108 Stat. 2199; Pub. L. 104-290, title I, Sec. 104(b), Oct. 11, 1996, 110 Stat. 3423.)

PROHIBITION AGAINST MANIPULATION OF SECURITY PRICES

SEC. 9. (a) It shall be unlawful for any person, directly or indi-rectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities ex-change, or for any member of a national securities exchange—

(1) For the purpose of creating a false or misleading appear-ance of active trading in any security other than a government se-curity, or a false or misleading appearance with respect to the mar-ket for any such security, (A) to effect any transaction in such secu-rity which involves no change in the beneficial ownership thereof, or (B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or (C) to enter any order or orders for the sale of any such security with the knowledge that an order or orders of substantially the same size, at substan-tially the same time, and at substantially the same price, for the


purchase of such security, has been or will be entered by or for the same or different parties.

(2) To effect, alone or with 1 or more other persons, a series of transactions in any security other than a government security, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.

(3) If a dealer, broker, security-based swap dealer, major secu-rity-based swap participant, or other person selling or offering for sale or purchasing or offering to purchase the security, a security-based swap, or a security-based swap agreement with respect to such security, to induce the purchase or sale of any security other than a government security, any security not so registered, any se-curity-based swap, or any security-based swap agreement with re-spect to such security by the circulation or dissemination in the or-dinary course of business of information to the effect that the price of any such security will or is likely to rise or fall because of mar-ket operations of any 1 or more persons conducted for the purpose of raising or depressing the price of such security.

(4) If a dealer, broker, security-based swap dealer, major secu-rity-based swap participant, or other person selling or offering for sale or purchasing or offering to purchase the security, a security-based swap, or security-based swap agreement with respect to such security, to make, regarding any security other than a government security, any security not so registered, any security-based swap, or any security-based swap agreement with respect to such security, for the purpose of inducing the purchase or sale of such security, such security-based swap, or such security-based swap agreement any statement which was at the time and in the light of the cir-cumstances under which it was made, false or misleading with re-spect to any material fact, and which that person knew or had rea-sonable ground to believe was so false or misleading.

(5) For a consideration, received directly or indirectly from a broker, dealer, security-based swap dealer, major security-based swap participant, or other person selling or offering for sale or pur-chasing or offering to purchase the security, a security-based swap, or security-based swap agreement with respect to such security, to induce the purchase of any security other than a government secu-rity, any security not so registered, any security-based swap, or any security-based swap agreement with respect to such security by the circulation or dissemination of information to the effect that the price of any such security will or is likely to rise or fall because of the market operations of any 1 or more persons conducted for the purpose of raising or depressing the price of such security.

(6) To effect either alone or with one or more other persons any series of transactions for the purchase and/or sale of any security other than a government security for the purpose of pegging, fixing, or stabilizing the price of such security in contravention of such rules and regulations as the Commission may prescribe as nec-essary or appropriate in the public interest or for the protection of investors.


(b) It shall be unlawful for any person to effect, in contraven-tion of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protec-tion of investors—

(1) any transaction in connection with any security where-by any party to such transaction acquires—

(A) any put, call, straddle, or other option or privilege of buying the security from or selling the security to an-other without being bound to do so;

(B) any security futures product on the security; or (C) any security-based swap involving the security or

the issuer of the security; (2) any transaction in connection with any security with

relation to which such person has, directly or indirectly, any interest in any—

(A) such put, call, straddle, option, or privilege; (B) such security futures product; or (C) such security-based swap; or

(3) any transaction in any security for the account of any person who such person has reason to believe has, and who ac-tually has, directly or indirectly, any interest in any—

(A) such put, call, straddle, option, or privilege; (B) such security futures product with relation to such

security; or (C) any security-based swap involving such security or

the issuer of such security. (c) It shall be unlawful for any broker, dealer, or member of

a national securities exchange directly or indirectly to endorse or guarantee the performance of any put, call, straddle, option, or privilege in relation to any security other than a government secu-rity, in contravention of such rules and regulations as the Commis-sion may prescribe as necessary or appropriate in the public inter-est or for the protection of investors.

(d) TRANSACTIONS RELATING TO SHORT SALES OF SECURITIES.—It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate com-merce, or of any facility of any national securities exchange, or for any member of a national securities exchange to effect, alone or with one or more other persons, a manipulative short sale of any security. The Commission shall issue such other rules as are nec-essary or appropriate to ensure that the appropriate enforcement options and remedies are available for violations of this subsection in the public interest or for the protection of investors.

(e) The terms ‘‘put’’, ‘‘call’’, ‘‘straddle’’, ‘‘option’’, or ‘‘privilege’’ as used in this section shall not include any registered warrant, right, or convertible security.

(f) Any person who willfully participates in any act or trans-action in violation of subsection (a), (b), or (c) of this section, shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the per-son so injured may sue in law or in equity in any court of com-petent jurisdiction to recover the damages sustained as a result of any such act or transaction. In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of


29Two subsecs. (j) have been enacted.

such suit, and assess reasonable costs, including reasonable attor-neys’ fees, against either party litigant. Every person who becomes liable to make any payment under this subsection may recover con-tribution as in cases of contract from any person who, if joined in the original suit, would have been liable to make the same pay-ment. No action shall be maintained to enforce any liability created under this section, unless brought within one year after the dis-covery of the facts constituting the violation and within three years after such violation.

(g) The provisions of subsection (a) shall not apply to an ex-empted security.

(h)(1) Notwithstanding any other provision of law, the Commis-sion shall have the authority to regulate the trading of any put, call, straddle, option, or privilege on any security, certificate of de-posit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency (but not, with respect to any of the foregoing, an option on a contract for future delivery other than a security fu-tures product).

(2) Notwithstanding the Commodity Exchange Act, the Com-mission shall have the authority to regulate the trading of any se-curity futures product to the extent provided in the securities laws.

(i) LIMITATIONS ON PRACTICES THAT AFFECT MARKET VOLA-TILITY.—It shall be unlawful for any person, by the use of the mails or any means or instrumentality of interstate commerce or of any facility of any national securities exchange, to use or employ any act or practice in connection with the purchase or sale of any eq-uity security in contravention of such rules or regulations as the Commission may adopt, consistent with the public interest, the protection of investors, and the maintenance of fair and orderly markets—

(1) to prescribe means reasonably designed to prevent ma-nipulation of price levels of the equity securities market or a substantial segment thereof; and

(2) to prohibit or constrain, during periods of extraordinary market volatility, any trading practice in connection with the purchase or sale of equity securities that the Commission de-termines (A) has previously contributed significantly to ex-traordinary levels of volatility that have threatened the main-tenance of fair and orderly markets; and (B) is reasonably cer-tain to engender such levels of volatility if not prohibited or constrained.

In adopting rules under paragraph (2), the Commission shall, con-sistent with the purposes of this subsection, minimize the impact on the normal operations of the market and a natural person’s free-dom to buy or sell any equity security.

(j) [29] The authority of the Commission under this section with respect to security-based swap agreements shall be subject to the restrictions and limitations of section 3A(b) of this title.


30Two subsecs. (j) have been enacted.31Margin so in law. 32So in original. Probably should be followed by a comma.

(j) [30] It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities ex-change, to effect any transaction in, or to induce or attempt to in-duce the purchase or sale of, any security-based swap, in connec-tion with which such person engages in any fraudulent, deceptive, or manipulative act or practice, makes any fictitious quotation, or engages in any transaction, practice, or course of business which operates as a fraud or deceit upon any person. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such transactions, acts, practices, and courses of business as are fraudu-lent, deceptive, or manipulative, and such quotations as are ficti-tious.

(June 6, 1934, ch. 404, title I, Sec. 9, 48 Stat. 889; Pub. L. 97-303, Sec. 3, Oct. 13, 1982, 96 Stat. 1409; Pub. L. 101-432, Sec. 6(a), Oct. 16, 1990, 104 Stat. 975; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 205(a)(1), (2), title III, Sec. 303(b), (c)], Dec. 21, 2000, 114 Stat. 2763, 2763A-425, 2763A-426, 2763A-453, 2763A-454; Pub. L. 111-203, title VII, Secs. 762(d)(2), 763(f), (g), title IX, Secs. 929L(1), 929X(b), July 21, 2010, 124 Stat. 1760, 1777, 1861, 1870.)

REGULATION OF THE USE OF MANIPULATIVE AND DECEPTIVE DEVICES

SEC. 10. It shall be unlawful for any person, directly or indi-rectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securi-ties exchange—

(a)(1) To effect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any secu-rity other than a government security, in contravention of such rules and regulations as the Commission may prescribe as nec-essary or appropriate in the public interest or for the protec-tion of investors. (2) [31] Paragraph (1) of this subsection shall not apply to secu-

rity futures products. (b) To use or employ, in connection with the purchase or

sale of any security registered on a national securities ex-change or any security not so registered, or any securities-based swap agreement [32] any manipulative or deceptive de-vice or contrivance in contravention of such rules and regula-tions as the Commission may prescribe as necessary or appro-priate in the public interest or for the protection of investors.

(c)(1) To effect, accept, or facilitate a transaction involving the loan or borrowing of securities in contravention of such rules and regulations as the Commission may prescribe as nec-essary or appropriate in the public interest or for the protec-tion of investors.

90Sec. 10A SECURITIES EXCHANGE ACT OF 1934

(2) Nothing in paragraph (1) may be construed to limit the authority of the appropriate Federal banking agency (as de-fined in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q))), the National Credit Union Administration, or any other Federal department or agency having a responsi-bility under Federal law to prescribe rules or regulations re-stricting transactions involving the loan or borrowing of securi-ties in order to protect the safety and soundness of a financial institution or to protect the financial system from systemic risk.

Rules promulgated under subsection (b) that prohibit fraud, manip-ulation, or insider trading (but not rules imposing or specifying re-porting or recordkeeping requirements, procedures, or standards as prophylactic measures against fraud, manipulation, or insider trad-ing), and judicial precedents decided under subsection (b) and rules promulgated thereunder that prohibit fraud, manipulation, or in-sider trading, shall apply to security-based swap agreements to the same extent as they apply to securities. Judicial precedents decided under section 17(a) of the Securities Act of 1933 and sections 9, 15, 16, 20, and 21A of this title, and judicial precedents decided under applicable rules promulgated under such sections, shall apply to se-curity-based swap agreements to the same extent as they apply to securities.

(June 6, 1934, ch. 404, title I, Sec. 10, 48 Stat. 891; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 206(g), title III, Sec. 303(d)], Dec. 21, 2000, 114 Stat. 2763, 2763A-432, 2763A-454; Pub. L. 111-203, title VII, Sec. 762(d)(3), title IX, Secs. 929L(2), 984(a), July 21, 2010, 124 Stat. 1761, 1861, 1932.)

SEC. 10A. AUDIT REQUIREMENTS.

(a) IN GENERAL.—Each audit required pursuant to this title of the financial statements of an issuer by a registered public ac-counting firm shall include, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission—

(1) procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material ef-fect on the determination of financial statement amounts;

(2) procedures designed to identify related party trans-actions that are material to the financial statements or other-wise require disclosure therein; and

(3) an evaluation of whether there is substantial doubt about the ability of the issuer to continue as a going concern during the ensuing fiscal year. (b) REQUIRED RESPONSE TO AUDIT DISCOVERIES.—

(1) INVESTIGATION AND REPORT TO MANAGEMENT.—If, in the course of conducting an audit pursuant to this title to which subsection (a) applies, the registered public accounting firm detects or otherwise becomes aware of information indi-cating that an illegal act (whether or not perceived to have a material effect on the financial statements of the issuer) has or may have occurred, the firm shall, in accordance with gen-


erally accepted auditing standards, as may be modified or sup-plemented from time to time by the Commission—

(A)(i) determine whether it is likely that an illegal act has occurred; and

(ii) if so, determine and consider the possible effect of the illegal act on the financial statements of the issuer, in-cluding any contingent monetary effects, such as fines, penalties, and damages; and

(B) as soon as practicable, inform the appropriate level of the management of the issuer and assure that the audit committee of the issuer, or the board of directors of the issuer in the absence of such a committee, is adequately informed with respect to illegal acts that have been de-tected or have otherwise come to the attention of such firm in the course of the audit, unless the illegal act is clearly inconsequential. (2) RESPONSE TO FAILURE TO TAKE REMEDIAL ACTION.—If,

after determining that the audit committee of the board of di-rectors of the issuer, or the board of directors of the issuer in the absence of an audit committee, is adequately informed with respect to illegal acts that have been detected or have other-wise come to the attention of the firm in the course of the audit of such accountant, the registered public accounting firm concludes that—

(A) the illegal act has a material effect on the financial statements of the issuer;

(B) the senior management has not taken, and the board of directors has not caused senior management to take, timely and appropriate remedial actions with respect to the illegal act; and

(C) the failure to take remedial action is reasonably expected to warrant departure from a standard report of the auditor, when made, or warrant resignation from the audit engagement;

the registered public accounting firm shall, as soon as prac-ticable, directly report its conclusions to the board of directors.

(3) NOTICE TO COMMISSION; RESPONSE TO FAILURE TO NO-TIFY.—An issuer whose board of directors receives a report under paragraph (2) shall inform the Commission by notice not later than 1 business day after the receipt of such report and shall furnish the registered public accounting firm making such report with a copy of the notice furnished to the Commis-sion. If the registered public accounting firm fails to receive a copy of the notice before the expiration of the required 1-busi-ness-day period, the registered public accounting firm shall—

(A) resign from the engagement; or (B) furnish to the Commission a copy of its report (or

the documentation of any oral report given) not later than 1 business day following such failure to receive notice. (4) REPORT AFTER RESIGNATION.—If a registered public ac-

counting firm resigns from an engagement under paragraph (3)(A), the firm shall, not later than 1 business day following the failure by the issuer to notify the Commission under para-


graph (3), furnish to the Commission a copy of the report of the firm (or the documentation of any oral report given). (c) AUDITOR LIABILITY LIMITATION.—No registered public ac-

counting firm shall be liable in a private action for any finding, conclusion, or statement expressed in a report made pursuant to paragraph (3) or (4) of subsection (b), including any rule promul-gated pursuant thereto.

(d) CIVIL PENALTIES IN CEASE-AND-DESIST PROCEEDINGS.—If the Commission finds, after notice and opportunity for hearing in a proceeding instituted pursuant to section 21C, that a registered public accounting firm has willfully violated paragraph (3) or (4) of subsection (b), the Commission may, in addition to entering an order under section 21C, impose a civil penalty against the reg-istered public accounting firm and any other person that the Com-mission finds was a cause of such violation. The determination to impose a civil penalty and the amount of the penalty shall be gov-erned by the standards set forth in section 21B.

(e) PRESERVATION OF EXISTING AUTHORITY.—Except as pro-vided in subsection (d), nothing in this section shall be held to limit or otherwise affect the authority of the Commission under this title.

(f) DEFINITIONS.—As used in this section, the term ‘‘illegal act’’ means an act or omission that violates any law, or any rule or reg-ulation having the force of law. As used in this section, the term ‘‘issuer’’ means an issuer (as defined in section 3), the securities of which are registered under section 12, or that is required to file re-ports pursuant to section 15(d), or that files or has filed a registra-tion statement that has not yet become effective under the Securi-ties Act of 1933 (15 U.S.C. 77a et seq.), and that it has not with-drawn.

(g) PROHIBITED ACTIVITIES.—Except as provided in subsection (h), it shall be unlawful for a registered public accounting firm (and any associated person of that firm, to the extent determined appro-priate by the Commission) that performs for any issuer any audit required by this title or the rules of the Commission under this title or, beginning 180 days after the date of commencement of the operations of the Public Company Accounting Oversight Board es-tablished under section 101 of the Sarbanes-Oxley Act of 2002 (in this section referred to as the ‘‘Board’’), the rules of the Board, to provide to that issuer, contemporaneously with the audit, any non-audit service, including—

(1) bookkeeping or other services related to the accounting records or financial statements of the audit client;

(2) financial information systems design and implementa-tion;

(3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

(4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resources; (7) broker or dealer, investment adviser, or investment

banking services; (8) legal services and expert services unrelated to the

audit; and


(9) any other service that the Board determines, by regula-tion, is impermissible. (h) PREAPPROVAL REQUIRED FOR NON-AUDIT SERVICES.—A reg-

istered public accounting firm may engage in any non-audit service, including tax services, that is not described in any of paragraphs (1) through (9) of subsection (g) for an audit client, only if the activ-ity is approved in advance by the audit committee of the issuer, in accordance with subsection (i).

(i) PREAPPROVAL REQUIREMENTS.—(1) IN GENERAL.—

(A) AUDIT COMMITTEE ACTION.—All auditing services (which may entail providing comfort letters in connection with securities underwritings or statutory audits required for insurance companies for purposes of State law) and non-audit services, other than as provided in subpara-graph (B), provided to an issuer by the auditor of the issuer shall be preapproved by the audit committee of the issuer.

(B) DE MINIMIS EXCEPTION.—The preapproval require-ment under subparagraph (A) is waived with respect to the provision of non-audit services for an issuer, if—

(i) the aggregate amount of all such non-audit services provided to the issuer constitutes not more than 5 percent of the total amount of revenues paid by the issuer to its auditor during the fiscal year in which the non-audit services are provided;

(ii) such services were not recognized by the issuer at the time of the engagement to be non-audit serv-ices; and

(iii) such services are promptly brought to the at-tention of the audit committee of the issuer and ap-proved prior to the completion of the audit by the audit committee or by 1 or more members of the audit committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the audit committee.

(2) DISCLOSURE TO INVESTORS.—Approval by an audit com-mittee of an issuer under this subsection of a non-audit service to be performed by the auditor of the issuer shall be disclosed to investors in periodic reports required by section 13(a).

(3) DELEGATION AUTHORITY.—The audit committee of an issuer may delegate to 1 or more designated members of the audit committee who are independent directors of the board of directors, the authority to grant preapprovals required by this subsection. The decisions of any member to whom authority is delegated under this paragraph to preapprove an activity under this subsection shall be presented to the full audit com-mittee at each of its scheduled meetings.

(4) APPROVAL OF AUDIT SERVICES FOR OTHER PURPOSES.— In carrying out its duties under subsection (m)(2), if the audit committee of an issuer approves an audit service within the scope of the engagement of the auditor, such audit service shall be deemed to have been preapproved for purposes of this sub-section.


(j) AUDIT PARTNER ROTATION.—It shall be unlawful for a reg-istered public accounting firm to provide audit services to an issuer if the lead (or coordinating) audit partner (having primary respon-sibility for the audit), or the audit partner responsible for reviewing the audit, has performed audit services for that issuer in each of the 5 previous fiscal years of that issuer.

(k) REPORTS TO AUDIT COMMITTEES.—Each registered public accounting firm that performs for any issuer any audit required by this title shall timely report to the audit committee of the issuer—

(1) all critical accounting policies and practices to be used; (2) all alternative treatments of financial information with-

in generally accepted accounting principles that have been dis-cussed with management officials of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and

(3) other material written communications between the registered public accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences. (l) CONFLICTS OF INTEREST.—It shall be unlawful for a reg-

istered public accounting firm to perform for an issuer any audit service required by this title, if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serv-ing in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the audit.

(m) STANDARDS RELATING TO AUDIT COMMITTEES.—(1) COMMISSION RULES.—

(A) IN GENERAL.—Effective not later than 270 days after the date of enactment of this subsection, the Commis-sion shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of any portion of paragraphs (2) through (6).

(B) OPPORTUNITY TO CURE DEFECTS.—The rules of the Commission under subparagraph (A) shall provide for ap-propriate procedures for an issuer to have an opportunity to cure any defects that would be the basis for a prohibi-tion under subparagraph (A), before the imposition of such prohibition. (2) RESPONSIBILITIES RELATING TO REGISTERED PUBLIC AC-

COUNTING FIRMS.—The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be di-rectly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and the auditor regarding financial re-porting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee.

(3) INDEPENDENCE.—


(A) IN GENERAL.—Each member of the audit com-mittee of the issuer shall be a member of the board of di-rectors of the issuer, and shall otherwise be independent.

(B) CRITERIA.—In order to be considered to be inde-pendent for purposes of this paragraph, a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee—

(i) accept any consulting, advisory, or other com-pensatory fee from the issuer; or

(ii) be an affiliated person of the issuer or any subsidiary thereof. (C) EXEMPTION AUTHORITY.—The Commission may ex-

empt from the requirements of subparagraph (B) a par-ticular relationship with respect to audit committee mem-bers, as the Commission determines appropriate in light of the circumstances. (4) COMPLAINTS.—Each audit committee shall establish

procedures for—(A) the receipt, retention, and treatment of complaints

received by the issuer regarding accounting, internal ac-counting controls, or auditing matters; and

(B) the confidential, anonymous submission by em-ployees of the issuer of concerns regarding questionable ac-counting or auditing matters. (5) AUTHORITY TO ENGAGE ADVISERS.—Each audit com-

mittee shall have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties.

(6) FUNDING.—Each issuer shall provide for appropriate funding, as determined by the audit committee, in its capacity as a committee of the board of directors, for payment of com-pensation—

(A) to the registered public accounting firm employed by the issuer for the purpose of rendering or issuing an audit report; and

(B) to any advisers employed by the audit committee under paragraph (5).

(June 6, 1934, ch. 404, title I, Sec. 10A, as added Dec. 22, 1995, Pub. L. 104-67, title III, Sec. 301(a), 109 Stat. 762; amended Pub. L. 107-204, title II, Secs. 201(a), 202-204, 205(b), (d), 206, title III, Sec. 301, July 30, 2002, 116 Stat. 771-775; Pub. L. 111-203, title IX, Sec. 985(b)(3), July 21, 2010, 124 Stat. 1933.)

SEC. 10B. POSITION LIMITS AND POSITION ACCOUNTABILITY FOR SECURITY-BASED SWAPS AND LARGE TRADER REPORT-ING.

(a) POSITION LIMITS.—As a means reasonably designed to pre-vent fraud and manipulation, the Commission shall, by rule or reg-ulation, as necessary or appropriate in the public interest or for the protection of investors, establish limits (including related hedge ex-emption provisions) on the size of positions in any security-based


swap that may be held by any person. In establishing such limits, the Commission may require any person to aggregate positions in—

(1) any security-based swap and any security or loan or group of securities or loans on which such security-based swap is based, which such security-based swap references, or to which such security-based swap is related as described in para-graph (68) of section 3(a), and any other instrument relating to such security or loan or group or index of securities or loans; or

(2) any security-based swap and—(A) any security or group or index of securities, the

price, yield, value, or volatility of which, or of which any interest therein, is the basis for a material term of such security-based swap as described in paragraph (68) of sec-tion 3(a); and

(B) any other instrument relating to the same security or group or index of securities described under subpara-graph (A).

(b) EXEMPTIONS.—The Commission, by rule, regulation, or order, may conditionally or unconditionally exempt any person or class of persons, any security-based swap or class of security-based swaps, or any transaction or class of transactions from any require-ment the Commission may establish under this section with re-spect to position limits.

(c) SRO RULES.—(1) IN GENERAL.—As a means reasonably designed to pre-

vent fraud or manipulation, the Commission, by rule, regula-tion, or order, as necessary or appropriate in the public inter-est, for the protection of investors, or otherwise in furtherance of the purposes of this title, may direct a self-regulatory orga-nization—

(A) to adopt rules regarding the size of positions in any security-based swap that may be held by—

(i) any member of such self-regulatory organiza-tion; or

(ii) any person for whom a member of such self- regulatory organization effects transactions in such se-curity-based swap; and (B) to adopt rules reasonably designed to ensure com-

pliance with requirements prescribed by the Commission under this subsection. (2) REQUIREMENT TO AGGREGATE POSITIONS.—In estab-

lishing the limits under paragraph (1), the self-regulatory orga-nization may require such member or person to aggregate posi-tions in—

(A) any security-based swap and any security or loan or group or narrow-based security index of securities or loans on which such security-based swap is based, which such security- based swap references, or to which such se-curity-based swap is related as described in section 3(a)(68), and any other instrument relating to such secu-rity or loan or group or narrow-based security index of se-curities or loans; or

(B)(i) any security-based swap; and


(ii) any security-based swap and any other instrument relating to the same security or group or narrow-based se-curity index of securities.

(d) LARGE TRADER REPORTING.—The Commission, by rule or regulation, may require any person that effects transactions for such person’s own account or the account of others in any securi-ties-based swap or uncleared security-based swap and any security or loan or group or narrow-based security index of securities or loans as set forth in paragraphs (1) and (2) of subsection (a) under this section to report such information as the Commission may pre-scribe regarding any position or positions in any security-based swap or uncleared security-based swap and any security or loan or group or narrow-based security index of securities or loans and any other instrument relating to such security or loan or group or nar-row-based security index of securities or loans as set forth in para-graphs (1) and (2) of subsection (a) under this section.

(June 6, 1934, ch. 404, title I, Sec. 10B, as added Pub. L. 111-203, title VII, Sec. 763(h), July 21, 2010, 124 Stat. 1778.)

SEC. 10C. COMPENSATION COMMITTEES.

(a) INDEPENDENCE OF COMPENSATION COMMITTEES.—(1) LISTING STANDARDS.—The Commission shall, by rule,

direct the national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer, other than an issuer that is a controlled company, lim-ited partnership, company in bankruptcy proceedings, open-ended management investment company that is registered under the Investment Company Act of 1940, or a foreign pri-vate issuer that provides annual disclosures to shareholders of the reasons that the foreign private issuer does not have an independent compensation committee, that does not comply with the requirements of this subsection.

(2) INDEPENDENCE OF COMPENSATION COMMITTEES.—The rules of the Commission under paragraph (1) shall require that each member of the compensation committee of the board of di-rectors of an issuer be—

(A) a member of the board of directors of the issuer; and

(B) independent. (3) INDEPENDENCE.—The rules of the Commission under

paragraph (1) shall require that, in determining the definition of the term ‘‘independence’’ for purposes of paragraph (2), the national securities exchanges and the national securities asso-ciations shall consider relevant factors, including—

(A) the source of compensation of a member of the board of directors of an issuer, including any consulting, advisory, or other compensatory fee paid by the issuer to such member of the board of directors; and

(B) whether a member of the board of directors of an issuer is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.


(4) EXEMPTION AUTHORITY.—The rules of the Commission under paragraph (1) shall permit a national securities ex-change or a national securities association to exempt a par-ticular relationship from the requirements of paragraph (2), with respect to the members of a compensation committee, as the national securities exchange or national securities associa-tion determines is appropriate, taking into consideration the size of an issuer and any other relevant factors. (b) INDEPENDENCE OF COMPENSATION CONSULTANTS AND

OTHER COMPENSATION COMMITTEE ADVISERS.—(1) IN GENERAL.—The compensation committee of an issuer

may only select a compensation consultant, legal counsel, or other adviser to the compensation committee after taking into consideration the factors identified by the Commission under paragraph (2).

(2) RULES.—The Commission shall identify factors that af-fect the independence of a compensation consultant, legal coun-sel, or other adviser to a compensation committee of an issuer. Such factors shall be competitively neutral among categories of consultants, legal counsel, or other advisers and preserve the ability of compensation committees to retain the services of members of any such category, and shall include—

(A) the provision of other services to the issuer by the person that employs the compensation consultant, legal counsel, or other adviser;

(B) the amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel, or other adviser, as a percentage of the total rev-enue of the person that employs the compensation consult-ant, legal counsel, or other adviser;

(C) the policies and procedures of the person that em-ploys the compensation consultant, legal counsel, or other adviser that are designed to prevent conflicts of interest;

(D) any business or personal relationship of the com-pensation consultant, legal counsel, or other adviser with a member of the compensation committee; and

(E) any stock of the issuer owned by the compensation consultant, legal counsel, or other adviser.

(c) COMPENSATION COMMITTEE AUTHORITY RELATING TO COM-PENSATION CONSULTANTS.—

(1) AUTHORITY TO RETAIN COMPENSATION CONSULTANT.—(A) IN GENERAL.—The compensation committee of an

issuer, in its capacity as a committee of the board of direc-tors, may, in its sole discretion, retain or obtain the advice of a compensation consultant.

(B) DIRECT RESPONSIBILITY OF COMPENSATION COM-MITTEE.—The compensation committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of a compensation consultant.

(C) RULE OF CONSTRUCTION.—This paragraph may not be construed—

(i) to require the compensation committee to im-plement or act consistently with the advice or rec-ommendations of the compensation consultant; or


(ii) to affect the ability or obligation of a com-pensation committee to exercise its own judgment in fulfillment of the duties of the compensation com-mittee.

(2) DISCLOSURE.—In any proxy or consent solicitation ma-terial for an annual meeting of the shareholders (or a special meeting in lieu of the annual meeting) occurring on or after the date that is 1 year after the date of enactment of this sec-tion, each issuer shall disclose in the proxy or consent mate-rial, in accordance with regulations of the Commission, wheth-er—

(A) the compensation committee of the issuer retained or obtained the advice of a compensation consultant; and

(B) the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

(d) AUTHORITY TO ENGAGE INDEPENDENT LEGAL COUNSEL AND OTHER ADVISERS.—

(1) IN GENERAL.—The compensation committee of an issuer, in its capacity as a committee of the board of directors, may, in its sole discretion, retain and obtain the advice of inde-pendent legal counsel and other advisers.

(2) DIRECT RESPONSIBILITY OF COMPENSATION COM-MITTEE.—The compensation committee of an issuer shall be di-rectly responsible for the appointment, compensation, and oversight of the work of independent legal counsel and other advisers.

(3) RULE OF CONSTRUCTION.—This subsection may not be construed—

(A) to require a compensation committee to implement or act consistently with the advice or recommendations of independent legal counsel or other advisers under this sub-section; or

(B) to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committee.

(e) COMPENSATION OF COMPENSATION CONSULTANTS, INDE-PENDENT LEGAL COUNSEL, AND OTHER ADVISERS.—Each issuer shall provide for appropriate funding, as determined by the com-pensation committee in its capacity as a committee of the board of directors, for payment of reasonable compensation—

(1) to a compensation consultant; and (2) to independent legal counsel or any other adviser to the

compensation committee. (f) COMMISSION RULES.—

(1) IN GENERAL.—Not later than 360 days after the date of enactment of this section, the Commission shall, by rule, direct the national securities exchanges and national securities asso-ciations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of this section.

(2) OPPORTUNITY TO CURE DEFECTS.—The rules of the Com-mission under paragraph (1) shall provide for appropriate pro-cedures for an issuer to have a reasonable opportunity to cure


33So in original. Probably should be ‘‘compensation in’’.

any defects that would be the basis for the prohibition under paragraph (1), before the imposition of such prohibition.

(3) EXEMPTION AUTHORITY.—(A) IN GENERAL.—The rules of the Commission under

paragraph (1) shall permit a national securities exchange or a national securities association to exempt a category of issuers from the requirements under this section, as the national securities exchange or the national securities as-sociation determines is appropriate.

(B) CONSIDERATIONS.—In determining appropriate ex-emptions under subparagraph (A), the national securities exchange or the national securities association shall take into account the potential impact of the requirements of this section on smaller reporting issuers.

(g) CONTROLLED COMPANY EXEMPTION.—(1) IN GENERAL.—This section shall not apply to any con-

trolled company. (2) DEFINITION.—For purposes of this section, the term

‘‘controlled company’’ means an issuer—(A) that is listed on a national securities exchange or

by a national securities association; and (B) that holds an election for the board of directors of

the issuer in which more than 50 percent of the voting power is held by an individual, a group, or another issuer.

(June 6, 1934, ch. 404, title I, Sec. 10C, as added Pub. L. 111-203, title IX, Sec. 952(a), July 21, 2010, 124 Stat. 1900.)

SEC. 10D. RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY.

(a) LISTING STANDARDS.—The Commission shall, by rule, direct the national securities exchanges and national securities associa-tions to prohibit the listing of any security of an issuer that does not comply with the requirements of this section.

(b) RECOVERY OF FUNDS.—The rules of the Commission under subsection (a) shall require each issuer to develop and implement a policy providing—

(1) for disclosure of the policy of the issuer on incentive- based compensation that is based on financial information re-quired to be reported under the securities laws; and

(2) that, in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer will recover from any current or former executive officer of the issuer who received incentive-based compensation (including stock options awarded as com-pensation) during the 3-year period preceding the date on which the issuer is required to prepare an accounting restate-ment, based on the erroneous data, in [33] excess of what would have been paid to the executive officer under the accounting restatement.


(June 6, 1934, ch. 404, title I, Sec. 10D, as added Pub. L. 111-203, title IX, Sec. 954, July 21, 2010, 124 Stat. 1904.)

TRADING BY MEMBERS OF EXCHANGES, BROKERS, AND DEALERS

SEC. 11. (a)(1) It shall be unlawful for any member of a na-tional securities exchange to effect any transaction on such ex-change for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion: Provided, however, That this para-graph shall not make unlawful—

(A) any transaction by a dealer acting in the capacity of market maker;

(B) any transaction for the account of an odd-lot dealer in a security in which he is so registered;

(C) any stabilizing transaction effected in compliance with rules under section 10(b) of this title to facilitate a distribution of a security in which the member effecting such transaction is participating;

(D) any bona fide arbitrage transaction, any bona fide hedge transaction involving a long or short position in an eq-uity security and a long or short position in a security entitling the holder to acquire or sell such equity security, or any risk arbitrage transaction in connection with a merger, acquisition, tender offer, or similar transaction involving a recapitalization;

(E) any transaction for the account of a natural person, the estate of a natural person, or a trust created by a natural per-son for himself or another natural person;

(F) any transaction to offset a transaction made in error; (G) any other transaction for a member’s own account pro-

vided that (i) such member is primarily engaged in the busi-ness of underwriting and distributing securities issued by other persons, selling securities to customers, and acting as broker, or any one or more of such activities, and whose gross income normally is derived principally from such business and related activities and (ii) such transaction is effected in compliance with rules of the Commission which, as a minimum, assure that the transaction is not inconsistent with the maintenance of fair and orderly markets and yields priority, parity, and precedence in execution to orders for the account of persons who are not members or associated with members of the ex-change;

(H) any transaction for an account with respect to which such member or an associated person thereof exercises invest-ment discretion if such member—

(i) has obtained, from the person or persons authorized to transact business for the account, express authorization for such member or associated person to effect such trans-actions prior to engaging in the practice of effecting such transactions;

(ii) furnishes the person or persons authorized to transact business for the account with a statement at least annually disclosing the aggregate compensation received


34So in law. Probably should be followed by a comma.

by the exchange member in effecting such transactions; and

(iii) complies with any rules the Commission has pre-scribed with respect to the requirements of clauses (i) and (ii); and (I) any other transaction of a kind which the Commission,

by rule, determines is consistent with the purposes of this paragraph, the protection of investors, and the maintenance of fair and orderly markets. (2) The Commission, by rule, as it deems necessary or appro-

priate in the public interest and for the protection of investors, to maintain fair and orderly markets, or to assure equal regulation of exchange markets and markets occurring otherwise than on an ex-change, may regulate or prohibit:

(A) transactions on a national securities exchange not unlawful under paragraph (1) of this subsection effected by any member thereof for its own account (unless such member is acting in the capacity of market maker or odd-lot dealer), the account of an associated person, or an account with respect to which such member or an associated person thereof exercises investment discretion;

(B) transactions otherwise than on a national securities ex-change effected by use of the mails or any means or instrumen-tality of interstate commerce by any member of a national se-curities exchange, broker, or dealer for the account of such member, broker, or dealer (unless such member, broker, or dealer is acting in the capacity of a market maker) [34] the ac-count of an associated person, or an account with respect to which such member, broker, or dealer or associated person thereof exercises investment discretion; and

(C) transactions on a national securities exchange effected by any broker or dealer not a member thereof for the account of such broker or dealer (unless such broker or dealer is acting in the capacity of market maker), the account of an associated person, or an account with respect to which such broker or dealer or associated person thereof exercises investment discre-tion. (3) The provisions of paragraph (1) of this subsection insofar as

they apply to transactions on a national securities exchange ef-fected by a member thereof who was a member on February 1, 1978 shall not become effective until February 1, 1979. Nothing in this paragraph shall be construed to impair or limit the authority of the Commission to regulate or prohibit such transactions prior to February 1, 1979, pursuant to paragraph (2) of this subsection.

(b) When not in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest and for the protection of investors, to maintain fair and orderly markets, or to remove impediments to and perfect the mechanism of a national market system, the rules of a national se-curities exchange may permit (1) a member to be registered as an odd-lot dealer and as such to buy and sell for his own account so far as may be reasonably necessary to carry on such odd-lot trans-


actions, and (2) a member to be registered as a specialist. Under the rules and regulations of the Commission a specialist may be permitted to act as a broker and dealer or limited to acting as a broker or dealer. It shall be unlawful for a specialist or an official of the exchange to disclose information in regard to orders placed with such specialist which is not available to all members of the exchange, to any person other than an official of the exchange, a representative of the Commission, or a specialist who may be act-ing for such specialist: Provided, however, That the Commission, by rule, may require disclosure to all members of the exchange of all orders placed with specialists, under such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. It shall also be un-lawful for a specialist permitted to act as a broker and dealer to effect on the exchange as broker any transaction except upon a market or limited price order.

(c) If because of the limited volume of transactions effected on an exchange, it is in the opinion of the Commission impracticable and not necessary or appropriate in the public interest or for the protection of investors to apply any of the foregoing provisions of this section or the rules and regulations thereunder, the Commis-sion shall have power, upon application of the exchange and on a showing that the rules of such exchange are otherwise adequate for the protection of investors, to exempt such exchange and its mem-bers from any such provision or rules and regulations.

(d) It shall be unlawful for a member of a national securities exchange who is both a dealer and a broker, or for any person who both as a broker and a dealer transacts a business in securities through the medium of a member or otherwise, to effect through the use of any facility of a national securities exchange or of the mails or of any means or instrumentality of interstate commerce, or otherwise in the case of a member, (1) any transaction in con-nection with which, directly or indirectly, he extends or maintains or arranges for the extension or maintenance of credit to or for a customer on any security (other than an exempted security) which was a part of a new issue in the distribution of which he partici-pated as a member of a selling syndicate or group within thirty days prior to such transaction: Provided, That credit shall not be deemed extended by reason of a bona fide delayed delivery of (i) any such security against full payment of the entire purchase price thereof upon such delivery within thirty-five days after such pur-chase or (ii) any mortgage related security or any small business related security against full payment of the entire purchase price thereof upon such delivery within one hundred and eighty days after such purchase, or within such shorter period as the Commis-sion may prescribe by rule or regulation, or (2) any transaction with respect to any security (other than an exempted security) un-less, if the transaction is with a customer, he discloses to such cus-tomer in writing at or before the completion of the transaction whether he is acting as a dealer for his own account, as a broker for such customer, or as a broker for some other person.

(June 6, 1934, ch. 404, title I, Sec. 11, 48 Stat. 891; Aug. 10, 1954, ch. 667, title II, Sec. 201, 68 Stat. 686; Pub. L. 94-29, Sec. 6, June


35So in law. Probably should be ‘‘are hereinafter’’.

4, 1975, 89 Stat. 110; Pub. L. 95-283, Sec. 18(a), May 21, 1978, 92 Stat. 275; Pub. L. 98-440, title I, Sec. 104, Oct. 3, 1984, 98 Stat. 1690; Pub. L. 103-68, Sec. 1, Aug. 11, 1993, 107 Stat. 691; Pub. L. 103-325, title II, Sec. 205, Sept. 23, 1994, 108 Stat. 2199.)

NATIONAL MARKET SYSTEM FOR SECURITIES; SECURITIES INFORMATION PROCESSORS

SEC. 11A. (a)(1) The Congress finds that—(A) The securities markets are an important national asset

which must be preserved and strengthened. (B) New data processing and communications techniques

create the opportunity for more efficient and effective market operations.

(C) It is in the public interest and appropriate for the pro-tection of investors and the maintenance of fair and orderly markets to assure—

(i) economically efficient execution of securities trans-actions;

(ii) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets;

(iii) the availability to brokers, dealers, and investors of information with respect to quotations for and trans-actions in securities;

(iv) the practicability of brokers executing investors’ orders in the best market; and

(v) an opportunity, consistent with the provisions of clauses (i) and (iv) of this subparagraph, for investors’ or-ders to be executed without the participation of a dealer. (D) The linking of all markets for qualified securities

through communication and data processing facilities will fos-ter efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the off-setting of investors’ orders, and contribute to best execution of such orders. (2) The Commission is directed, therefore, having due regard

for the public interest, the protection of investors, and the mainte-nance of fair and orderly markets, to use its authority under this title to facilitate the establishment of a national market system for securities (which may include subsystems for particular types of se-curities with unique trading characteristics) in accordance with the findings and to carry out the objectives set forth in paragraph (1) of this subsection. The Commission, by rule, shall designate the se-curities or classes of securities qualified for trading in the national market system from among securities other than exempted securi-ties. (Securities or classes of securities so designated hereinafter [35] in this section referred to as ‘‘qualified securities’’.)

(3) The Commission is authorized in furtherance of the direc-tive in paragraph (2) of this subsection—

(A) to create one or more advisory committees pursuant to the Federal Advisory Committee Act (which shall be in addi-


tion to the National Market Advisory Board established pursu-ant to subsection (d) of this section) and to employ one or more outside experts;

(B) by rule or order, to authorize or require self-regulatory organizations to act jointly with respect to matters as to which they share authority under this title in planning, developing, operating, or regulating a national market system (or a sub-system thereof) or one or more facilities thereof; and

(C) to conduct studies and make recommendations to the Congress from time to time as to the possible need for modi-fications of the scheme of self-regulation provided for in this title so as to adapt it to a national market system. (b)(1) Except as otherwise provided in this section, it shall be

unlawful for any securities information processor unless registered in accordance with this subsection, directly or indirectly, to make use of the mails or any means or instrumentality of interstate com-merce to perform the functions of a securities information proc-essor. The Commission, by rule or order, upon its own motion or upon application, may conditionally or unconditionally exempt any securities information processor or class of securities information processors or security or class of securities from any provision of this section or the rules or regulations thereunder, if the Commis-sion finds that such exemption is consistent with the public inter-est, the protection of investors, and the purposes of this section, in-cluding the maintenance of fair and orderly markets in securities and the removal of impediments to and perfection of the mecha-nism of a national market system: Provided, however, That a secu-rities information processor not acting as the exclusive processor of any information with respect to quotations for or transactions in securities is exempt from the requirement to register in accordance with this subsection unless the Commission, by rule or order, finds that the registration of such securities information processor is nec-essary or appropriate in the public interest, for the protection of in-vestors, or for the achievement of the purposes of this section.

(2) A securities information processor may be registered by fil-ing with the Commission an application for registration in such form as the Commission, by rule, may prescribe containing the ad-dress of its principal office, or offices, the names of the securities and markets for which it is then acting and for which it proposes to act as a securities information processor, and such other infor-mation and documents as the Commission, by rule, may prescribe with regard to performance capability, standards and procedures for the collection, processing, distribution, and publication of infor-mation with respect to quotations for and transactions in securi-ties, personnel qualifications, financial condition, and such other matters as the Commission determines to be germane to the provi-sions of this title and the rules and regulations thereunder, or nec-essary or appropriate in furtherance of the purposes of this section.

(3) The Commission shall, upon the filing of an application for registration pursuant to paragraph (2) of this subsection, publish notice of the filing and afford interested persons an opportunity to submit written data, views, and arguments concerning such appli-cation. Within ninety days of the date of the publication of such no-


tice (or within such longer period as to which the applicant con-sents) the Commission shall—

(A) by order grant such registration, or (B) institute proceedings to determine whether registration

should be denied. Such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing and shall be concluded within one hundred eighty days of the date of publication of notice of the filing of the applica-tion for registration. At the conclusion of such proceedings the Commission, by order, shall grant or deny such registration. The Commission may extend the time for the conclusion of such proceedings for up to sixty days if it finds good cause for such extension and publishes its reasons for so finding or for such longer periods as to which the applicant consents.

The Commission shall grant the registration of a securities infor-mation processor if the Commission finds that such securities infor-mation processor is so organized, and has the capacity, to be able to assure the prompt, accurate, and reliable performance of its functions as a securities information processor, comply with the provisions of this title and the rules and regulations thereunder, carry out its functions in a manner consistent with the purposes of this section, and, insofar as it is acting as an exclusive processor, operate fairly and efficiently. The Commission shall deny the reg-istration of a securities information processor if the Commission does not make any such finding.

(4) A registered securities information processor may, upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors, withdraw from registration by filing a written notice of withdrawal with the Commission. If the Commission finds that any registered securities information processor is no longer in existence or has ceased to do business in the capacity specified in its application for registration, the Commission, by order, shall cancel the registra-tion.

(5)(A) If any registered securities information processor pro-hibits or limits any person in respect of access to services offered, directly or indirectly, by such securities information processor, the registered securities information processor shall promptly file no-tice thereof with the Commission. The notice shall be in such form and contain such information as the Commission, by rule, may pre-scribe as necessary or appropriate in the public interest or for the protection of investors. Any prohibition or limitation on access to services with respect to which a registered securities information processor is required by this paragraph to file notice shall be sub-ject to review by the Commission on its own motion, or upon appli-cation by any person aggrieved thereby filed within thirty days after such notice has been filed with the Commission and received by such aggrieved person, or within such longer period as the Com-mission may determine. Application to the Commission for review, or the institution of review by the Commission on its own motion, shall not operate as a stay of such prohibition or limitation, unless the Commission otherwise orders, summarily or after notice and opportunity for hearing on the question of a stay (which hearing may consist solely of the submission of affidavits or presentation of


oral arguments). The Commission shall establish for appropriate cases an expedited procedure for consideration and determination of the question of a stay.

(B) In any proceeding to review the prohibition or limitation of any person in respect of access to services offered by a registered securities information processor, if the Commission finds, after no-tice and opportunity for hearing, that such prohibition or limitation is consistent with the provisions of this title and the rules and reg-ulations thereunder and that such person has not been discrimi-nated against unfairly, the Commission, by order, shall dismiss the proceeding. If the Commission does not make any such finding or if it finds that such prohibition or limitation imposes any burden on competition not necessary or appropriate in furtherance of the purposes of this title, the Commission, by order, shall set aside the prohibition or limitation and require the registered securities infor-mation processor to permit such person access to services offered by the registered securities information processor.

(6) The Commission, by order, may censure or place limitations upon the activities, functions, or operations of any registered secu-rities information processor or suspend for a period not exceeding twelve months or revoke the registration of any such processor, if the Commission finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or revocation is in the public interest, necessary or appropriate for the protection of investors or to assure the prompt, accurate, or re-liable performance of the functions of such securities information processor, and that such securities information processor has vio-lated or is unable to comply with any provision of this title or the rules or regulations thereunder.

(c)(1) No self-regulatory organization, member thereof, securi-ties information processor, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to collect, process, distribute, publish, or prepare for distribution or publication any information with respect to quotations for or trans-actions in any security other than an exempted security, to assist, participate in, or coordinate the distribution or publication of such information, or to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any such security in contraven-tion of such rules and regulations as the Commission shall pre-scribe as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title to—

(A) prevent the use, distribution, or publication of fraudu-lent, deceptive, or manipulative information with respect to quotations for and transactions in such securities;

(B) assure the prompt, accurate, reliable, and fair collec-tion, processing, distribution, and publication of information with respect to quotations for and transactions in such securi-ties and the fairness and usefulness of the form and content of such information;

(C) assure that all securities information processors may, for purposes of distribution and publication, obtain on fair and reasonable terms such information with respect to quotations for and transactions in such securities as is collected, proc-


essed, or prepared for distribution or publication by any exclu-sive processor of such information acting in such capacity;

(D) assure that all exchange members, brokers, dealers, se-curities information processors, and, subject to such limitations as the Commission, by rule, may impose as necessary or appro-priate for the protection of investors or maintenance of fair and orderly markets, all other persons may obtain on terms which are not unreasonably discriminatory such information with re-spect to quotations for and transactions in such securities as is published or distributed by any self-regulatory organization or securities information processor;

(E) assure that all exchange members, brokers, and deal-ers transmit and direct orders for the purchase or sale of quali-fied securities in a manner consistent with the establishment and operation of a national market system; and

(F) assure equal regulation of all markets for qualified se-curities and all exchange members, brokers, and dealers effect-ing transactions in such securities. (2) The Commission, by rule, as it deems necessary or appro-

priate in the public interest or for the protection of investors, may require any person who has effected the purchase or sale of any qualified security by use of the mails or any means or instrumen-tality of interstate commerce to report such purchase or sale to a registered securities information processor, national securities ex-change, or registered securities association and require such proc-essor, exchange, or association to make appropriate distribution and publication of information with respect to such purchase or sale.

(3)(A) The Commission, by rule, is authorized to prohibit bro-kers and dealers from effecting transactions in securities registered pursuant to section 12(b) otherwise than on a national securities exchange, if the Commission finds, on the record after notice and opportunity for hearing, that—

(i) as a result of transactions in such securities effected otherwise than on a national securities exchange the fairness or orderliness of the markets for such securities has been af-fected in a manner contrary to the public interest or the pro-tection of investors;

(ii) no rule of any national securities exchange unreason-ably impairs the ability of any dealer to solicit or effect trans-actions in such securities for his own account or unreasonably restricts competition among dealers in such securities or be-tween dealers acting in the capacity of market makers who are specialists in such securities and such dealers who are not spe-cialists in such securities, and

(iii) the maintenance or restoration of fair and orderly markets in such securities may not be assured through other lawful means under this title.

The Commission may conditionally or unconditionally exempt any security or transaction or any class of securities or transactions from any such prohibition if the Commission deems such exemption consistent with the public interest, the protection of investors, and the maintenance of fair and orderly markets.


36Indentation so in original.

(B) For the purposes of subparagraph (A) of this paragraph, the ability of a dealer to solicit or effect transactions in securities for his own account shall not be deemed to be unreasonably im-paired by any rule of an exchange fairly and reasonably prescribing the sequence in which orders brought to the exchange must be exe-cuted or which has been adopted to effect compliance with a rule of the Commission promulgated under this title.

(4) The Commission is directed to review any and all rules of national securities exchanges which limit or condition the ability of members to effect transactions in securities otherwise than on such exchanges.

(5) No national securities exchange or registered securities as-sociation may limit or condition the participation of any member in any registered clearing agency.

(6) [36] TICK SIZE.—(A) STUDY AND REPORT.—The Commission shall con-

duct a study examining the transition to trading and quoting securities in one penny increments, also known as decimalization. The study shall examine the impact that decimalization has had on the number of initial public of-ferings since its implementation relative to the period be-fore its implementation. The study shall also examine the impact that this change has had on liquidity for small and middle capitalization company securities and whether there is sufficient economic incentive to support trading operations in these securities in penny increments. Not later than 90 days after the date of enactment of this para-graph, the Commission shall submit to Congress a report on the findings of the study.

(B) DESIGNATION.—If the Commission determines that the securities of emerging growth companies should be quoted and traded using a minimum increment of greater than $0.01, the Commission may, by rule not later than 180 days after the date of enactment of this paragraph, designate a minimum increment for the securities of emerging growth companies that is greater than $0.01 but less than $0.10 for use in all quoting and trading of securi-ties in any exchange or other execution venue.

(d)(1) Not later than one hundred eighty days after the date of enactment of the Securities Acts Amendments of 1975, the Com-mission shall establish a National Market Advisory Board (herein-after in this section referred to as the ‘‘Advisory Board’’) to be com-posed of fifteen members, not all of whom shall be from the same geographical area of the United States, appointed by the Commis-sion for a term specified by the Commission of not less than two years or more than five years. The Advisory Board shall consist of persons associated with brokers and dealers (who shall be a major-ity) and persons not so associated who are representative of the public and, to the extent feasible, have knowledge of the securities markets of the United States.

(2) It shall be the responsibility of the Advisory Board to for-mulate and furnish to the Commission its views on significant reg-


ulatory proposals made by the Commission or any self-regulatory organization concerning the establishment, operation, and regula-tion of the markets for securities in the United States.

(3)(A) The Advisory Board shall study and make recommenda-tions to the Commission as to the steps it finds appropriate to fa-cilitate the establishment of a national market system. In so doing, the Advisory Board shall assume the responsibilities of any advi-sory committee appointed to advise the Commission with respect to the national market system which is in existence at the time of the establishment of the Advisory Board.

(B) The Advisory Board shall study the possible need for modi-fications of the scheme of self-regulation provided for in this title so as to adapt it to a national market system, including the need for the establishment of a new self-regulatory organization (herein-after in this section referred to as a ‘‘National Market Regulatory Board’’ or ‘‘Regulatory Board’’) to administer the national market system. In the event the Advisory Board determines a National Market Regulatory Board should be established, it shall make rec-ommendations as to:

(i) the point in time at which a Regulatory Board should be established;

(ii) the composition of a Regulatory Board; (iii) the scope of the authority of a Regulatory Board; (iv) the relationship of a Regulatory Board to the Commis-

sion and to existing self-regulatory organizations; and (v) the manner in which a Regulatory Board should be

funded. The Advisory Board shall report to the Congress, on or before De-cember 31, 1976, the results of such study and its recommenda-tions, including such recommendations for legislation as it deems appropriate.

(C) In carrying out its responsibilities under this paragraph, the Advisory Board shall consult with self-regulatory organizations, brokers, dealers, securities information processors, issuers, inves-tors, representatives of Government agencies, and other persons in-terested or likely to participate in the establishment, operation, or regulation of the national market system.

(e) NATIONAL MARKETS SYSTEM FOR SECURITY FUTURES PROD-UCTS.—

(1) CONSULTATION AND COOPERATION REQUIRED.—With re-spect to security futures products, the Commission and the Commodity Futures Trading Commission shall consult and co-operate so that, to the maximum extent practicable, their re-spective regulatory responsibilities may be fulfilled and the rules and regulations applicable to security futures products may foster a national market system for security futures prod-ucts if the Commission and the Commodity Futures Trading Commission jointly determine that such a system would be consistent with the congressional findings in subsection (a)(1). In accordance with this objective, the Commission shall, at least 15 days prior to the issuance for public comment of any proposed rule or regulation under this section concerning secu-rity futures products, consult and request the views of the Commodity Futures Trading Commission.


(2) APPLICATION OF RULES BY ORDER OF CFTC.—No rule adopted pursuant to this section shall be applied to any person with respect to the trading of security futures products on an exchange that is registered under section 6(g) unless the Com-modity Futures Trading Commission has issued an order di-recting that such rule is applicable to such persons.

(June 6, 1934, ch. 404, title I, Sec. 11A, as added Pub. L. 94-29, Sec. 7, June 4, 1975, 89 Stat. 111; amended Pub. L. 98-620, title IV, Sec. 402(14), Nov. 8, 1984, 98 Stat. 3358; Pub. L. 100-181, title III, Sec. 313, 314, Dec. 4, 1987, 101 Stat. 1256; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 206(c)], Dec. 21, 2000, 114 Stat. 2763, 2763A-430; Pub. L. 112-106, title I, Sec. 106(b), Apr. 5, 2012, 126 Stat. 312.)

REGISTRATION REQUIREMENTS FOR SECURITIES

SEC. 12. (a) It shall be unlawful for any member, broker, or dealer to effect any transaction in any security (other than an ex-empted security) on a national securities exchange unless a reg-istration is effective as to such security for such exchange in ac-cordance with the provisions of this title and the rules and regula-tions thereunder. The provisions of this subsection shall not apply in respect of a security futures product traded on a national securi-ties exchange.

(b) A security may be registered on a national securities ex-change by the issuer filing an application with the exchange (and filing with the Commission such duplicate originals thereof as the Commission may require), which application shall contain—

(1) Such information, in such detail, as to the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer, and any guarantor of the security as to principal or interest or both, as the Commission may by rules and regulations require, as necessary or appropriate in the public interest or for the protection of investors, in respect of the following:

(A) the organization, financial structures, and nature of the business;

(B) the terms, position, rights, and privileges of the different classes of securities outstanding;

(C) the terms on which their securities are to be, and during the preceding three years have been, offered to the public or otherwise;

(D) the directors, officers, and underwriters, and each security holder of record holding more than 10 per centum of any class of any equity security of the issuer (other than an exempted security), their remuneration and their inter-ests in the securities of, and their material contracts with, the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer;

(E) remuneration to others than directors and officers exceeding $20,000 per annum;

(F) bonus and profit-sharing arrangements;


(G) management and service contracts; (H) options existing or to be created in respect of their

securities; (I) material contracts, not made in the ordinary course

of business, which are to be executed in whole or in part at or after the filing of the application or which were made not more than two years before such filing, and every ma-terial patent or contract for a material patent right shall be deemed a material contract;

(J) balance sheets for not more than the three pre-ceding fiscal years, certified if required by the rules and regulations of the Commission by a registered public ac-counting firm;

(K) profit and loss statements for not more than the three preceding fiscal years, certified if required by the rules and regulations of the Commission by a registered public accounting firm; and

(L) any further financial statements which the Com-mission may deem necessary or appropriate for the protec-tion of investors. (2) Such copies of articles of incorporation, bylaws, trust

indentures, or corresponding documents by whatever name known, underwriting arrangements, and other similar docu-ments of, and voting trust agreements with respect to, the issuer and any person directly or indirectly controlling or con-trolled by, or under direct or indirect common control with, the issuer as the Commission may require as necessary or appro-priate for the proper protection of investors and to insure fair dealing in the security.

(3) Such copies of material contracts, referred to in para-graph (1)(I) above, as the Commission may require as nec-essary or appropriate for the proper protection of investors and to insure fair dealing in the security. (c) If in the judgment of the Commission any information re-

quired under subsection (b) of this section is inapplicable to any specified class or classes of issuers, the Commission shall require in lieu thereof the submission of such other information of com-parable character as it may deem applicable to such class of issuers.

(d) If the exchange authorities certify to the Commission that the security has been approved by the exchange for listing and reg-istration, the registration shall become effective thirty days after the receipt of such certification by the Commission or within such shorter period of time as the Commission may determine. A secu-rity registered with a national securities exchange may be with-drawn or stricken from listing and registration in accordance with the rules of the exchange and, upon such terms as the Commission may deem necessary to impose for the protection of investors, upon application by the issuer or the exchange to the Commission; whereupon the issuer shall be relieved from further compliance with the provisions of this section and section 13 of this title and any rules or regulations under such sections as to the securities so withdrawn or stricken. An unissued security may be registered only in accordance with such rules and regulations as the Commis-


sion may prescribe as necessary or appropriate in the public inter-est or for the protection of investors.

(e) Notwithstanding the foregoing provisions of this section, the Commission may by such rules and regulations as it deems nec-essary or appropriate in the public interest or for the protection of investors permit securities listed on any exchange at the time the registration of such exchange as a national securities exchange be-comes effective, to be registered for a period ending not later than July 1, 1935, without complying with the provisions of this section.

(f)(1)(A) Notwithstanding the preceding subsections of this sec-tion, any national securities exchange, in accordance with the re-quirements of this subsection and the rules hereunder, may extend unlisted trading privileges to—

(i) any security that is listed and registered on a national securities exchange, subject to subparagraph (B); and

(ii) any security that is otherwise registered pursuant to this section, or that would be required to be so registered ex-cept for the exemption from registration provided in subpara-graph (B) or (G) of subsection (g)(2), subject to subparagraph (E) of this paragraph. (B) A national securities exchange may not extend unlisted

trading privileges to a security described in subparagraph (A)(i) during such interval, if any, after the commencement of an initial public offering of such security, as is or may be required pursuant to subparagraph (C).

(C) Not later than 180 days after the date of enactment of the Unlisted Trading Privileges Act of 1994, the Commission shall pre-scribe, by rule or regulation, the duration of the interval referred to in subparagraph (B), if any, as the Commission determines to be necessary or appropriate for the maintenance of fair and orderly markets, the protection of investors and the public interest, or oth-erwise in furtherance of the purposes of this title. Until the earlier of the effective date of such rule or regulation or 240 days after such date of enactment, such interval shall begin at the opening of trading on the day on which such security commences trading on the national securities exchange with which such security is reg-istered and end at the conclusion of the next day of trading.

(D) The Commission may prescribe, by rule or regulation such additional procedures or requirements for extending unlisted trad-ing privileges to any security as the Commission deems necessary or appropriate for the maintenance of fair and orderly markets, the protection of investors and the public interest, or otherwise in fur-therance of the purposes of this title.

(E) No extension of unlisted trading privileges to securities de-scribed in subparagraph (A)(ii) may occur except pursuant to a rule, regulation, or order of the Commission approving such exten-sion or extensions. In promulgating such rule or regulation or in issuing such order, the Commission—

(i) shall find that such extension or extensions of unlisted trading privileges is consistent with the maintenance of fair and orderly markets, the protection of investors and the public interest, and otherwise in furtherance of the purposes of this title;


(ii) shall take account of the public trading activity in such securities, the character of such trading, the impact of such ex-tension on the existing markets for such securities, and the de-sirability of removing impediments to and the progress that has been made toward the development of a national market system; and

(iii) shall not permit a national securities exchange to ex-tend unlisted trading privileges to such securities if any rule of such national securities exchange would unreasonably im-pair the ability of a dealer to solicit or effect transactions in such securities for its own account, or would unreasonably re-strict competition among dealers in such securities or between such dealers acting in the capacity of market makers who are specialists and such dealers who are not specialists. (F) An exchange may continue to extend unlisted trading privi-

leges in accordance with this paragraph only if the exchange and the subject security continue to satisfy the requirements for eligi-bility under this paragraph, including any rules and regulations issued by the Commission pursuant to this paragraph, except that unlisted trading privileges may continue with regard to securities which had been admitted on such exchange prior to July 1, 1964, notwithstanding the failure to satisfy such requirements. If un-listed trading privileges in a security are discontinued pursuant to this subparagraph, the exchange shall cease trading in that secu-rity, unless the exchange and the subject security thereafter satisfy the requirements of this paragraph and the rules issued hereunder.

(G) For purposes of this paragraph—(i) a security is the subject of an initial public offering if—

(I) the offering of the subject security is registered under the Securities Act of 1933; and

(II) the issuer of the security, immediately prior to fil-ing the registration statement with respect to the offering, was not subject to the reporting requirements of section 13 or 15(d) of this title; and (ii) an initial public offering of such security commences at

the opening of trading on the day on which such security com-mences trading on the national securities exchange with which such security is registered. (2)(A) At any time within 60 days of commencement of trading

on an exchange of a security pursuant to unlisted trading privi-leges, the Commission may summarily suspend such unlisted trad-ing privileges on the exchange. Such suspension shall not be re-viewable under section 25 of this title and shall not be deemed to be a final agency action for purposes of section 704 of title 5, United States Code. Upon such suspension—

(i) the exchange shall cease trading in the security by the close of business on the date of such suspension, or at such time as the Commission may prescribe by rule or order for the maintenance of fair and orderly markets, the protection of in-vestors and the public interest, or otherwise in furtherance of the purposes of this title; and

(ii) if the exchange seeks to extend unlisted trading privi-leges to the security, the exchange shall file an application to reinstate its ability to do so with the Commission pursuant to


such procedures as the Commission may prescribe by rule or order for the maintenance of fair and orderly markets, the pro-tection of investors and the public interest, or otherwise in fur-therance of the purposes of this title. (B) A suspension under subparagraph (A) shall remain in effect

until the Commission, by order, grants approval of an application to reinstate, as described in subparagraph (A)(ii).

(C) A suspension under subparagraph (A) shall not affect the validity or force of an extension of unlisted trading privileges in ef-fect prior to such suspension.

(D) The Commission shall not approve an application by a na-tional securities exchange to reinstate its ability to extend unlisted trading privileges to a security unless the Commission finds, after notice and opportunity for hearing, that the extension of unlisted trading privileges pursuant to such application is consistent with the maintenance of fair and orderly markets, the protection of in-vestors and the public interest, and otherwise in furtherance of the purposes of this title. If the application is made to reinstate un-listed trading privileges to a security described in paragraph (1)(A)(ii), the Commission—

(i) shall take account of the public trading activity in such security, the character of such trading, the impact of such ex-tension on the existing markets for such a security, and the de-sirability of removing impediments to and the progress that has been made toward the development of a national market system; and

(ii) shall not grant any such application if any rule of the national securities exchange making application under this subsection would unreasonably impair the ability of a dealer to solicit or effect transactions in such security for its own ac-count, or would unreasonably restrict competition among deal-ers in such security or between such dealers acting in the ca-pacity of marketmakers who are specialists and such dealers who are not specialists. (3) Notwithstanding paragraph (2), the Commission shall by

rules and regulations suspend unlisted trading privileges in whole or in part for any or all classes of securities for a period not exceed-ing twelve months, if it deems such suspension necessary or appro-priate in the public interest or for the protection of investors or to prevent evasion of the purposes of this title.

(4) On the application of the issuer of any security for which unlisted trading privileges on any exchange have been continued or extended pursuant to this subsection, or of any broker or dealer who makes or creates a market for such security, or of any other person having a bona fide interest in the question of termination or suspension of such unlisted trading privileges, or on its own mo-tion, the Commission shall by order terminate, or suspend for a pe-riod not exceeding twelve months, such unlisted trading privileges for such security if the Commission finds, after appropriate notice and opportunity for hearing, that such termination or suspension is necessary or appropriate in the public interest or for the protec-tion of investors.

(5) In any proceeding under this subsection in which appro-priate notice and opportunity for hearing are required, notice of not


37Indentation so in original.

less than ten days to the applicant in such proceeding, to the issuer of the security involved, to the exchange which is seeking to con-tinue or extend or has continued or extended unlisted trading privi-leges for such security, and to the exchange, if any, on which such security is listed and registered, shall be deemed adequate notice, and any broker or dealer who makes or creates a market for such security, and any other person having a bona fide interest in such proceeding, shall upon application be entitled to be heard.

(6) Any security for which unlisted trading privileges are con-tinued or extended pursuant to this subsection shall be deemed to be registered on a national securities exchange within the meaning of this title. The powers and duties of the Commission under this title shall be applicable to the rules of an exchange in respect to any such security. The Commission may, by such rules and regula-tions as it deems necessary or appropriate in the public interest or for the protection of investors, either unconditionally or upon speci-fied terms and conditions, or for stated periods, exempt such secu-rities from the operation of any provision of section 13, 14, or 16 of this title.

(g)(1) Every issuer which is engaged in interstate commerce, or in a business affecting interstate commerce, or whose securities are traded by use of the mails or any means or instrumentality of interstate commerce shall—

(A) within 120 days after the last day of its first fiscal year ended on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an ex-empted security) held of record by either—

(i) [37] 2,000 persons, or (ii) [37] 500 persons who are not accredited investors (as

such term is defined by the Commission), and (B) in the case of an issuer that is a bank or a bank hold-

ing company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), not later than 120 days after the last day of its first fiscal year ended after the effective date of this subsection, on which the issuer has total assets exceeding $10,000,000 and a class of equity secu-rity (other than an exempted security) held of record by 2,000 or more persons,

register such security by filing with the Commission a registration statement (and such copies thereof as the Commission may require) with respect to such security containing such information and docu-ments as the Commission may specify comparable to that which is required in an application to register a security pursuant to sub-section (b) of this section. Each such registration statement shall become effective sixty days after filing with the Commission or within such shorter period as the Commission may direct. Until such registration statement becomes effective it shall not be deemed filed for the purposes of section 18 of this title. Any issuer may register any class of equity security not required to be reg-istered by filing a registration statement pursuant to the provisions of this paragraph. The Commission is authorized to extend the date


upon which any issuer or class of issuers is required to register a security pursuant to the provisions of this paragraph.

(2) The provisions of this subsection shall not apply in respect of—

(A) any security listed and registered on a national securi-ties exchange.

(B) any security issued by an investment company reg-istered pursuant to section 8 of the Investment Company Act of 1940.

(C) any security, other than permanent stock, guaranty stock, permanent reserve stock, or any similar certificate evi-dencing nonwithdrawable capital, issued by a savings and loan association, building and loan association, cooperative bank, homestead association, or similar institution, which is super-vised and examined by State or Federal authority having su-pervision over any such institution.

(D) any security of an issuer organized and operated exclu-sively for religious, educational, benevolent, fraternal, chari-table, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any private shareholder or individual; or any security of a fund that is excluded from the definition of an investment com-pany under section 3(c)(10)(B) of the Investment Company Act of 1940.

(E) any security of an issuer which is a ‘‘cooperative asso-ciation’’ as defined in the Agricultural Marketing Act, approved June 15, 1929, as amended, or a federation of such cooperative associations, if such federation possesses no greater powers or purposes than cooperative associations so defined.

(F) any security issued by a mutual or cooperative organi-zation which supplies a commodity or service primarily for the benefit of its members and operates not for pecuniary profit, but only if the security is part of a class issuable only to per-sons who purchase commodities or services from the issuer, the security is transferable only to a successor in interest or occu-pancy of premises serviced or to be served by the issuer, and no dividends are payable to the holder of the security.

(G) any security issued by an insurance company if all of the following conditions are met:

(i) Such insurance company is required to and does file an annual statement with the Commissioner of Insurance (or other officer or agency performing a similar function) of its domiciliary State, and such annual statement con-forms to that prescribed by the National Association of In-surance Commissioners or in the determination of such State commissioner, officer or agency substantially con-forms to that so prescribed.

(ii) Such insurance company is subject to regulation by its domiciliary State of proxies, consents, or authorizations in respect of securities issued by such company and such regulation conforms to that prescribed by the National As-sociation of Insurance Commissioners.

(iii) After July 1, 1966, the purchase and sales of secu-rities issued by such insurance company by beneficial own-



39So in original.

ers, directors, or officers of such company are subject to regulation (including reporting) by its domiciliary State substantially in the manner provided in section 16 of this title. (H) any interest or participation in any collective trust

funds maintained by a bank or in a separate account main-tained by an insurance company which interest or participation is issued in connection with (i) a stock-bonus, pension, or prof-it-sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954, [38] (ii) an annuity plan which meets the requirements for deduction of the employer’s contribution under section 404(a)(2) of such Code, or (iii) a church plan, company, or account that is ex-cluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940. (3) The Commission may by rules or regulations or, on its own

motion, after notice and opportunity for hearing, by order, exempt from this subsection any security of a foreign issuer, including any certificate of deposit for such a security, if the Commission finds that such exemption is in the public interest and is consistent with the protection of investors.

(4) Registration of any class of security pursuant to this subsection shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a certification with the Commission that the number of holders of record of such class of security is reduced to less than 300 persons, or, in the case of a bank or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons persons. [39] The Commission shall after notice and opportunity for hearing deny termination of registration if it finds that the certification is untrue. Termination of registration shall be deferred pending final determination on the question of de-nial.

(5) For the purposes of this subsection the term ‘‘class’’ shall include all securities of an issuer which are of substantially similar character and the holders of which enjoy substantially similar rights and privileges. The Commission may for the purpose of this subsection define by rules and regulations the terms ‘‘total assets’’ and ‘‘held of record’’ as it deems necessary or appropriate in the public interest or for the protection of investors in order to prevent circumvention of the provisions of this subsection. For purposes of this subsection, a security futures product shall not be considered a class of equity security of the issuer of the securities underlying the security futures product. For purposes of determining whether an issuer is required to register a security with the Commission pursuant to paragraph (1), the definition of ‘held of record’ shall not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions ex-empted from the registration requirements of section 5 of the Secu-rities Act of 1933.


40Indentation so in original. 41Probably should read ‘‘4(a(6)’’. 42So in original. Probably should be followed by a comma.

(6) [40] EXCLUSION FOR PERSONS HOLDING CERTAIN SECURI-TIES.— The Commission shall, by rule, exempt, conditionally or unconditionally, securities acquired pursuant to an offering made under section 4(6) [41] of the Securities Act of 1933 from the provisions of this subsection. (h) The Commission may by rules and regulations, or upon ap-

plication of an interested person, by order, after notice and oppor-tunity for hearing, exempt in whole or in part any issuer or class of issuers from the provisions of subsection (g) of this section or from section 13, 14, or 15(d) or may exempt from section 16 any officer, director, or beneficial owner of securities of any issuer, any security of which is required to be registered pursuant to sub-section (g) hereof, upon such terms and conditions and for such pe-riod as it deems necessary or appropriate, if the Commission finds, by reason of the number of public investors, amount of trading in-terest in the securities, the nature and extent of the activities of the issuer, income or assets of the issuer, or otherwise, that such action is not inconsistent with the public interest or the protection of investors. The Commission may, for the purposes of any of the above-mentioned sections or subsections of this title, classify issuers and prescribe requirements appropriate for each such class.

(i) In respect of any securities issued by banks and savings as-sociations the deposits of which are insured in accordance with the Federal Deposit Insurance Act, the powers, functions, and duties vested in the Commission to administer and enforce sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f), and 16 of this Act, and sec-tions 302, 303, 304, 306, 401(b), 404, 406, and 407 of the Sarbanes-Oxley Act of 2002, (1) with respect to national banks and Federal savings associations, the accounts of which are insured by the Fed-eral Deposit Insurance Corporation [42] are vested in the Comp-troller of the Currency, (2) with respect to all other member banks of the Federal Reserve System are vested in the Board of Gov-ernors of the Federal Reserve System, and (3) with respect to all other insured banks and State savings associations, the accounts of which are insured by the Federal Deposit Insurance Corporation, are vested in the Federal Deposit Insurance Corporation. The Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation shall have the power to make such rules and regulations as may be necessary for the execution of the functions vested in them as provided in this subsection. In carrying out their responsibilities under this subsection, the agencies named in the first sentence of this subsection shall issue substantially similar regulations to reg-ulations and rules issued by the Commission under sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f) and 16 of this Act, and sec-tions 302, 303, 304, 306, 401(b), 404, 406, and 407 of the Sarbanes-Oxley Act of 2002, unless they find that implementation of substan-tially similar regulations with respect to insured banks and insured institutions are not necessary or appropriate in the public interest or for protection of investors, and publish such findings, and the detailed reasons therefor, in the Federal Register. Such regulations


of the above-named agencies, or the reasons for failure to publish such substantially similar regulations to those of the Commission, shall be published in the Federal Register within 120 days of the date of enactment of this subsection, and, thereafter, within 60 days of any changes made by the Commission in its relevant regu-lations and rules.

(j) The Commission is authorized, by order, as it deems nec-essary or appropriate for the protection of investors to deny, to sus-pend the effective date of, to suspend for a period not exceeding twelve months, or to revoke the registration of a security, if the Commission finds, on the record after notice and opportunity for hearing, that the issuer of such security has failed to comply with any provision of this title or the rules and regulations thereunder. No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked pursuant to the preceding sentence.

(k) TRADING SUSPENSIONS; EMERGENCY AUTHORITY.—(1) TRADING SUSPENSIONS.—If in its opinion the public in-

terest and the protection of investors so require, the Commis-sion is authorized by order—

(A) summarily to suspend trading in any security (other than an exempted security) for a period not exceed-ing 10 business days, and

(B) summarily to suspend all trading on any national securities exchange or otherwise, in securities other than exempted securities, for a period not exceeding 90 calendar days.

The action described in subparagraph (B) shall not take effect unless the Commission notifies the President of its decision and the President notifies the Commission that the President does not disapprove of such decision. If the actions described in subparagraph (A) or (B) involve a security futures product, the Commission shall consult with and consider the views of the Commodity Futures Trading Commission.

(2) EMERGENCY ORDERS.—(A) IN GENERAL.—The Commission, in an emergency,

may by order summarily take such action to alter, supple-ment, suspend, or impose requirements or restrictions with respect to any matter or action subject to regulation by the Commission or a self-regulatory organization under the se-curities laws, as the Commission determines is necessary in the public interest and for the protection of investors—

(i) to maintain or restore fair and orderly securi-ties markets (other than markets in exempted securi-ties);

(ii) to ensure prompt, accurate, and safe clearance and settlement of transactions in securities (other than exempted securities); or

(iii) to reduce, eliminate, or prevent the substan-tial disruption by the emergency of—

(I) securities markets (other than markets in exempted securities), investment companies, or


any other significant portion or segment of such markets; or

(II) the transmission or processing of securi-ties transactions (other than transactions in ex-empted securities).

(B) EFFECTIVE PERIOD.—An order of the Commission under this paragraph shall continue in effect for the period specified by the Commission, and may be extended. Except as provided in subparagraph (C), an order of the Commis-sion under this paragraph may not continue in effect for more than 10 business days, including extensions.

(C) EXTENSION.—An order of the Commission under this paragraph may be extended to continue in effect for more than 10 business days if, at the time of the exten-sion, the Commission finds that the emergency still exists and determines that the continuation of the order beyond 10 business days is necessary in the public interest and for the protection of investors to attain an objective described in clause (i), (ii), or (iii) of subparagraph (A). In no event shall an order of the Commission under this paragraph continue in effect for more than 30 calendar days.

(D) SECURITY FUTURES.—If the actions described in subparagraph (A) involve a security futures product, the Commission shall consult with and consider the views of the Commodity Futures Trading Commission.

(E) EXEMPTION.—In exercising its authority under this paragraph, the Commission shall not be required to com-ply with the provisions of—

(i) section 19(c); or (ii) section 553 of title 5, United States Code.

(3) TERMINATION OF EMERGENCY ACTIONS BY PRESIDENT.— The President may direct that action taken by the Commission under paragraph (1)(B) or paragraph (2) of this subsection shall not continue in effect.

(4) COMPLIANCE WITH ORDERS.—No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security in contravention of an order of the Commission under this subsection unless such order has been stayed, modi-fied, or set aside as provided in paragraph (5) of this sub-section or has ceased to be effective upon direction of the Presi-dent as provided in paragraph (3).

(5) LIMITATIONS ON REVIEW OF ORDERS.—An order of the Commission pursuant to this subsection shall be subject to re-view only as provided in section 25(a) of this title. Review shall be based on an examination of all the information before the Commission at the time such order was issued. The reviewing court shall not enter a stay, writ of mandamus, or similar re-lief unless the court finds, after notice and hearing before a panel of the court, that the Commission’s action is arbitrary, capricious, an abuse of discretion, or otherwise not in accord-ance with law.


(6) CONSULTATION.—Prior to taking any action described in paragraph (1)(B), the Commission shall consult with and consider the views of the Secretary of the Treasury, the Board of Governors of the Federal Reserve System, and the Com-modity Futures Trading Commission, unless such consultation is impracticable in light of the emergency.

(7) DEFINITION.—For purposes of this subsection, the term ‘‘emergency’’ means—

(A) a major market disturbance characterized by or constituting—

(i) sudden and excessive fluctuations of securities prices generally, or a substantial threat thereof, that threaten fair and orderly markets; or

(ii) a substantial disruption of the safe or efficient operation of the national system for clearance and set-tlement of transactions in securities, or a substantial threat thereof; or (B) a major disturbance that substantially disrupts, or

threatens to substantially disrupt—(i) the functioning of securities markets, invest-

ment companies, or any other significant portion or segment of the securities markets; or

(ii) the transmission or processing of securities transactions.

(l) It shall be unlawful for an issuer, any class of whose securi-ties is registered pursuant to this section or would be required to be so registered except for the exemption from registration pro-vided by subsection (g)(2)(B) or (g)(2)(G) of this section, by the use of any means or instrumentality of interstate commerce, or of the mails, to issue, either originally or upon transfer, any of such secu-rities in a form or with a format which contravenes such rules and regulations as the Commission may prescribe as necessary or ap-propriate for the prompt and accurate clearance and settlement of transactions in securities. The provisions of this subsection shall not apply to variable annuity contracts or variable life policies issued by an insurance company or its separate accounts.

(June 6, 1934, ch. 404, title I, Sec. 12, 48 Stat. 892; May 27, 1936, ch. 462, Sec. 1, 49 Stat. 1375; Aug. 10, 1954, ch. 667, title II, Sec. 202, 68 Stat. 686; Aug. 20, 1964, Pub. L. 88-467, Sec. 3, 78 Stat. 565; July 29, 1968, Pub. L. 90-439, Sec. 1, 82 Stat. 454; Dec. 14, 1970, Pub. L. 91-547, Sec. 28(c), 84 Stat. 1435; Oct. 28, 1974, Pub. L. 93-495, title I, Sec. 105(b), 88 Stat. 1503; June 4, 1975, Pub. L. 94-29, Secs. 8, 9, 89 Stat. 117, 118; Oct. 22, 1986, Pub. L. 99-514, Sec. 2, 100 Stat. 2095; Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 314, 101 Stat. 1256; Aug. 9, 1989, Pub. L. 101-73, title VII, Sec. 744(u)(2), 103 Stat. 441; Oct. 16, 1990, Pub. L. 101-432, Sec. 2, 104 Stat. 963; Oct. 22, 1994, Pub. L. 103-389, Sec. 2, 108 Stat. 4081; Dec. 8, 1995, Pub. L. 104-62, Sec. 4(d), 109 Stat. 685; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5) [title II, Secs. 206(e), 208(b)(1), (2)], 114 Stat. 2763, 2763A-431, 2763A-435; Pub. L. 107-204, Sec. 3(b)(4), title II, Sec. 205(c)(1), July 30, 2002, 116 Stat. 749, 774; Pub. L. 108-359, Sec. 1(c)(2), Oct. 25, 2004 118 Stat. 1666; Pub. L. 108-386, Sec. 8(f)(4), Oct. 30, 2004, 118 Stat. 2232; Pub. L. 108-458,


title VII, Sec. 7803(b)(1), (c), Dec. 17, 2004, 118 Stat. 3862; Pub. L. 111-203, title III, Sec. 376(2), title IX, Sec. 986(a)(2), July, 22, 2010, 124 Stat. 1569, 1935; Pub. L. 112-106, title III, Sec. 303(a), title V, Secs. 501, 502, title VI, Sec. 601(a), Apr. 5, 2012, 126 Stat. 321, 325, 326.)

PERIODICAL AND OTHER REPORTS

SEC. 13. (a) Every issuer of a security registered pursuant to section 12 of this title shall file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security—

(1) such information and documents (and such copies thereof) as the Commission shall require to keep reasonably current the information and documents required to be included in or filed with an application or registration statement filed pursuant to section 12, except that the Commission may not require the filing of any material contract wholly executed be-fore July 1, 1962.

(2) such annual reports (and such copies thereof), certified if required by the rules and regulations of the Commission by independent public accountants, and such quarterly reports (and such copies thereof), as the Commission may prescribe.

Every issuer of a security registered on a national securities ex-change shall also file a duplicate original of such information, docu-ments, and reports with the exchange. In any registration state-ment, periodic report, or other reports to be filed with the Commis-sion, an emerging growth company need not present selected finan-cial data in accordance with section 229.301 of title 17, Code of Federal Regulations, for any period prior to the earliest audited pe-riod presented in connection with its first registration statement that became effective under this Act or the Securities Act of 1933 and, with respect to any such statement or reports, an emerging growth company may not be required to comply with any new or revised financial accounting standard until such date that a com-pany that is not an issuer (as defined under section 2(a) of the Sar-banes-Oxley Act of 2002 (15 U.S.C. 7201(a))) is required to comply with such new or revised accounting standard, if such standard ap-plies to companies that are not issuers.

(b)(1) The Commission may prescribe, in regard to reports made pursuant to this title, the form or forms in which the re-quired information shall be set forth, the items or details to be shown in the balance sheet and the earnings statement, and the methods to be followed in the preparation of reports, in the ap-praisal or valuation of assets and liabilities, in the determination of depreciation and depletion, in the differentiation of recurring and nonrecurring income, in the differentiation of investment and operating income, and in the preparation, where the Commission deems it necessary or desirable, of separate and/or consolidated balance sheets or income accounts of any person directly or indi-rectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer; but in the case of the reports of any person whose methods of accounting are pre-


scribed under the provisions of any law of the United States, or any rule or regulation thereunder, the rules and regulations of the Commission with respect to reports shall not be inconsistent with the requirements imposed by such law or rule or regulation in re-spect of the same subject matter (except that such rules and regu-lations of the Commission may be inconsistent with such require-ments to the extent that the Commission determines that the pub-lic interest or the protection of investors so requires).

(2) Every issuer which has a class of securities registered pur-suant to section 12 of this title and every issuer which is required to file reports pursuant to section 15(d) of this title shall—

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—

(i) transactions are executed in accordance with man-agement’s general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with gen-erally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain ac-countability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appro-priate action is taken with respect to any differences; and (C) notwithstanding any other provision of law, pay the al-

locable share of such issuer of a reasonable annual accounting support fee or fees, determined in accordance with section 109 of the Sarbanes-Oxley Act of 2002. (3)(A) With respect to matters concerning the national security

of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in coopera-tion with the head of any Federal department or agency respon-sible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written direc-tive of the head of such department or agency pursuant to Presi-dential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and cir-cumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.

(B) Each head of a Federal department or agency of the United States who issues a directive pursuant to this paragraph shall maintain a complete file of all such directives and shall, on October 1 of each year, transmit a summary of matters covered by such di-rectives in force at any time during the previous year to the Perma-nent Select Committee on Intelligence of the House of Representa-tives and the Select Committee on Intelligence of the Senate.

(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as provided in paragraph (5) of this subsection.


(5) No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

(6) Where an issuer which has a class of securities registered pursuant to section 12 of this title or an issuer which is required to file reports pursuant to section 15(d) of this title holds 50 per centum or less of the voting power with respect to a domestic or foreign firm, the provisions of paragraph (2) require only that the issuer proceed in good faith to use its influence, to the extent rea-sonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls consistent with paragraph (2). Such circumstances include the relative degree of the issuer’s ownership of the domestic or for-eign firm and the laws and practices governing the business oper-ations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be con-clusively presumed to have complied with the requirements of paragraph (2).

(7) For the purpose of paragraph (2) of this subsection, the terms ‘‘reasonable assurances’’ and ‘‘reasonable detail’’ mean such level of detail and degree of assurance as would satisfy prudent of-ficials in the conduct of their own affairs.

(c) If in the judgment of the Commission any report required under subsection (a) is inapplicable to any specified class or classes of issuers, the Commission shall require in lieu thereof the submis-sion of such reports of comparable character as it may deem appli-cable to such class or classes of issuers.

(d)(1) Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is reg-istered pursuant to section 12 of this title, or any equity security of an insurance company which would have been required to be so registered except for the exemption contained in section 12(g)(2)(G) of this title, or any equity security issued by a closed-end invest-ment company registered under the Investment Company Act of 1940 or any equity security issued by a Native Corporation pursu-ant to section 37(d)(6) of the Alaska Native Claims Settlement Act, or otherwise becomes or is deemed to become a beneficial owner of any of the foregoing upon the purchase or sale of a security-based swap that the Commission may define by rule, and is directly or indirectly the beneficial owner of more than 5 per centum of such class shall, within ten days after such acquisition or within such shorter time as the Commission may establish by rule, file with the Commission, a statement containing such of the following informa-tion, and such additional information, as the Commission may by rules and regulations, prescribe as necessary or appropriate in the public interest or for the protection of investors—

(A) the background, and identity, residence, and citizen-ship of, and the nature of such beneficial ownership by, such person and all other persons by whom or on whose behalf the purchases have been or are to be effected;

(B) the source and amount of the funds or other consider-ation used or to be used in making the purchases, and if any part of the purchase price is represented or is to be rep-resented by funds or other consideration borrowed or otherwise


obtained for the purpose of acquiring, holding, or trading such security, a description of the transaction and the names of the parties thereto, except that where a source of funds is a loan made in the ordinary course of business by a bank, as defined in section 3(a)(6) of this title, if the person filing such state-ment so requests, the name of the bank shall not be made available to the public;

(C) if the purpose of the purchases or prospective pur-chases is to acquire control of the business of the issuer of the securities any plans or proposals which such persons may have to liquidate such issuer, to sell its assets to or merge it with any other persons, or to make any other major change in its business or corporate structure;

(D) the number of shares of such security which are bene-ficially owned, and the number of shares concerning which there is a right to acquire, directly or indirectly, by (i) such person, and (ii) by each associate of such person, giving the background, identity, residence, and citizenship of each such associate; and

(E) information as to any contracts, arrangements, or un-derstandings with any person with respect to any securities of the issuer, including but not limited to transfer of any of the securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or guaranties of profits, division of losses or profits, or the giving or with-holding of proxies, naming the persons with whom such con-tracts, arrangements, or understandings have been entered into, and giving the details thereof. (2) If any material change occurs in the facts set forth in the

statement filed with the Commission, an amendment shall be filed with the Commission, in accordance with such rules and regula-tions as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(3) When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a ‘‘person’’ for the purposes of this sub-section.

(4) In determining, for purposes of this subsection, any per-centage of a class of any security, such class shall be deemed to consist of the amount of the outstanding securities of such class, exclusive of any securities of such class held by or for the account of the issuer or a subsidiary of the issuer.

(5) The Commission, by rule or regulation or by order, may permit any person to file in lieu of the statement required by para-graph (1) of this subsection or the rules and regulations there-under, a notice stating the name of such person, the number of shares of any equity securities subject to paragraph (1) which are owned by him, the date of their acquisition and such other informa-tion as the Commission may specify, if it appears to the Commis-sion that such securities were acquired by such person in the ordi-nary course of his business and were not acquired for the purpose of and do not have the effect of changing or influencing the control


of the issuer nor in connection with or as a participant in any transaction having such purpose or effect.

(6) The provisions of this subsection shall not apply to—(A) any acquisition or offer to acquire securities made or

proposed to be made by means of a registration statement under the Securities Act of 1933;

(B) any acquisition of the beneficial ownership of a security which, together with all other acquisitions by the same person of securities of the same class during the preceding twelve months, does not exceed 2 per centum of that class;

(C) any acquisition of an equity security by the issuer of such security;

(D) any acquisition or proposed acquisition of a security which the Commission, by rules or regulations or by order, shall exempt from the provisions of this subsection as not en-tered into for the purpose of, and not having the effect of, changing or influencing the control of the issuer or otherwise as not comprehended within the purposes of this subsection. (e)(1) It shall be unlawful for an issuer which has a class of

equity securities registered pursuant to section 12 of this title, or which is a closed-end investment company registered under the In-vestment Company Act of 1940, to purchase any equity security issued by it if such purchase is in contravention of such rules and regulations as the Commission, in the public interest or for the pro-tection of investors, may adopt (A) to define acts and practices which are fraudulent, deceptive, or manipulative, and (B) to pre-scribe means reasonably designed to prevent such acts and prac-tices. Such rules and regulations may require such issuer to pro-vide holders of equity securities of such class with such information relating to the reasons for such purchase, the source of funds, the number of shares to be purchased, the price to be paid for such se-curities, the method of purchase, and such additional information, as the Commission deems necessary or appropriate in the public in-terest or for the protection of investors, or which the Commission deems to be material to a determination whether such security should be sold.

(2) For the purpose of this subsection, a purchase by or for the issuer or any person controlling, controlled by, or under common control with the issuer, or a purchase subject to control of the issuer or any such person, shall be deemed to be a purchase by the issuer. The Commission shall have power to make rules and regu-lations implementing this paragraph in the public interest and for the protection of investors, including exemptive rules and regula-tions covering situations in which the Commission deems it unnec-essary or inappropriate that a purchase of the type described in this paragraph shall be deemed to be a purchase by the issuer for purposes of some or all of the provisions of paragraph (1) of this subsection.

(3) At the time of filing such statement as the Commission may require by rule pursuant to paragraph (1) of this subsection, the person making the filing shall pay to the Commission a fee at a rate that, subject to paragraph (4), is equal to $92 per $1,000,000 of the value of securities proposed to be purchased. The fee shall be reduced with respect to securities in an amount equal to any fee


43Margin so in law. 44Margin so in law. 45Margin so in law. 46Margin so in law.

paid with respect to any securities issued in connection with the proposed transaction under section 6(b) of the Securities Act of 1933, or the fee paid under that section shall be reduced in an amount equal to the fee paid to the Commission in connection with such transaction under this paragraph.

(4) [43] ANNUAL ADJUSTMENT.—For each fiscal year, the Commission shall by order adjust the rate required by para-graph (3) for such fiscal year to a rate that is equal to the rate (expressed in dollars per million) that is applicable under sec-tion 6(b) of the Securities Act of 1933 for such fiscal year.

(5) [44] FEE COLLECTIONS.—Fees collected pursuant to this subsection for fiscal year 2012 and each fiscal year thereafter shall be deposited and credited as general revenue of the Treasury and shall not be available for obligation.

(6) [45] EFFECTIVE DATE; PUBLICATION.—In exercising its authority under this subsection, the Commission shall not be required to comply with the provisions of section 553 of title 5, United States Code. An adjusted rate prescribed under para-graph (4) shall be published and take effect in accordance with section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)).

(7) [46] PRO RATA APPLICATION.—The rates per $1,000,000 required by this subsection shall be applied pro rata to amounts and balances of less than $1,000,000. (f)(1) Every institutional investment manager which uses the

mails, or any means or instrumentality of interstate commerce in the course of its business as an institutional investment manager and which exercises investment discretion with respect to accounts holding equity securities of a class described in section 13(d)(1) of this title or otherwise becomes or is deemed to become a beneficial owner of any security of a class described in subsection (d)(1) upon the purchase or sale of a security-based swap that the Commission may define by rule, having an aggregate fair market value on the last trading day in any of the preceding twelve months of at least $100,000,000 or such lesser amount (but in no case less than $10,000,000) as the Commission, by rule, may determine, shall file reports with the Commission in such form, for such periods, and at such times after the end of such periods as the Commission, by rule, may prescribe, but in no event shall such reports be filed for periods longer than one year or shorter than one quarter. Such re-ports shall include for each such equity security held on the last day of the reporting period by accounts (in aggregate or by type as the Commission, by rule, may prescribe) with respect to which the institutional investment manager exercises investment discretion (other than securities held in amounts which the Commission, by rule, determines to be insignificant for purposes of this subsection), the name of the issuer and the title, class, CUSIP number, number of shares or principal amount, and aggregate fair market value of each such security. Such reports may also include for accounts (in aggregate or by type) with respect to which the institutional invest-


47Margin so in law.

ment manager exercises investment discretion such of the following information as the Commission, by rule, prescribes—

(A) the name of the issuer and the title, class, CUSIP number, number of shares or principal amount, and aggregate fair market value or cost or amortized cost of each other secu-rity (other than an exempted security) held on the last day of the reporting period by such accounts;

(B) the aggregate fair market value or cost or amortized cost of exempted securities (in aggregate or by class) held on the last day of the reporting period by such accounts;

(C) the number of shares of each equity security of a class described in section 13(d)(1) of this title held on the last day of the reporting period by such accounts with respect to which the institutional investment manager possesses sole or shared authority to exercise the voting rights evidenced by such secu-rities;

(D) the aggregate purchases and aggregate sales during the reporting period of each security (other than an exempted security) effected by or for such accounts; and

(E) with respect to any transaction or series of trans-actions having a market value of at least $500,000 or such other amount as the Commission, by rule, may determine, ef-fected during the reporting period by or for such accounts in any equity security of a class described in section 13(d)(1) of this title—

(i) the name of the issuer and the title, class, and CUSIP number of the security;

(ii) the number of shares or principal amount of the security involved in the transaction;

(iii) whether the transaction was a purchase or sale; (iv) the per share price or prices at which the trans-

action was effected; (v) the date or dates of the transaction; (vi) the date or dates of the settlement of the trans-

action; (vii) the broker or dealer through whom the trans-

action was effected; (viii) the market or markets in which the transaction

was effected; and (ix) such other related information as the Commission,

by rule, may prescribe. (2) [47] The Commission shall prescribe rules providing for

the public disclosure of the name of the issuer and the title, class, CUSIP number, aggregate amount of the number of short sales of each security, and any additional information de-termined by the Commission following the end of the reporting period. At a minimum, such public disclosure shall occur every month. (3) The Commission, by rule or order, may exempt, condi-

tionally or unconditionally, any institutional investment manager or security or any class of institutional investment managers or se-


curities from any or all of the provisions of this subsection or the rules thereunder.

(4) The Commission shall make available to the public for a reasonable fee a list of all equity securities of a class described in section 13(d)(1) of this title, updated no less frequently than reports are required to be filed pursuant to paragraph (1) of this sub-section. The Commission shall tabulate the information contained in any report filed pursuant to this subsection in a manner which will, in the view of the Commission, maximize the usefulness of the information to other Federal and State authorities and the public. Promptly after the filing of any such report, the Commission shall make the information contained therein conveniently available to the public for a reasonable fee in such form as the Commission, by rule, may prescribe, except that the Commission, as it determines to be necessary or appropriate in the public interest or for the pro-tection of investors, may delay or prevent public disclosure of any such information in accordance with section 552 of title 5, United States Code. Notwithstanding the preceding sentence, any such in-formation identifying the securities held by the account of a nat-ural person or an estate or trust (other than a business trust or investment company) shall not be disclosed to the public.

(5) In exercising its authority under this subsection, the Com-mission shall determine (and so state) that its action is necessary or appropriate in the public interest and for the protection of inves-tors or to maintain fair and orderly markets or, in granting an ex-emption, that its action is consistent with the protection of inves-tors and the purposes of this subsection. In exercising such author-ity the Commission shall take such steps as are within its power, including consulting with the Comptroller General of the United States, the Director of the Office of Management and Budget, the appropriate regulatory agencies, Federal and State authorities which, directly or indirectly, require reports from institutional in-vestment managers of information substantially similar to that called for by this subsection, national securities exchanges, and registered securities associations, (A) to achieve uniform, central-ized reporting of information concerning the securities holdings of and transactions by or for accounts with respect to which institu-tional investment managers exercise investment discretion, and (B) consistently with the objective set forth in the preceding subpara-graph, to avoid unnecessarily duplicative reporting by, and mini-mize the compliance burden on, institutional investment managers. Federal authorities which, directly or indirectly, require reports from institutional investment managers of information substan-tially similar to that called for by this subsection shall cooperate with the Commission in the performance of its responsibilities under the preceding sentence. An institutional investment manager which is a bank, the deposits of which are insured in accordance with the Federal Deposit Insurance Act, shall file with the appro-priate regulatory agency a copy of every report filed with the Com-mission pursuant to this subsection.

(6)(A) For purposes of this subsection the term ‘‘institutional investment manager’’ includes any person, other than a natural person, investing in or buying and selling securities for its own ac-


48So in law. Probably should be ‘‘account’’.

count, and any person exercising investment discretion with re-spect to the account of any other person.

(B) The Commission shall adopt such rules as it deems nec-essary or appropriate to prevent duplicative reporting pursuant to this subsection by two or more institutional investment managers exercising investment discretion with respect to the same amount [48].

(g)(1) Any person who is directly or indirectly the beneficial owner of more than 5 per centum of any security of a class de-scribed in subsection (d)(1) of this section or otherwise becomes or is deemed to become a beneficial owner of any security of a class described in subsection (d)(1) upon the purchase or sale of a secu-rity-based swap that the Commission may define by rule shall file with the Commission a statement setting forth, in such form and at such time as the Commission may, by rule, prescribe—

(A) such person’s identity, residence, and citizenship; and (B) the number and description of the shares in which

such person has an interest and the nature of such interest. (2) If any material change occurs in the facts set forth in the

statement filed with the Commission, an amendment shall be filed with the Commission, in accordance with such rules and regula-tions as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(3) When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a ‘‘person’’ for the purposes of this sub-section.


(5) In exercising its authority under this subsection, the Com-mission shall take such steps as it deems necessary or appropriate in the public interest or for the protection of investors (A) to achieve centralized reporting of information regarding ownership, (B) to avoid unnecessarily duplicative reporting by and minimize the compliance burden on persons required to report, and (C) to tabulate and promptly make available the information contained in any report filed pursuant to this subsection in a manner which will, in the view of the Commission, maximize the usefulness of the information to other Federal and State agencies and the public.

(6) The Commission may, by rule or order, exempt, in whole or in part, any person or class of persons from any or all of the re-porting requirements of this subsection as it deems necessary or appropriate in the public interest or for the protection of investors.

(h) LARGE TRADER REPORTING.—(1) IDENTIFICATION REQUIREMENTS FOR LARGE TRADERS.—

For the purpose of monitoring the impact on the securities markets of securities transactions involving a substantial vol-ume or a large fair market value or exercise value and for the


purpose of otherwise assisting the Commission in the enforce-ment of this title, each large trader shall—

(A) provide such information to the Commission as the Commission may by rule or regulation prescribe as nec-essary or appropriate, identifying such large trader and all accounts in or through which such large trader effects such transactions; and

(B) identify, in accordance with such rules or regula-tions as the Commission may prescribe as necessary or ap-propriate, to any registered broker or dealer by or through whom such large trader directly or indirectly effects securi-ties transactions, such large trader and all accounts di-rectly or indirectly maintained with such broker or dealer by such large trader in or through which such transactions are effected. (2) RECORDKEEPING AND REPORTING REQUIREMENTS FOR

BROKERS AND DEALERS.—Every registered broker or dealer shall make and keep for prescribed periods such records as the Commission by rule or regulation prescribes as necessary or appropriate in the public interest, for the protection of inves-tors, or otherwise in furtherance of the purposes of this title, with respect to securities transactions that equal or exceed the reporting activity level effected directly or indirectly by or through such registered broker or dealer of or for any person that such broker or dealer knows is a large trader, or any per-son that such broker or dealer has reason to know is a large trader on the basis of transactions in securities effected by or through such broker or dealer. Such records shall be available for reporting to the Commission, or any self-regulatory organi-zation that the Commission shall designate to receive such re-ports, on the morning of the day following the day the trans-actions were effected, and shall be reported to the Commission or a self-regulatory organization designated by the Commission immediately upon request by the Commission or such a self-regulatory organization. Such records and reports shall be in a format and transmitted in a manner prescribed by the Com-mission (including, but not limited to, machine readable form).

(3) AGGREGATION RULES.—The Commission may prescribe rules or regulations governing the manner in which trans-actions and accounts shall be aggregated for the purpose of this subsection, including aggregation on the basis of common ownership or control.

(4) EXAMINATION OF BROKER AND DEALER RECORDS.—All records required to be made and kept by registered brokers and dealers pursuant to this subsection with respect to trans-actions effected by large traders are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives of the Commission as the Commission deems necessary or appropriate in the public in-terest, for the protection of investors, or otherwise in further-ance of the purposes of this title.

(5) FACTORS TO BE CONSIDERED IN COMMISSION ACTIONS.— In exercising its authority under this subsection, the Commis-sion shall take into account—


(A) existing reporting systems; (B) the costs associated with maintaining information

with respect to transactions effected by large traders and reporting such information to the Commission or self-regu-latory organizations; and

(C) the relationship between the United States and international securities markets. (6) EXEMPTIONS.—The Commission, by rule, regulation, or

order, consistent with the purposes of this title, may exempt any person or class of persons or any transaction or class of transactions, either conditionally or upon specified terms and conditions or for stated periods, from the operation of this sub-section, and the rules and regulations thereunder.

(7) AUTHORITY OF COMMISSION TO LIMIT DISCLOSURE OF IN-FORMATION.—Notwithstanding any other provision of law, the Commission shall not be compelled to disclose any information required to be kept or reported under this subsection. Nothing in this subsection shall authorize the Commission to withhold information from Congress, or prevent the Commission from complying with a request for information from any other Fed-eral department or agency requesting information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this subsection shall be consid-ered a statute described in subsection (b)(3)(B) of such section 552.

(8) DEFINITIONS.—For purposes of this subsection—(A) the term ‘‘large trader’’ means every person who,

for his own account or an account for which he exercises investment discretion, effects transactions for the purchase or sale of any publicly traded security or securities by use of any means or instrumentality of interstate commerce or of the mails, or of any facility of a national securities ex-change, directly or indirectly by or through a registered broker or dealer in an aggregate amount equal to or in ex-cess of the identifying activity level;

(B) the term ‘‘publicly traded security’’ means any eq-uity security (including an option on individual equity se-curities, and an option on a group or index of such securi-ties) listed, or admitted to unlisted trading privileges, on a national securities exchange, or quoted in an automated interdealer quotation system;

(C) the term ‘‘identifying activity level’’ means trans-actions in publicly traded securities at or above a level of volume, fair market value, or exercise value as shall be fixed from time to time by the Commission by rule or regu-lation, specifying the time interval during which such transactions shall be aggregated;

(D) the term ‘‘reporting activity level’’ means trans-actions in publicly traded securities at or above a level of volume, fair market value, or exercise value as shall be fixed from time to time by the Commission by rule, regula-


tion, or order, specifying the time interval during which such transactions shall be aggregated; and

(E) the term ‘‘person’’ has the meaning given in section 3(a)(9) of this title and also includes two or more persons acting as a partnership, limited partnership, syndicate, or other group, but does not include a foreign central bank.

(i) ACCURACY OF FINANCIAL REPORTS.—Each financial report that contains financial statements, and that is required to be pre-pared in accordance with (or reconciled to) generally accepted ac-counting principles under this title and filed with the Commission shall reflect all material correcting adjustments that have been identified by a registered public accounting firm in accordance with generally accepted accounting principles and the rules and regula-tions of the Commission.

(j) OFF-BALANCE SHEET TRANSACTIONS.—Not later than 180 days after the date of enactment of the Sarbanes-Oxley Act of 2002, the Commission shall issue final rules providing that each annual and quarterly financial report required to be filed with the Com-mission shall disclose all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of oper-ations, liquidity, capital expenditures, capital resources, or signifi-cant components of revenues or expenses.

(k) PROHIBITION ON PERSONAL LOANS TO EXECUTIVES.—(1) IN GENERAL.—It shall be unlawful for any issuer (as de-

fined in section 2 of the Sarbanes-Oxley Act of 2002), directly or indirectly, including through any subsidiary, to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of that issuer. An extension of credit maintained by the issuer on the date of enactment of this subsection shall not be subject to the provisions of this subsection, provided that there is no material modification to any term of any such extension of credit or any renewal of any such extension of credit on or after that date of enactment.

(2) LIMITATION.—Paragraph (1) does not preclude any home improvement and manufactured home loans (as that term is defined in section 5 of the Home Owners’ Loan Act (12 U.S.C. 1464)), consumer credit (as defined in section 103 of the Truth in Lending Act (15 U.S.C. 1602)), or any extension of credit under an open end credit plan (as defined in section 103 of the Truth in Lending Act (15 U.S.C. 1602)), or a charge card (as defined in section 127(c)(4)(e) of the Truth in Lending Act (15 U.S.C. 1637(c)(4)(e)), or any extension of credit by a broker or dealer registered under section 15 of this title to an em-ployee of that broker or dealer to buy, trade, or carry securi-ties, that is permitted under rules or regulations of the Board of Governors of the Federal Reserve System pursuant to sec-tion 7 of this title (other than an extension of credit that would be used to purchase the stock of that issuer), that is—


(A) made or provided in the ordinary course of the con-sumer credit business of such issuer;

(B) of a type that is generally made available by such issuer to the public; and

(C) made by such issuer on market terms, or terms that are no more favorable than those offered by the issuer to the general public for such extensions of credit. (3) RULE OF CONSTRUCTION FOR CERTAIN LOANS.—Para-

graph (1) does not apply to any loan made or maintained by an insured depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)), if the loan is subject to the insider lending restrictions of section 22(h) of the Federal Reserve Act (12 U.S.C. 375b). (l) REAL TIME ISSUER DISCLOSURES.—Each issuer reporting

under section 13(a) or 15(d) shall disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, in plain English, which may include trend and qualitative information and graphic presentations, as the Commission determines, by rule, is necessary or useful for the protection of investors and in the pub-lic interest.

(m) PUBLIC AVAILABILITY OF SECURITY-BASED SWAP TRANS-ACTION DATA.—

(1) IN GENERAL.—(A) DEFINITION OF REAL-TIME PUBLIC REPORTING.—In

this paragraph, the term ‘‘real-time public reporting’’ means to report data relating to a security-based swap transaction, including price and volume, as soon as techno-logically practicable after the time at which the security-based swap transaction has been executed.

(B) PURPOSE.—The purpose of this subsection is to au-thorize the Commission to make security-based swap transaction and pricing data available to the public in such form and at such times as the Commission determines ap-propriate to enhance price discovery.

(C) GENERAL RULE.—The Commission is authorized to provide by rule for the public availability of security-based swap transaction, volume, and pricing data as follows:

(i) With respect to those security-based swaps that are subject to the mandatory clearing requirement de-scribed in section 3C(a)(1) (including those security-based swaps that are excepted from the requirement pursuant to section 3C(g)), the Commission shall re-quire real-time public reporting for such transactions.

(ii) With respect to those security-based swaps that are not subject to the mandatory clearing require-ment described in section 3C(a)(1), but are cleared at a registered clearing agency, the Commission shall re-quire real-time public reporting for such transactions.

(iii) With respect to security-based swaps that are not cleared at a registered clearing agency and which are reported to a security-based swap data repository


49So in original. Section 3C(a) does not contain a par. (6).

or the Commission under section 3C(a)(6), [49] the Commission shall require real-time public reporting for such transactions, in a manner that does not dis-close the business transactions and market positions of any person.

(iv) With respect to security-based swaps that are determined to be required to be cleared under section 3C(b) but are not cleared, the Commission shall re-quire real-time public reporting for such transactions. (D) REGISTERED ENTITIES AND PUBLIC REPORTING.—

The Commission may require registered entities to pub-licly disseminate the security-based swap transaction and pricing data required to be reported under this paragraph.

(E) RULEMAKING REQUIRED.—With respect to the rule providing for the public availability of transaction and pricing data for security-based swaps described in clauses (i) and (ii) of subparagraph (C), the rule promulgated by the Commission shall contain provisions—

(i) to ensure such information does not identify the participants;

(ii) to specify the criteria for determining what constitutes a large notional security-based swap trans-action (block trade) for particular markets and con-tracts;

(iii) to specify the appropriate time delay for re-porting large notional security-based swap trans-actions (block trades) to the public; and

(iv) that take into account whether the public dis-closure will materially reduce market liquidity. (F) TIMELINESS OF REPORTING.—Parties to a security-

based swap (including agents of the parties to a security-based swap) shall be responsible for reporting security-based swap transaction information to the appropriate reg-istered entity in a timely manner as may be prescribed by the Commission.

(G) REPORTING OF SWAPS TO REGISTERED SECURITY-BASED SWAP DATA REPOSITORIES.—Each security-based swap (whether cleared or uncleared) shall be reported to a registered security-based swap data repository.

(H) REGISTRATION OF CLEARING AGENCIES.—A clearing agency may register as a security-based swap data reposi-tory. (2) SEMIANNUAL AND ANNUAL PUBLIC REPORTING OF AGGRE-

GATE SECURITY-BASED SWAP DATA.—(A) IN GENERAL.—In accordance with subparagraph

(B), the Commission shall issue a written report on a semi-annual and annual basis to make available to the public information relating to—

(i) the trading and clearing in the major security- based swap categories; and

(ii) the market participants and developments in new products.


(B) USE; CONSULTATION.—In preparing a report under subparagraph (A), the Commission shall—

(i) use information from security-based swap data repositories and clearing agencies; and

(ii) consult with the Office of the Comptroller of the Currency, the Bank for International Settlements, and such other regulatory bodies as may be necessary. (C) AUTHORITY OF COMMISSION.—The Commission

may, by rule, regulation, or order, delegate the public re-porting responsibilities of the Commission under this para-graph in accordance with such terms and conditions as the Commission determines to be appropriate and in the pub-lic interest.

(n) SECURITY-BASED SWAP DATA REPOSITORIES.—(1) REGISTRATION REQUIREMENT.—It shall be unlawful for

any person, unless registered with the Commission, directly or indirectly, to make use of the mails or any means or instru-mentality of interstate commerce to perform the functions of a security-based swap data repository.

(2) INSPECTION AND EXAMINATION.—Each registered security- based swap data repository shall be subject to inspec-tion and examination by any representative of the Commission.

(3) COMPLIANCE WITH CORE PRINCIPLES.—(A) IN GENERAL.—To be registered, and maintain reg-

istration, as a security-based swap data repository, the se-curity-based swap data repository shall comply with—

(i) the requirements and core principles described in this subsection; and

(ii) any requirement that the Commission may im-pose by rule or regulation. (B) REASONABLE DISCRETION OF SECURITY-BASED SWAP

DATA REPOSITORY.—Unless otherwise determined by the Commission, by rule or regulation, a security-based swap data repository described in subparagraph (A) shall have reasonable discretion in establishing the manner in which the security-based swap data repository complies with the core principles described in this subsection. (4) STANDARD SETTING.—

(A) DATA IDENTIFICATION.—(i) IN GENERAL.—In accordance with clause (ii),

the Commission shall prescribe standards that specify the data elements for each security-based swap that shall be collected and maintained by each registered security-based swap data repository.

(ii) REQUIREMENT.—In carrying out clause (i), the Commission shall prescribe consistent data element standards applicable to registered entities and report-ing counterparties. (B) DATA COLLECTION AND MAINTENANCE.—The Com-

mission shall prescribe data collection and data mainte-nance standards for security-based swap data repositories.

(C) COMPARABILITY.—The standards prescribed by the Commission under this subsection shall be comparable to the data standards imposed by the Commission on clearing


agencies in connection with their clearing of security-based swaps. (5) DUTIES.—A security-based swap data repository shall—

(A) accept data prescribed by the Commission for each security-based swap under subsection (b);

(B) confirm with both counterparties to the security- based swap the accuracy of the data that was submitted;

(C) maintain the data described in subparagraph (A) in such form, in such manner, and for such period as may be required by the Commission;

(D)(i) provide direct electronic access to the Commis-sion (or any designee of the Commission, including another registered entity); and

(ii) provide the information described in subparagraph (A) in such form and at such frequency as the Commission may require to comply with the public reporting require-ments set forth in subsection (m);

(E) at the direction of the Commission, establish auto-mated systems for monitoring, screening, and analyzing security-based swap data;

(F) maintain the privacy of any and all security-based swap transaction information that the security-based swap data repository receives from a security-based swap dealer, counterparty, or any other registered entity; and

(G) on a confidential basis pursuant to section 24, upon request, and after notifying the Commission of the request, make available all data obtained by the security-based swap data repository, including individual counterparty trade and position data, to—

(i) each appropriate prudential regulator; (ii) the Financial Stability Oversight Council; (iii) the Commodity Futures Trading Commission; (iv) the Department of Justice; and (v) any other person that the Commission deter-

mines to be appropriate, including—(I) foreign financial supervisors (including for-

eign futures authorities); (II) foreign central banks; and (III) foreign ministries.

(H) CONFIDENTIALITY AND INDEMNIFICATION AGREE-MENT.— Before the security-based swap data repository may share information with any entity described in sub-paragraph (G)—

(i) the security-based swap data repository shall receive a written agreement from each entity stating that the entity shall abide by the confidentiality re-quirements described in section 24 relating to the in-formation on security-based swap transactions that is provided; and

(ii) each entity shall agree to indemnify the secu-rity-based swap data repository and the Commission for any expenses arising from litigation relating to the information provided under section 24.

(6) DESIGNATION OF CHIEF COMPLIANCE OFFICER.—


(A) IN GENERAL.—Each security-based swap data re-pository shall designate an individual to serve as a chief compliance officer.

(B) DUTIES.—The chief compliance officer shall—(i) report directly to the board or to the senior offi-

cer of the security-based swap data repository; (ii) review the compliance of the security-based

swap data repository with respect to the requirements and core principles described in this subsection;

(iii) in consultation with the board of the security- based swap data repository, a body performing a func-tion similar to the board of the security-based swap data repository, or the senior officer of the security-based swap data repository, resolve any conflicts of in-terest that may arise;

(iv) be responsible for administering each policy and procedure that is required to be established pur-suant to this section;

(v) ensure compliance with this title (including regulations) relating to agreements, contracts, or transactions, including each rule prescribed by the Commission under this section;

(vi) establish procedures for the remediation of noncompliance issues identified by the chief compli-ance officer through any—

(I) compliance office review; (II) look-back; (III) internal or external audit finding; (IV) self-reported error; or (V) validated complaint; and

(vii) establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. (C) ANNUAL REPORTS.—

(i) IN GENERAL.—In accordance with rules pre-scribed by the Commission, the chief compliance offi-cer shall annually prepare and sign a report that con-tains a description of—

(I) the compliance of the security-based swap data repository of the chief compliance officer with respect to this title (including regulations); and

(II) each policy and procedure of the security- based swap data repository of the chief compliance officer (including the code of ethics and conflict of interest policies of the security-based swap data repository). (ii) REQUIREMENTS.—A compliance report under

clause (i) shall—(I) accompany each appropriate financial re-

port of the security-based swap data repository that is required to be furnished to the Commission pursuant to this section; and


50So in original. Probably should be ‘‘clause (i),’’.

(II) include a certification that, under penalty of law, the compliance report is accurate and com-plete.

(7) CORE PRINCIPLES APPLICABLE TO SECURITY-BASED SWAP DATA REPOSITORIES.—

(A) ANTITRUST CONSIDERATIONS.—Unless necessary or appropriate to achieve the purposes of this title, the swap data repository shall not—

(i) adopt any rule or take any action that results in any unreasonable restraint of trade; or

(ii) impose any material anticompetitive burden on the trading, clearing, or reporting of transactions. (B) GOVERNANCE ARRANGEMENTS.—Each security-

based swap data repository shall establish governance ar-rangements that are transparent—

(i) to fulfill public interest requirements; and (ii) to support the objectives of the Federal Gov-

ernment, owners, and participants. (C) CONFLICTS OF INTEREST.—Each security-based

swap data repository shall—(i) establish and enforce rules to minimize con-

flicts of interest in the decision-making process of the security- based swap data repository; and

(ii) establish a process for resolving any conflicts of interest described in clause (i). (D) ADDITIONAL DUTIES DEVELOPED BY COMMISSION.—

(i) IN GENERAL.—The Commission may develop 1 or more additional duties applicable to security-based swap data repositories.

(ii) CONSIDERATION OF EVOLVING STANDARDS.—In developing additional duties under subparagraph (A), [50] the Commission may take into consideration any evolving standard of the United States or the international community.

(iii) ADDITIONAL DUTIES FOR COMMISSION DES-IGNEES.— The Commission shall establish additional duties for any registrant described in section 13(m)(2)(C) in order to minimize conflicts of interest, protect data, ensure compliance, and guarantee the safety and security of the security-based swap data re-pository.

(8) REQUIRED REGISTRATION FOR SECURITY-BASED SWAP DATA REPOSITORIES.—Any person that is required to be reg-istered as a security-based swap data repository under this subsection shall register with the Commission, regardless of whether that person is also licensed under the Commodity Ex-change Act as a swap data repository.

(9) RULES.—The Commission shall adopt rules governing persons that are registered under this subsection. (o) BENEFICIAL OWNERSHIP.—For purposes of this section and

section 16, a person shall be deemed to acquire beneficial owner-ship of an equity security based on the purchase or sale of a secu-


rity-based swap, only to the extent that the Commission, by rule, determines after consultation with the prudential regulators and the Secretary of the Treasury, that the purchase or sale of the se-curity-based swap, or class of security-based swap, provides inci-dents of ownership comparable to direct ownership of the equity se-curity, and that it is necessary to achieve the purposes of this sec-tion that the purchase or sale of the security-based swaps, or class of security-based swap, be deemed the acquisition of beneficial own-ership of the equity security.

(p) DISCLOSURES RELATING TO CONFLICT MINERALS ORIGI-NATING IN THE DEMOCRATIC REPUBLIC OF THE CONGO.—

(1) REGULATIONS.—(A) IN GENERAL.—Not later than 270 days after the

date of the enactment of this subsection, the Commission shall promulgate regulations requiring any person de-scribed in paragraph (2) to disclose annually, beginning with the person’s first full fiscal year that begins after the date of promulgation of such regulations, whether conflict minerals that are necessary as described in paragraph (2)(B), in the year for which such reporting is required, did originate in the Democratic Republic of the Congo or an adjoining country and, in cases in which such conflict min-erals did originate in any such country, submit to the Commission a report that includes, with respect to the pe-riod covered by the report—

(i) a description of the measures taken by the per-son to exercise due diligence on the source and chain of custody of such minerals, which measures shall in-clude an independent private sector audit of such re-port submitted through the Commission that is con-ducted in accordance with standards established by the Comptroller General of the United States, in ac-cordance with rules promulgated by the Commission, in consultation with the Secretary of State; and

(ii) a description of the products manufactured or contracted to be manufactured that are not DRC con-flict free (’’DRC conflict free’’ is defined to mean the products that do not contain minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country), the entity that conducted the independent private sector audit in accordance with clause (i), the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the ef-forts to determine the mine or location of origin with the greatest possible specificity. (B) CERTIFICATION.—The person submitting a report

under subparagraph (A) shall certify the audit described in clause (i) of such subparagraph that is included in such re-port. Such a certified audit shall constitute a critical com-ponent of due diligence in establishing the source and chain of custody of such minerals.

(C) UNRELIABLE DETERMINATION.—If a report required to be submitted by a person under subparagraph (A) relies


on a determination of an independent private sector audit, as described under subparagraph (A)(i), or other due dili-gence processes previously determined by the Commission to be unreliable, the report shall not satisfy the require-ments of the regulations promulgated under subparagraph (A)(i).

(D) DRC CONFLICT FREE.—For purposes of this para-graph, a product may be labeled as ‘‘DRC conflict free’’ if the product does not contain conflict minerals that directly or indirectly finance or benefit armed groups in the Demo-cratic Republic of the Congo or an adjoining country.

(E) INFORMATION AVAILABLE TO THE PUBLIC.—Each person described under paragraph (2) shall make available to the public on the Internet website of such person the in-formation disclosed by such person under subparagraph (A). (2) PERSON DESCRIBED.—A person is described in this

paragraph if—(A) the person is required to file reports with the Com-

mission pursuant to paragraph (1)(A); and (B) conflict minerals are necessary to the functionality

or production of a product manufactured by such person. (3) REVISIONS AND WAIVERS.—The Commission shall revise

or temporarily waive the requirements described in paragraph (1) if the President transmits to the Commission a determina-tion that—

(A) such revision or waiver is in the national security interest of the United States and the President includes the reasons therefor; and

(B) establishes a date, not later than 2 years after the initial publication of such exemption, on which such ex-emption shall expire. (4) TERMINATION OF DISCLOSURE REQUIREMENTS.—The re-

quirements of paragraph (1) shall terminate on the date on which the President determines and certifies to the appropriate congressional committees, but in no case earlier than the date that is one day after the end of the 5-year period beginning on the date of the enactment of this subsection, that no armed groups continue to be directly involved and benefitting from commercial activity involving conflict minerals.

(5) DEFINITIONS.—For purposes of this subsection, the terms ‘‘adjoining country’’, ‘‘appropriate congressional commit-tees’’, ‘‘armed group’’, and ‘‘conflict mineral’’ have the meaning given those terms under section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (q) DISCLOSURE OF PAYMENTS BY RESOURCE EXTRACTION

ISSUERS.—(1) DEFINITIONS.—In this subsection—

(A) the term ‘‘commercial development of oil, natural gas, or minerals’’ includes exploration, extraction, proc-essing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the Commission;


51So in law. The word ‘‘a’’ probably should appear.

(B) the term ‘‘foreign government’’ means a foreign government, a department, agency, or instrumentality of a foreign government, or a company owned by a foreign gov-ernment, as determined by the Commission;

(C) the term ‘‘payment’’—(i) means a payment that is—

(I) made to further the commercial develop-ment of oil, natural gas, or minerals; and

(II) not de minimis; and (ii) includes taxes, royalties, fees (including license

fees), production entitlements, bonuses, and other ma-terial benefits, that the Commission, consistent with the guidelines of the Extractive Industries Trans-parency Initiative (to the extent practicable), deter-mines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals; (D) the term ‘‘resource extraction issuer’’ means an

issuer that—(i) is required to file an annual report with the

Commission; and (ii) engages in the commercial development of oil,

natural gas, or minerals; (E) the term ‘‘interactive data format’’ means an elec-

tronic data format in which pieces of information are iden-tified using an interactive data standard; and

(F) the term ‘‘interactive data standard’’ means [51] standardized list of electronic tags that mark information included in the annual report of a resource extraction issuer. (2) DISCLOSURE.—

(A) INFORMATION REQUIRED.—Not later than 270 days after the date of enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commission shall issue final rules that require each resource extraction issuer to include in an annual report of the resource ex-traction issuer information relating to any payment made by the resource extraction issuer, a subsidiary of the re-source extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals, including—

(i) the type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals; and

(ii) the type and total amount of such payments made to each government. (B) CONSULTATION IN RULEMAKING.—In issuing rules

under subparagraph (A), the Commission may consult with any agency or entity that the Commission determines is relevant.


(C) INTERACTIVE DATA FORMAT.—The rules issued under subparagraph (A) shall require that the information included in the annual report of a resource extraction issuer be submitted in an interactive data format.

(D) INTERACTIVE DATA STANDARD.—(i) IN GENERAL.—The rules issued under subpara-

graph (A) shall establish an interactive data standard for the information included in the annual report of a resource extraction issuer.

(ii) ELECTRONIC TAGS.—The interactive data standard shall include electronic tags that identify, for any payments made by a resource extraction issuer to a foreign government or the Federal Government—

(I) the total amounts of the payments, by cat-egory;

(II) the currency used to make the payments; (III) the financial period in which the pay-

ments were made; (IV) the business segment of the resource ex-

traction issuer that made the payments; (V) the government that received the pay-

ments, and the country in which the government is located;

(VI) the project of the resource extraction issuer to which the payments relate; and

(VII) such other information as the Commis-sion may determine is necessary or appropriate in the public interest or for the protection of inves-tors.

(E) INTERNATIONAL TRANSPARENCY EFFORTS.—To the extent practicable, the rules issued under subparagraph (A) shall support the commitment of the Federal Govern-ment to international transparency promotion efforts relat-ing to the commercial development of oil, natural gas, or minerals.

(F) EFFECTIVE DATE.—With respect to each resource extraction issuer, the final rules issued under subpara-graph (A) shall take effect on the date on which the re-source extraction issuer is required to submit an annual report relating to the fiscal year of the resource extraction issuer that ends not earlier than 1 year after the date on which the Commission issues final rules under subpara-graph (A). (3) PUBLIC AVAILABILITY OF INFORMATION.—

(A) IN GENERAL.—To the extent practicable, the Com-mission shall make available online, to the public, a com-pilation of the information required to be submitted under the rules issued under paragraph (2)(A).

(B) OTHER INFORMATION.—Nothing in this paragraph shall require the Commission to make available online in-formation other than the information required to be sub-mitted under the rules issued under paragraph (2)(A).


(4) AUTHORIZATION OF APPROPRIATIONS.—There are author-ized to be appropriated to the Commission such sums as may be necessary to carry out this subsection. (r) DISCLOSURE OF CERTAIN ACTIVITIES RELATING TO IRAN.—

(1) IN GENERAL.—Each issuer required to file an annual or quarterly report under subsection (a) shall disclose in that re-port the information required by paragraph (2) if, during the period covered by the report, the issuer or any affiliate of the issuer—

(A) knowingly engaged in an activity described in sub-section (a) or (b) of section 5 of the Iran Sanctions Act of 1996 (Public Law 104-172; 50 U.S.C. 1701 note);

(B) knowingly engaged in an activity described in sub-section (c)(2) of section 104 of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (22 U.S.C. 8513) or a transaction described in subsection (d)(1) of that section;

(C) knowingly engaged in an activity described in sec-tion 105A(b)(2) of that Act; or

(D) knowingly conducted any transaction or dealing with—

(i) any person the property and interests in prop-erty of which are blocked pursuant to Executive Order No. 13224 (66 Fed. Reg. 49079; relating to blocking property and prohibiting transactions with persons who commit, threaten to commit, or support ter-rorism);

(ii) any person the property and interests in prop-erty of which are blocked pursuant to Executive Order No. 13382 (70 Fed. Reg. 38567; relating to blocking of property of weapons of mass destruction proliferators and their supporters); or

(iii) any person or entity identified under section 560.304 of title 31, Code of Federal Regulations (relat-ing to the definition of the Government of Iran) with-out the specific authorization of a Federal department or agency.

(2) INFORMATION REQUIRED.—If an issuer or an affiliate of the issuer has engaged in any activity described in paragraph (1), the issuer shall disclose a detailed description of each such activity, including—

(A) the nature and extent of the activity; (B) the gross revenues and net profits, if any, attrib-

utable to the activity; and (C) whether the issuer or the affiliate of the issuer (as

the case may be) intends to continue the activity. (3) NOTICE OF DISCLOSURES.—If an issuer reports under

paragraph (1) that the issuer or an affiliate of the issuer has knowingly engaged in any activity described in that paragraph, the issuer shall separately file with the Commission, concur-rently with the annual or quarterly report under subsection (a), a notice that the disclosure of that activity has been in-cluded in that annual or quarterly report that identifies the issuer and contains the information required by paragraph (2).


(4) PUBLIC DISCLOSURE OF INFORMATION.—Upon receiving a notice under paragraph (3) that an annual or quarterly re-port includes a disclosure of an activity described in paragraph (1), the Commission shall promptly—

(A) transmit the report to—(i) the President; (ii) the Committee on Foreign Affairs and the

Committee on Financial Services of the House of Rep-resentatives; and

(iii) the Committee on Foreign Relations and the Committee on Banking, Housing, and Urban Affairs of the Senate; and (B) make the information provided in the disclosure

and the notice available to the public by posting the infor-mation on the Internet website of the Commission. (5) INVESTIGATIONS.—Upon receiving a report under para-

graph (4) that includes a disclosure of an activity described in paragraph (1) (other than an activity described in subpara-graph (D)(iii) of that paragraph), the President shall—

(A) initiate an investigation into the possible imposi-tion of sanctions under the Iran Sanctions Act of 1996 (Public Law 104-172; 50 U.S.C. 1701 note), section 104 or 105A of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, an Executive order specified in clause (i) or (ii) of paragraph (1)(D), or any other provi-sion of law relating to the imposition of sanctions with re-spect to Iran, as applicable; and

(B) not later than 180 days after initiating such an in-vestigation, make a determination with respect to whether sanctions should be imposed with respect to the issuer or the affiliate of the issuer (as the case may be). (6) SUNSET.—The provisions of this subsection shall termi-

nate on the date that is 30 days after the date on which the President makes the certification described in section 401(a) of the Comprehensive Iran Sanctions, Accountability, and Divest-ment Act of 2010 (22 U.S.C. 8551(a)).

(June 6, 1934, ch. 404, title I, Sec. 13, 48 Stat. 894; Aug. 20, 1964, Pub. L. 88-467, Sec. 4, 78 Stat. 569; July 29, 1968, Pub. L. 90-439, Sec. 2, 82 Stat. 454; Dec. 22, 1970, Pub. L. 91-567, Sec. 1, 2, 84 Stat. 1497; June 4, 1975, Pub. L. 94-29, Sec. 10, 89 Stat. 119; Feb. 5, 1976, Pub. L. 94-210, title III, Sec. 308(b), 90 Stat. 57; Dec. 19, 1977, Pub. L. 95-213, title I, Sec. 102, title II, Sec. 202, 203, 91 Stat. 1494, 1498, 1499; June 6, 1983, Pub. L. 98-38, Sec. 2(a), 97 Stat. 205; Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 315, 316, 101 Stat. 1256; Feb. 3, 1988, Pub. L. 100-241, Sec. 12(d), 101 Stat. 1810; Aug. 23, 1988, Pub. L. 100-418, title V, Sec. 5002, 102 Stat. 1415; Oct. 16, 1990, Pub. L. 101-432, Sec. 3, 104 Stat. 964; Pub. L. 107-123, Sec. 5, Jan. 16, 2002, 115 Stat. 2395; Pub. L. 107-204, title I, Sec. 109(h), title IV, Secs. 401(a), 402(a), 409, July 30, 2002, 116 Stat. 771, 785, 787, 791; renumbered Sec. 109(i), Pub. L. 111-203, title IX, Sec. 982(h)(3), July 21, 2010, 124 Stat. 1930; Pub. L. 111-203, title VII, Secs. 763(i), 766(b), (c), (e), title IX, Secs. 929R(a), 929X(a), 985(b)(4), 991(b)(2), title XV, Secs. 1502(b), 1504,


July 21, 2010, 124 Stat. 1779, 1799, 1866, 1870, 1933, 1952, 2213, 2220; Pub. L. 112-106, title I, Sec. 102(b)(2), Apr. 5, 2012, 126 Stat. 309; Pub. L. 112-158, title II, Sec. 219(a), Aug. 10, 2012, 126 Stat. 1235.)

SEC. 13A. REPORTING AND RECORDKEEPING FOR CERTAIN SECU-RITY-BASED SWAPS.

(a) REQUIRED REPORTING OF SECURITY-BASED SWAPS NOT AC-CEPTED BY ANY CLEARING AGENCY OR DERIVATIVES CLEARING OR-GANIZATION.—

(1) IN GENERAL.—Each security-based swap that is not ac-cepted for clearing by any clearing agency or derivatives clear-ing organization shall be reported to—

(A) a security-based swap data repository described in section 13(n); or

(B) in the case in which there is no security-based swap data repository that would accept the security-based swap, to the Commission pursuant to this section within such time period as the Commission may by rule or regula-tion prescribe. (2) TRANSITION RULE FOR PREENACTMENT SECURITY-BASED

SWAPS.—(A) SECURITY-BASED SWAPS ENTERED INTO BEFORE THE

DATE OF ENACTMENT OF THE WALL STREET TRANSPARENCY AND ACCOUNTABILITY ACT OF 2010.—Each security-based swap entered into before the date of enactment of the Wall Street Transparency and Accountability Act of 2010, the terms of which have not expired as of the date of enact-ment of that Act, shall be reported to a registered security-based swap data repository or the Commission by a date that is not later than—

(i) 30 days after issuance of the interim final rule; or

(ii) such other period as the Commission deter-mines to be appropriate. (B) COMMISSION RULEMAKING.—The Commission shall

promulgate an interim final rule within 90 days of the date of enactment of this section providing for the report-ing of each security-based swap entered into before the date of enactment as referenced in subparagraph (A).

(C) EFFECTIVE DATE.—The reporting provisions de-scribed in this section shall be effective upon the date of the enactment of this section. (3) REPORTING OBLIGATIONS.—

(A) SECURITY-BASED SWAPS IN WHICH ONLY 1 COUNTERPARTY IS A SECURITY-BASED SWAP DEALER OR MAJOR SECURITY-BASED SWAP PARTICIPANT.—With respect to a security-based swap in which only 1 counterparty is a security-based swap dealer or major security-based swap participant, the security-based swap dealer or major secu-rity-based swap participant shall report the security-based swap as required under paragraphs (1) and (2).

(B) SECURITY-BASED SWAPS IN WHICH 1 COUNTERPARTY IS A SECURITY-BASED SWAP DEALER AND THE OTHER A


MAJOR SECURITY-BASED SWAP PARTICIPANT.—With respect to a security-based swap in which 1 counterparty is a secu-rity-based swap dealer and the other a major security-based swap participant, the security-based swap dealer shall report the security-based swap as required under paragraphs (1) and (2).

(C) OTHER SECURITY-BASED SWAPS.—With respect to any other security-based swap not described in subpara-graph (A) or (B), the counterparties to the security-based swap shall select a counterparty to report the security-based swap as required under paragraphs (1) and (2).

(b) DUTIES OF CERTAIN INDIVIDUALS.—Any individual or entity that enters into a security-based swap shall meet each requirement described in subsection (c) if the individual or entity did not—

(1) clear the security-based swap in accordance with sec-tion 3C(a)(1); or

(2) have the data regarding the security-based swap ac-cepted by a security-based swap data repository in accordance with rules (including timeframes) adopted by the Commission under this title. (c) REQUIREMENTS.—An individual or entity described in sub-

section (b) shall—(1) upon written request from the Commission, provide re-

ports regarding the security-based swaps held by the indi-vidual or entity to the Commission in such form and in such manner as the Commission may request; and

(2) maintain books and records pertaining to the security- based swaps held by the individual or entity in such form, in such manner, and for such period as the Commission may re-quire, which shall be open to inspection by—

(A) any representative of the Commission; (B) an appropriate prudential regulator; (C) the Commodity Futures Trading Commission; (D) the Financial Stability Oversight Council; and (E) the Department of Justice.

(d) IDENTICAL DATA.—In prescribing rules under this section, the Commission shall require individuals and entities described in subsection (b) to submit to the Commission a report that contains data that is not less comprehensive than the data required to be collected by security-based swap data repositories under this title.

(June 6, 1934, ch. 404, title I, Sec. 13A, as added Pub. L. 111-203, title VII, Sec. 766(a), July 21, 2010, 124 Stat. 1797.)

PROXIES

SEC. 14. (a)(1) It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate com-merce or of any facility of a national securities exchange or other-wise, in contravention of such rules and regulations as the Com-mission may prescribe as necessary or appropriate in the public in-terest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in


respect of any security (other than an exempted security) registered pursuant to section 12 of this title.

(2) The rules and regulations prescribed by the Commission under paragraph (1) may include—

(A) a requirement that a solicitation of proxy, consent, or authorization by (or on behalf of) an issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer; and

(B) a requirement that an issuer follow a certain procedure in relation to a solicitation described in subparagraph (A). (b)(1) It shall be unlawful for any member of a national securi-

ties exchange, or any broker or dealer registered under this title, or any bank, association, or other entity that exercises fiduciary powers, in contravention of such rules and regulations as the Com-mission may prescribe as necessary or appropriate in the public in-terest or for the protection of investors, to give, or to refrain from giving a proxy, consent, authorization, or information statement in respect of any security registered pursuant to section 12 of this title, or any security issued by an investment company registered under the Investment Company Act of 1940, and carried for the ac-count of a customer.

(2) With respect to banks, the rules and regulations prescribed by the Commission under paragraph (1) shall not require the dis-closure of the names of beneficial owners of securities in an account held by the bank on the date of enactment of this paragraph unless the beneficial owner consents to the disclosure. The provisions of this paragraph shall not apply in the case of a bank which the Commission finds has not made a good faith effort to obtain such consent from such beneficial owners.

(c) Unless proxies, consents, or authorizations in respect of a security registered pursuant to section 12 of this title, or a security issued by an investment company registered under the Investment Company Act of 1940, are solicited by or on behalf of the manage-ment of the issuer from the holders of record of such security in accordance with the rules and regulations prescribed under sub-section (a) of this section, prior to any annual or other meeting of the holders of such security, such issuer shall, in accordance with rules and regulations prescribed by the Commission, file with the Commission and transmit to all holders of record of such security information substantially equivalent to the information which would be required to be transmitted if a solicitation were made, but no information shall be required to be filed or transmitted pursu-ant to this subsection before July 1, 1964.

(d)(1) It shall be unlawful for any person, directly or indirectly, by use of the mails or by any means or instrumentality of inter-state commerce or of any facility of a national securities exchange or otherwise, to make a tender offer for, or a request or invitation for tenders of, any class of any equity security which is registered pursuant to section 12 of this title, or any equity security of an in-surance company which would have been required to be so reg-istered except for the exemption contained in section 12(g)(2)(G) of this title, or any equity security issued by a closed-end investment company registered under the Investment Company Act of 1940, if, after consummation thereof, such person would, directly or indi-


rectly, be the beneficial owner of more than 5 per centum of such class, unless at the time copies of the offer or request or invitation are first published or sent or given to security holders such person has filed with the Commission a statement containing such of the information specified in section 13(d) of this title, and such addi-tional information as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. All requests or invitations for tenders or advertisements making a tender offer or requesting or inviting tenders, of such a security shall be filed as a part of such statement and shall contain such of the information contained in such state-ment as the Commission may by rules and regulations prescribe. Copies of any additional material soliciting or requesting such ten-der offers subsequent to the initial solicitation or request shall con-tain such information as the Commission may by rules and regula-tions prescribe as necessary or appropriate in the public interest or for the protection of investors, and shall be filed with the Commis-sion not later than the time copies of such material are first pub-lished or sent or given to security holders. Copies of all statements, in the form in which such material is furnished to security holders and the Commission, shall be sent to the issuer not later than the date such material is first published or sent or given to any secu-rity holders.

(2) When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a ‘‘person’’ for purposes of this subsection.


(4) Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request or invitation for tenders shall be made in accordance with such rules and regu-lations as the Commission may prescribe as necessary or appro-priate in the public interest or for the protection of investors.

(5) Securities deposited pursuant to a tender offer or request or invitation for tenders may be withdrawn by or on behalf of the depositor at any time until the expiration of seven days after the time definitive copies of the offer or request or invitation are first published or sent or given to security holders, and at any time after sixty days from the date of the original tender offer or request or invitation, except as the Commission may otherwise prescribe by rules, regulations, or order as necessary or appropriate in the pub-lic interest or for the protection of investors.

(6) Where any person makes a tender offer, or request or invi-tation for tenders, for less than all the outstanding equity securi-ties of a class, and where a greater number of securities is depos-ited pursuant thereto within ten days after copies of the offer or request or invitation are first published or sent or given to security holders than such person is bound or willing to take up and pay for, the securities taken up shall be taken up as nearly as may be pro rata, disregarding fractions, according to the number of securi-


ties deposited by each depositor. The provisions of this subsection shall also apply to securities deposited within ten days after notice of an increase in the consideration offered to security holders, as described in paragraph (7), is first published or sent or given to se-curity holders.

(7) Where any person varies the terms of a tender offer or re-quest or invitation for tenders before the expiration thereof by in-creasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for pursuant to the tender offer or request or invitation for tenders whether or not such securities have been taken up by such person before the vari-ation of the tender offer or request or invitation.

(8) The provisions of this subsection shall not apply to any offer for, or request or invitation for tenders of, any security—

(A) if the acquisition of such security, together with all other acquisitions by the same person of securities of the same class during the preceding twelve months, would not exceed 2 per centum of that class;

(B) by the issuer of such security; or (C) which the Commission, by rules or regulations or by

order, shall exempt from the provisions of this subsection as not entered into for the purpose of, and not having the effect of, changing or influencing the control of the issuer or other-wise as not comprehended within the purposes of this sub-section. (e) It shall be unlawful for any person to make any untrue

statement of a material fact or omit to state any material fact nec-essary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or prac-tices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commis-sion shall, for the purposes of this subsection, by rules and regula-tions define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipula-tive.

(f) If, pursuant to any arrangement or understanding with the person or persons acquiring securities in a transaction subject to subsection (d) of this section or subsection (d) of section 13 of this title, any persons are to be elected or designated as directors of the issuer, otherwise than at a meeting of security holders, and the persons so elected or designated will constitute a majority of the di-rectors of the issuer, then, prior to the time any such person takes office as a director, and in accordance with rules and regulations prescribed by the Commission, the issuer shall file with the Com-mission, and transmit to all holders of record of securities of the issuer who would be entitled to vote at a meeting for election of di-rectors, information substantially equivalent to the information which would be required by subsection (a) or (c) of this section to be transmitted if such person or persons were nominees for election as directors at a meeting of such security holders.


52Margin so in law.

(g)(1)(A) At the time of filing such preliminary proxy solicita-tion material as the Commission may require by rule pursuant to subsection (a) of this section that concerns an acquisition, merger, consolidation, or proposed sale or other disposition of substantially all the assets of a company, the person making such filing, other than a company registered under the Investment Company Act of 1940, shall pay to the Commission the following fees:

(i) for preliminary proxy solicitation material involving an acquisition, merger, or consolidation, if there is a proposed pay-ment of cash or transfer of securities or property to share-holders, a fee at a rate that, subject to paragraph (4), is equal to $92 per $1,000,000 of such proposed payment, or of the value of such securities or other property proposed to be trans-ferred; and

(ii) for preliminary proxy solicitation material involving a proposed sale or other disposition of substantially all of the as-sets of a company, a fee at a rate that, subject to paragraph (4), is equal to $92 per $1,000,000 of the cash or of the value of any securities or other property proposed to be received upon such sale or disposition. (B) The fee imposed under subparagraph (A) shall be reduced

with respect to securities in an amount equal to any fee paid to the Commission with respect to such securities in connection with the proposed transaction under section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)), or the fee paid under that section shall be reduced in an amount equal to the fee paid to the Commission in connection with such transaction under this subsection. Where two or more companies involved in an acquisition, merger, consolida-tion, sale, or other disposition of substantially all the assets of a company must file such proxy material with the Commission, each shall pay a proportionate share of such fee.

(2) At the time of filing such preliminary information state-ment as the Commission may require by rule pursuant to sub-section (c) of this section, the issuer shall pay to the Commission the same fee as required for preliminary proxy solicitation material under paragraph (1) of this subsection.

(3) At the time of filing such statement as the Commission may require by rule pursuant to subsection (d)(1) of this section, the person making the filing shall pay to the Commission a fee at a rate that, subject to paragraph (4), is equal to $92 per $1,000,000 of the aggregate amount of cash or of the value of securities or other property proposed to be offered. The fee shall be reduced with respect to securities in an amount equal to any fee paid with re-spect to such securities in connection with the proposed transaction under section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)), or the fee paid under that section shall be reduced in an amount equal to the fee paid to the Commission in connection with such transaction under this subsection.

(4) [52] ANNUAL ADJUSTMENT.—For each fiscal year, the Commission shall by order adjust the rate required by para-graphs (1) and (3) for such fiscal year to a rate that is equal to the rate (expressed in dollars per million) that is applicable


53Margin so in law. 54Margin so in law. 55Margin so in law.

under section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)) for such fiscal year.

(5) [53] FEE COLLECTION.—Fees collected pursuant to this subsection for fiscal year 2012 and each fiscal year thereafter shall be deposited and credited as general revenue of the Treasury and shall not be available for obligation.

(6) [54] REVIEW; EFFECTIVE DATE; PUBLICATION.—In exer-cising its authority under this subsection, the Commission shall not be required to comply with the provisions of section 553 of title 5, United States Code. An adjusted rate prescribed under paragraph (4) shall be published and take effect in ac-cordance with section 6(b) of the Securities Act of 1933 (15 U.S.C. 77f(b)).

(7) [55] PRO RATA APPLICATION.—The rates per $1,000,000 required by this subsection shall be applied pro rata to amounts and balances of less than $1,000,000. (8) Notwithstanding any other provision of law, the Commis-

sion may impose fees, charges, or prices for matters not involving any acquisition, merger, consolidation, sale, or other disposition of assets described in this subsection, as authorized by section 9701 of title 31, United States Code, or otherwise.

(h) PROXY SOLICITATIONS AND TENDER OFFERS IN CONNECTION WITH LIMITED PARTNERSHIP ROLLUP TRANSACTIONS.—

(1) PROXY RULES TO CONTAIN SPECIAL PROVISIONS.—It shall be unlawful for any person to solicit any proxy, consent, or au-thorization concerning a limited partnership rollup transaction, or to make any tender offer in furtherance of a limited partner-ship rollup transaction, unless such transaction is conducted in accordance with rules prescribed by the Commission under subsections (a) and (d) as required by this subsection. Such rules shall—

(A) permit any holder of a security that is the subject of the proposed limited partnership rollup transaction to engage in preliminary communications for the purpose of determining whether to solicit proxies, consents, or author-izations in opposition to the proposed limited partnership rollup transaction, without regard to whether any such communication would otherwise be considered a solicita-tion of proxies, and without being required to file soliciting material with the Commission prior to making that deter-mination, except that—

(i) nothing in this subparagraph shall be con-strued to limit the application of any provision of this title prohibiting, or reasonably designed to prevent, fraudulent, deceptive, or manipulative acts or prac-tices under this title; and

(ii) any holder of not less than 5 percent of the outstanding securities that are the subject of the pro-posed limited partnership rollup transaction who en-gages in the business of buying and selling limited partnership interests in the secondary market shall be


required to disclose such ownership interests and any potential conflicts of interests in such preliminary communications; (B) require the issuer to provide to holders of the secu-

rities that are the subject of the limited partnership rollup transaction such list of the holders of the issuer’s securi-ties as the Commission may determine in such form and subject to such terms and conditions as the Commission may specify;

(C) prohibit compensating any person soliciting prox-ies, consents, or authorizations directly from security hold-ers concerning such a limited partnership rollup trans-action—

(i) on the basis of whether the solicited proxy, con-sent, or authorization either approves or disapproves the proposed limited partnership rollup transaction; or

(ii) contingent on the approval, disapproval, or completion of the limited partnership rollup trans-action; (D) set forth disclosure requirements for soliciting ma-

terial distributed in connection with a limited partnership rollup transaction, including requirements for clear, con-cise, and comprehensible disclosure with respect to—

(i) any changes in the business plan, voting rights, form of ownership interest, or the compensation of the general partner in the proposed limited partnership rollup transaction from each of the original limited partnerships;

(ii) the conflicts of interest, if any, of the general partner;

(iii) whether it is expected that there will be a sig-nificant difference between the exchange values of the limited partnerships and the trading price of the secu-rities to be issued in the limited partnership rollup transaction;

(iv) the valuation of the limited partnerships and the method used to determine the value of the inter-ests of the limited partners to be exchanged for the se-curities in the limited partnership rollup transaction;

(v) the differing risks and effects of the limited partnership rollup transaction for investors in dif-ferent limited partnerships proposed to be included, and the risks and effects of completing the limited partnership rollup transaction with less than all lim-ited partnerships;

(vi) the statement by the general partner required under subparagraph (E);

(vii) such other matters deemed necessary or ap-propriate by the Commission; (E) require a statement by the general partner as to

whether the proposed limited partnership rollup trans-action is fair or unfair to investors in each limited partner-ship, a discussion of the basis for that conclusion, and an evaluation and a description by the general partner of al-


ternatives to the limited partnership rollup transaction, such as liquidation;

(F) provide that, if the general partner or sponsor has obtained any opinion (other than an opinion of counsel), appraisal, or report that is prepared by an outside party and that is materially related to the limited partnership rollup transaction, such soliciting materials shall contain or be accompanied by clear, concise, and comprehensible disclosure with respect to—

(i) the analysis of the transaction, scope of review, preparation of the opinion, and basis for and methods of arriving at conclusions, and any representations and undertakings with respect thereto;

(ii) the identity and qualifications of the person who prepared the opinion, the method of selection of such person, and any material past, existing, or con-templated relationships between the person or any of its affiliates and the general partner, sponsor, suc-cessor, or any other affiliate;

(iii) any compensation of the preparer of such opinion, appraisal, or report that is contingent on the transaction’s approval or completion; and

(iv) any limitations imposed by the issuer on the access afforded to such preparer to the issuer’s per-sonnel, premises, and relevant books and records; (G) provide that, if the general partner or sponsor has

obtained any opinion, appraisal, or report as described in subparagraph (F) from any person whose compensation is contingent on the transaction’s approval or completion or who has not been given access by the issuer to its per-sonnel and premises and relevant books and records, the general partner or sponsor shall state the reasons therefor;

(H) provide that, if the general partner or sponsor has not obtained any opinion on the fairness of the proposed limited partnership rollup transaction to investors in each of the affected partnerships, such soliciting materials shall contain or be accompanied by a statement of such part-ner’s or sponsor’s reasons for concluding that such an opin-ion is not necessary in order to permit the limited partners to make an informed decision on the proposed transaction;

(I) require that the soliciting material include a clear, concise, and comprehensible summary of the limited part-nership rollup transaction (including a summary of the matters referred to in clauses (i) through (vii) of subpara-graph (D) and a summary of the matter referred to in sub-paragraphs (F), (G), and (H)), with the risks of the limited partnership rollup transaction set forth prominently in the fore part thereof;

(J) provide that any solicitation or offering period with respect to any proxy solicitation, tender offer, or informa-tion statement in a limited partnership rollup transaction shall be for not less than the lesser of 60 calendar days or the maximum number of days permitted under applicable State law; and


(K) contain such other provisions as the Commission determines to be necessary or appropriate for the protec-tion of investors in limited partnership rollup transactions. (2) EXEMPTIONS.—The Commission may, consistent with

the public interest, the protection of investors, and the pur-poses of this title, exempt by rule or order any security or class of securities, any transaction or class of transactions, or any person or class of persons, in whole or in part, conditionally or unconditionally, from the requirements imposed pursuant to paragraph (1) or from the definition contained in paragraph (4).

(3) EFFECT ON COMMISSION AUTHORITY.—Nothing in this subsection limits the authority of the Commission under sub-section (a) or (d) or any other provision of this title or pre-cludes the Commission from imposing, under subsection (a) or (d) or any other provision of this title, a remedy or procedure required to be imposed under this subsection.

(4) DEFINITION OF LIMITED PARTNERSHIP ROLLUP TRANS-ACTION.— Except as provided in paragraph (5), as used in this subsection, the term ‘‘limited partnership rollup transaction’’ means a transaction involving the combination or reorganiza-tion of one or more limited partnerships, directly or indirectly, in which—

(A) some or all of the investors in any of such limited partnerships will receive new securities, or securities in another entity, that will be reported under a transaction reporting plan declared effective before the date of enact-ment of this subsection by the Commission under section 11A;

(B) any of the investors’ limited partnership securities are not, as of the date of filing, reported under a trans-action reporting plan declared effective before the date of enactment of this subsection by the Commission under sec-tion 11A;

(C) investors in any of the limited partnerships in-volved in the transaction are subject to a significant ad-verse change with respect to voting rights, the term of ex-istence of the entity, management compensation, or invest-ment objectives; and

(D) any of such investors are not provided an option to receive or retain a security under substantially the same terms and conditions as the original issue. (5) EXCLUSIONS FROM DEFINITION.—Notwithstanding para-

graph (4), the term ‘‘limited partnership rollup transaction’’ does not include—

(A) a transaction that involves only a limited partner-ship or partnerships having an operating policy or practice of retaining cash available for distribution and reinvesting proceeds from the sale, financing, or refinancing of assets in accordance with such criteria as the Commission deter-mines appropriate;

(B) a transaction involving only limited partnerships wherein the interests of the limited partners are repur-chased, recalled, or exchanged in accordance with the


terms of the preexisting limited partnership agreements for securities in an operating company specifically identi-fied at the time of the formation of the original limited partnership;

(C) a transaction in which the securities to be issued or exchanged are not required to be and are not registered under the Securities Act of 1933;

(D) a transaction that involves only issuers that are not required to register or report under section 12, both before and after the transaction;

(E) a transaction, except as the Commission may oth-erwise provide by rule for the protection of investors, in-volving the combination or reorganization of one or more limited partnerships in which a non-affiliated party suc-ceeds to the interests of a general partner or sponsor, if—

(i) such action is approved by not less than 66 2/3 percent of the outstanding units of each of the par-ticipating limited partnerships; and

(ii) as a result of the transaction, the existing gen-eral partners will receive only compensation to which they are entitled as expressly provided for in the pre-existing limited partnership agreements; or (F) a transaction, except as the Commission may oth-

erwise provide by rule for the protection of investors, in which the securities offered to investors are securities of another entity that are reported under a transaction re-porting plan declared effective before the date of enact-ment of this subsection by the Commission under section 11A, if—

(i) such other entity was formed, and such class of securities was reported and regularly traded, not less than 12 months before the date on which soliciting material is mailed to investors; and

(ii) the securities of that entity issued to investors in the transaction do not exceed 20 percent of the total outstanding securities of the entity, exclusive of any securities of such class held by or for the account of the entity or a subsidiary of the entity.

(i) DISCLOSURE OF PAY VERSUS PERFORMANCE.—The Commis-sion shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the share-holders of the issuer a clear description of any compensation re-quired to be disclosed by the issuer under section 229.402 of title 17, Code of Federal Regulations (or any successor thereto), includ-ing, for any issuer other than an emerging growth company, infor-mation that shows the relationship between executive compensa-tion actually paid and the financial performance of the issuer, tak-ing into account any change in the value of the shares of stock and dividends of the issuer and any distributions. The disclosure under this subsection may include a graphic representation of the infor-mation required to be disclosed.

(j) DISCLOSURE OF HEDGING BY EMPLOYEES AND DIRECTORS.—The Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of


the shareholders of the issuer whether any employee or member of the board of directors of the issuer, or any designee of such em-ployee or member, is permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any de-crease in the market value of equity securities—

(1) granted to the employee or member of the board of di-rectors by the issuer as part of the compensation of the em-ployee or member of the board of directors; or

(2) held, directly or indirectly, by the employee or member of the board of directors.

(June 6, 1934, ch. 404, title I, Sec. 14, 48 Stat. 895; Aug. 20, 1964, Pub. L. 88-467, Sec. 5, 78 Stat. 569; July 29, 1968, Pub. L. 90-439, Sec. 3, 82 Stat. 455; Dec. 22, 1970, Pub. L. 91-567, Sec. 3-5, 84 Stat. 1497; June 6, 1983, Pub. L. 98-38, Sec. 2(b), 97 Stat. 205; Dec. 28, 1985, Pub. L. 99-222, Sec. 2, 99 Stat. 1737; Nov. 15, 1990, Pub. L. 101-550, title III, Sec. 302, 104 Stat. 2721; Dec. 17, 1993, Pub. L. 103-202, title III, Sec. 302(a), 107 Stat. 2359; Nov. 3, 1998, Pub. L. 105-353, title III, Sec. 301(b)(7), 112 Stat. 3236; Pub. L. 107-123, Sec. 6, Jan. 16, 2002, 115 Stat. 2396; Pub. L. 111-203, title IX, Secs. 953(a), 955, 971(a), 991(b)(3), July 21, 2010, 124 Stat. 1903, 1904, 1915, 1953; Pub. L. 112-106, title I, Sec. 102(a)(2), Apr. 5, 2012, 126 Stat. 309.)

SEC. 14A. SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSA-TION.

(a) SEPARATE RESOLUTION REQUIRED.—(1) IN GENERAL.—Not less frequently than once every 3

years, a proxy or consent or authorization for an annual or other meeting of the shareholders for which the proxy solicita-tion rules of the Commission require compensation disclosure shall include a separate resolution subject to shareholder vote to approve the compensation of executives, as disclosed pursu-ant to section 229.402 of title 17, Code of Federal Regulations, or any successor thereto.

(2) FREQUENCY OF VOTE.—Not less frequently than once every 6 years, a proxy or consent or authorization for an an-nual or other meeting of the shareholders for which the proxy solicitation rules of the Commission require compensation dis-closure shall include a separate resolution subject to share-holder vote to determine whether votes on the resolutions re-quired under paragraph (1) will occur every 1, 2, or 3 years.

(3) EFFECTIVE DATE.—The proxy or consent or authoriza-tion for the first annual or other meeting of the shareholders occurring after the end of the 6-month period beginning on the date of enactment of this section shall include—

(A) the resolution described in paragraph (1); and (B) a separate resolution subject to shareholder vote to

determine whether votes on the resolutions required under paragraph (1) will occur every 1, 2, or 3 years.

(b) SHAREHOLDER APPROVAL OF GOLDEN PARACHUTE COM-PENSATION.—


(1) DISCLOSURE.—In any proxy or consent solicitation ma-terial (the solicitation of which is subject to the rules of the Commission pursuant to subsection (a)) for a meeting of the shareholders occurring after the end of the 6-month period be-ginning on the date of enactment of this section, at which shareholders are asked to approve an acquisition, merger, con-solidation, or proposed sale or other disposition of all or sub-stantially all the assets of an issuer, the person making such solicitation shall disclose in the proxy or consent solicitation material, in a clear and simple form in accordance with regula-tions to be promulgated by the Commission, any agreements or understandings that such person has with any named execu-tive officers of such issuer (or of the acquiring issuer, if such issuer is not the acquiring issuer) concerning any type of com-pensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition, merger, con-solidation, sale, or other disposition of all or substantially all of the assets of the issuer and the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such executive of-ficer.

(2) SHAREHOLDER APPROVAL.—Any proxy or consent or au-thorization relating to the proxy or consent solicitation mate-rial containing the disclosure required by paragraph (1) shall include a separate resolution subject to shareholder vote to ap-prove such agreements or understandings and compensation as disclosed, unless such agreements or understandings have been subject to a shareholder vote under subsection (a). (c) RULE OF CONSTRUCTION.—The shareholder vote referred to

in subsections (a) and (b) shall not be binding on the issuer or the board of directors of an issuer, and may not be construed—

(1) as overruling a decision by such issuer or board of di-rectors;

(2) to create or imply any change to the fiduciary duties of such issuer or board of directors;

(3) to create or imply any additional fiduciary duties for such issuer or board of directors; or

(4) to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation. (d) DISCLOSURE OF VOTES.—Every institutional investment

manager subject to section 13(f) shall report at least annually how it voted on any shareholder vote pursuant to subsections (a) and (b), unless such vote is otherwise required to be reported publicly by rule or regulation of the Commission.

(e) EXEMPTION.—(1) IN GENERAL.—The Commission may, by rule or order,

exempt any other issuer or class of issuers from the require-ment under subsection (a) or (b). In determining whether to make an exemption under this subsection, the Commission shall take into account, among other considerations, whether


56So in original. Probably should be ‘‘burden’’.57So in original. Probably should be ‘‘section’’.

the requirements under subsections (a) and (b) disproportion-ately burdens [56] small issuers.

(2) TREATMENT OF EMERGING GROWTH COMPANIES.—(A) IN GENERAL.—An emerging growth company shall

be exempt from the requirements of subsections (a) and (b).

(B) COMPLIANCE AFTER TERMINATION OF EMERGING GROWTH COMPANY TREATMENT.—An issuer that was an emerging growth company but is no longer an emerging growth company shall include the first separate resolution described under subsection (a)(1) not later than the end of—

(i) in the case of an issuer that was an emerging growth company for less than 2 years after the date of first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933, the 3-year period beginning on such date; and

(ii) in the case of any other issuer, the 1-year pe-riod beginning on the date the issuer is no longer an emerging growth company.

(June 6, 1934, ch. 404, title I, Sec. 14A, as added Pub. L. 111-203, title IX, Sec. 951, July 21, 2010, 124 Stat. 1899; amended Pub. L. 112-106, title I, Sec. 102(a)(1), Apr. 5, 2012, 126 Stat. 308.)

SEC. 14B. CORPORATE GOVERNANCE.

Not later than 180 days after the date of enactment of this subsection [57], the Commission shall issue rules that require an issuer to disclose in the annual proxy sent to investors the reasons why the issuer has chosen—

(1) the same person to serve as chairman of the board of directors and chief executive officer (or in equivalent positions); or

(2) different individuals to serve as chairman of the board of directors and chief executive officer (or in equivalent posi-tions of the issuer).

(June 6, 1934, ch. 404, title I, Sec. 14B, as added Pub. L. 111-203, title IX, Sec. 972, July 21, 2010, 124 Stat. 1915.)

REGISTRATION AND REGULATION OF BROKERS AND DEALERS

SEC. 15. (a)(1) It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate com-merce to effect any transactions in, or to induce or attempt to in-


duce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section.

(2) The Commission, by rule or order, as it deems consistent with the public interest and the protection of investors, may condi-tionally or unconditionally exempt from paragraph (1) of this sub-section any broker or dealer or class of brokers or dealers specified in such rule or order.

(b)(1) A broker or dealer may be registered by filing with the Commission an application for registration in such form and con-taining such information and documents concerning such broker or dealer and any persons associated with such broker or dealer as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. Within forty-five days of the date of the filing of such application (or with-in such longer period as to which the applicant consents), the Com-mission shall—

(A) by order grant registration, or (B) institute proceedings to determine whether registration

should be denied. Such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing and shall be concluded within one hundred twenty days of the date of the filing of the application for registration. At the conclusion of such proceedings, the Commission, by order, shall grant or deny such registration. The Commission may extend the time for conclusion of such proceedings for up to ninety days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the applicant consents.

The Commission shall grant such registration if the Commission finds that the requirements of this section are satisfied. The order granting registration shall not be effective until such broker or dealer has become a member of a registered securities association, or until such broker or dealer has become a member of a national securities exchange, if such broker or dealer effects transactions solely on that exchange, unless the Commission has exempted such broker or dealer, by rule or order, from such membership. The Commission shall deny such registration if it does not make such a finding or if it finds that if the applicant were so registered, its registration would be subject to suspension or revocation under paragraph (4) of this subsection.

(2)(A) An application for registration of a broker or dealer to be formed or organized may be made by a broker or dealer to which the broker or dealer to be formed or organized is to be the suc-cessor. Such application, in such form as the Commission, by rule, may prescribe, shall contain such information and documents con-cerning the applicant, the successor, and any persons associated with the applicant or the successor, as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. The grant or denial of registration to such an applicant shall be in accordance with the procedures set forth in paragraph (1) of this subsection. If the Commission grants such registration, the registration shall terminate on the forty-fifth


day after the effective date thereof, unless prior thereto the suc-cessor shall, in accordance with such rules and regulations as the Commission may prescribe, adopt the application for registration as its own.

(B) Any person who is a broker or dealer solely by reason of acting as a municipal securities dealer or municipal securities broker, who so acts through a separately identifiable department or division, and who so acted in such a manner on the date of enact-ment of the Securities Acts Amendments of 1975, may, in accord-ance with such terms and conditions as the Commission, by rule, prescribes as necessary and appropriate in the public interest and for the protection of investors, register such separately identifiable department or division in accordance with this subsection. If any such department or division is so registered, the department or di-vision and not such person himself shall be the broker or dealer for purposes of this title.

(C) Within six months of the date of the granting of registra-tion to a broker or dealer, the Commission, or upon the authoriza-tion and direction of the Commission, a registered securities asso-ciation or national securities exchange of which such broker or dealer is a member, shall conduct an inspection of the broker or dealer to determine whether it is operating in conformity with the provisions of this title and the rules and regulations thereunder: Provided, however, That the Commission may delay such inspec-tion of any class of brokers or dealers for a period not to exceed six months.

(3) Any provision of this title (other than section 5 and subsection (a) of this section) which prohibits any act, practice, or course of business if the mails or any means or instrumentality of interstate commerce is used in connection therewith shall also pro-hibit any such act, practice, or course of business by any registered broker or dealer or any person acting on behalf of such a broker or dealer, irrespective of any use of the mails or any means or in-strumentality of interstate commerce in connection therewith.

(4) The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding twelve months, or revoke the registration of any broker or dealer if it finds, on the record after notice and oppor-tunity for hearing, that such censure, placing of limitations, sus-pension, or revocation is in the public interest and that such broker or dealer, whether prior or subsequent to becoming such, or any person associated with such broker or dealer, whether prior or sub-sequent to becoming so associated—

(A) has willfully made or caused to be made in any appli-cation for registration or report required to be filed with the Commission or with any other appropriate regulatory agency under this title, or in any proceeding before the Commission with respect to registration, any statement which was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, or


58So in law. The periods at the end of subparagraphs (A) through (E) probably should be semi-colons.

59So in law. Probably should be ‘‘municipal securities dealer, municipal advisor,’’. 60So in law. The periods at the end of subparagraphs (A) through (E) probably should be semi-

colons. 61So in law. Probably should be ‘‘municipal securities dealer, municipal advisor,’’.

has omitted to state in any such application or report any ma-terial fact which is required to be stated therein. [58]

(B) has been convicted within ten years preceding the fil-ing of any application for registration or at any time thereafter of any felony or misdemeanor or of a substantially equivalent crime by a foreign court of competent jurisdiction which the Commission finds—

(i) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, brib-ery, perjury, burglary, any substantially equivalent activ-ity however denominated by the laws of the relevant for-eign government, or conspiracy to commit any such of-fense;

(ii) arises out of the conduct of the business of a broker, dealer, municipal securities dealer municipal advi-sor,, [59] government securities broker, government securi-ties dealer, investment adviser, bank, insurance company, fiduciary, transfer agent, nationally recognized statistical rating organization, foreign person performing a function substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Ex-change Act (7 U.S.C. 1 et seq.) or any substantially equiva-lent foreign statute or regulation;

(iii) involves the larceny, theft, robbery, extortion, for-gery, counterfeiting, fraudulent concealment, embezzle-ment, fraudulent conversion, or misappropriation of funds, or securities, or substantially equivalent activity however denominated by the laws of the relevant foreign govern-ment; or

(iv) involves the violation of section 152, 1341, 1342, or 1343 or chapter 25 or 47 of title 18, United States Code, or a violation of a substantially equivalent foreign stat-ute. [60] (C) is permanently or temporarily enjoined by order, judg-

ment, or decree of any court of competent jurisdiction from act-ing as an investment adviser, underwriter, broker, dealer, mu-nicipal securities dealer municipal advisor,, [61] government se-curities broker, government securities dealer, security-based swap dealer, major security-based swap participant, transfer agent, nationally recognized statistical rating organization, for-eign person performing a function substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Exchange Act or any substantially equivalent foreign statute or regulation, or as an affiliated per-son or employee of any investment company, bank, insurance company, foreign entity substantially equivalent to any of the above, or entity or person required to be registered under the Commodity Exchange Act or any substantially equivalent for-





eign statute or regulation, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security. [62]

(D) has willfully violated any provision of the Securities Act of 1933, the Investment Advisers Act of 1940, the Invest-ment Company Act of 1940, the Commodity Exchange Act, this title, the rules or regulations under any of such statutes, or the rules of the Municipal Securities Rulemaking Board, or is un-able to comply with any such provision. [63]

(E) has willfully aided, abetted, counseled, commanded, in-duced, or procured the violation by any other person of any provision of the Securities Act of 1933, the Investment Advis-ers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, this title, the rules or regulations under any of such statutes, or the rules of the Municipal Secu-rities Rulemaking Board, or has failed reasonably to supervise, with a view to preventing violations of the provisions of such statutes, rules, and regulations, another person who commits such a violation, if such other person is subject to his super-vision. For the purposes of this subparagraph (E) no person shall be deemed to have failed reasonably to supervise any other person, if—

(i) there have been established procedures, and a sys-tem for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and

(ii) such person has reasonably discharged the duties and obligations incumbent upon him by reason of such pro-cedures and system without reasonable cause to believe that such procedures and system were not being complied with. [64] (F) is subject to any order of the Commission barring or

suspending the right of the person to be associated with a broker, dealer, security-based swap dealer, or a major security-based swap participant;

(G) has been found by a foreign financial regulatory au-thority to have—

(i) made or caused to be made in any application for registration or report required to be filed with a foreign fi-nancial regulatory authority, or in any proceeding before a foreign financial regulatory authority with respect to reg-istration, any statement that was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, or has omitted to state in any application or report to the foreign financial regulatory authority any material fact that is re-quired to be stated therein;


(ii) violated any foreign statute or regulation regarding transactions in securities, or contracts of sale of a com-modity for future delivery, traded on or subject to the rules of a contract market or any board of trade;

(iii) aided, abetted, counseled, commanded, induced, or procured the violation by any person of any provision of any statutory provisions enacted by a foreign government, or rules or regulations thereunder, empowering a foreign financial regulatory authority regarding transactions in se-curities, or contracts of sale of a commodity for future de-livery, traded on or subject to the rules of a contract mar-ket or any board of trade, or has been found, by a foreign financial regulatory authority, to have failed reasonably to supervise, with a view to preventing violations of such statutory provisions, rules, and regulations, another per-son who commits such a violation, if such other person is subject to his supervision; or (H) is subject to any final order of a State securities com-

mission (or any agency or officer performing like functions), State authority that supervises or examines banks, savings as-sociations, or credit unions, State insurance commission (or any agency or office performing like functions), an appropriate Federal banking agency (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(q))), or the National Credit Union Administration, that—

(i) bars such person from association with an entity regulated by such commission, authority, agency, or offi-cer, or from engaging in the business of securities, insur-ance, banking, savings association activities, or credit union activities; or

(ii) constitutes a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct.

(5) Pending final determination whether any registration under this subsection shall be revoked, the Commission, by order, may suspend such registration, if such suspension appears to the Commission, after notice and opportunity for hearing, to be nec-essary or appropriate in the public interest or for the protection of investors. Any registered broker or dealer may, upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors, withdraw from registration by filing a written notice of withdrawal with the Commission. If the Commission finds that any registered broker or dealer is no longer in existence or has ceased to do business as a broker or dealer, the Commission, by order, shall cancel the reg-istration of such broker or dealer.

(6)(A) With respect to any person who is associated, who is seeking to become associated, or, at the time of the alleged mis-conduct, who was associated or was seeking to become associated with a broker or dealer, or any person participating, or, at the time of the alleged misconduct, who was participating, in an offering of any penny stock, the Commission, by order, shall censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar any such person from


being associated with a broker, dealer, investment adviser, munic-ipal securities dealer, municipal advisor, transfer agent, or nation-ally recognized statistical rating organization, or from participating in an offering of penny stock, if the Commission finds, on the record after notice and opportunity for a hearing, that such cen-sure, placing of limitations, suspension, or bar is in the public in-terest and that such person—

(i) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), or (E) of paragraph (4) of this subsection;

(ii) has been convicted of any offense specified in subpara-graph (B) of such paragraph (4) within 10 years of the com-mencement of the proceedings under this paragraph; or

(iii) is enjoined from any action, conduct, or practice speci-fied in subparagraph (C) of such paragraph (4). (B) It shall be unlawful—

(i) for any person as to whom an order under subpara-graph (A) is in effect, without the consent of the Commission, willfully to become, or to be, associated with a broker or dealer in contravention of such order, or to participate in an offering of penny stock in contravention of such order;

(ii) for any broker or dealer to permit such a person, with-out the consent of the Commission, to become or remain, a per-son associated with the broker or dealer in contravention of such order, if such broker or dealer knew, or in the exercise of reasonable care should have known, of such order; or

(iii) for any broker or dealer to permit such a person, with-out the consent of the Commission, to participate in an offering of penny stock in contravention of such order, if such broker or dealer knew, or in the exercise of reasonable care should have known, of such order and of such participation. (C) For purposes of this paragraph, the term ‘‘person partici-

pating in an offering of penny stock’’ includes any person acting as any promoter, finder, consultant, agent, or other person who en-gages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempt-ing to induce the purchase or sale of any penny stock. The Commis-sion may, by rule or regulation, define such term to include other activities, and may, by rule, regulation, or order, exempt any per-son or class of persons, in whole or in part, conditionally or uncon-ditionally, from such term.

(7) No registered broker or dealer or government securities broker or government securities dealer registered (or required to register) under section 15C(a)(1)(A) shall effect any transaction in, or induce the purchase or sale of, any security unless such broker or dealer meets such standards of operational capability and such broker or dealer and all natural persons associated with such broker or dealer meet such standards of training, experience, com-petence, and such other qualifications as the Commission finds nec-essary or appropriate in the public interest or for the protection of investors. The Commission shall establish such standards by rules and regulations, which may—


65So in law. The word ‘‘or’’ should not appear. 66Margins so in law.

(A) specify that all or any portion of such standards shall be applicable to any class of brokers and dealers and persons associated with brokers and dealers;

(B) require persons in any such class to pass tests pre-scribed in accordance with such rules and regulations, which tests shall, with respect to any class of partners, officers, or su-pervisory employees (which latter term may be defined by the Commission’s rules and regulations and as so defined shall in-clude branch managers of brokers or dealers) engaged in the management of the broker or dealer, include questions relating to bookkeeping, accounting, internal control over cash and se-curities, supervision of employees, maintenance of records, and other appropriate matters; and

(C) provide that persons in any such class other than bro-kers and dealers and partners, officers, and supervisory em-ployees of brokers or dealers, may be qualified solely on the basis of compliance with such standards of training and such other qualifications as the Commission finds appropriate.

The Commission, by rule, may prescribe reasonable fees and charges to defray its costs in carrying out this paragraph, includ-ing, but not limited to, fees for any test administered by it or under its direction. The Commission may cooperate with registered secu-rities associations and national securities exchanges in devising and administering tests and may require registered brokers and dealers and persons associated with such brokers and dealers to pass tests administered by or on behalf of any such association or exchange and to pay such association or exchange reasonable fees or charges to defray the costs incurred by such association or ex-change in administering such tests.

(8) It shall be unlawful for any registered broker or dealer to effect any transaction in, or induce or attempt to induce the pur-chase or sale of, any security (other than or [65] commercial paper, bankers’ acceptances, or commercial bills), unless such broker or dealer is a member of a securities association registered pursuant to section 15A of this title or effects transactions in securities solely on a national securities exchange of which it is a member.

(9) The Commission by rule or order, as it deems consistent with the public interest and the protection of investors, may condi-tionally or unconditionally exempt from paragraph (8) of this sub-section any broker or dealer or class of brokers or dealers specified in such rule or order.

(10) For the purposes of determining whether a person is sub-ject to a statutory disqualification under section 6(c)(2), 15A(g)(2), or 17A(b)(4)(A) of this title, the term ‘‘Commission’’ in paragraph (4)(B) of this subsection shall mean ‘‘exchange’’, ‘‘association’’, or ‘‘clearing agency’’, respectively.

(11) [66] BROKER/DEALER REGISTRATION WITH RESPECT TO TRANSACTIONS IN SECURITY FUTURES PRODUCTS.—

(A) NOTICE REGISTRATION.—(i) CONTENTS OF NOTICE.—Notwithstanding para-

graphs (1) and (2), a broker or dealer required to reg-


67Subsection (i) of section 17 was struck out and subsec. (j) was redesignated (i) by Pub. L. 111-203, title VI, Sec. 617(a), July 21, 2010, 124 Stat. 1616.

68Margins so in law.

ister only because it effects transactions in security fu-tures products on an exchange registered pursuant to section 6(g) may register for purposes of this section by filing with the Commission a written notice in such form and containing such information concerning such broker or dealer and any persons associated with such broker or dealer as the Commission, by rule, may pre-scribe as necessary or appropriate in the public inter-est or for the protection of investors. A broker or deal-er may not register under this paragraph unless that broker or dealer is a member of a national securities association registered under section 15A(k).

(ii) IMMEDIATE EFFECTIVENESS.—Such registration shall be effective contemporaneously with the submis-sion of notice, in written or electronic form, to the Commission, except that such registration shall not be effective if the registration would be subject to suspen-sion or revocation under paragraph (4).

(iii) SUSPENSION.—Such registration shall be sus-pended immediately if a national securities association registered pursuant to section 15A(k) of this title sus-pends the membership of that broker or dealer.

(iv) TERMINATION.—Such registration shall be ter-minated immediately if any of the above stated condi-tions for registration set forth in this paragraph are no longer satisfied. (B) EXEMPTIONS FOR REGISTERED BROKERS AND DEAL-

ERS.—A broker or dealer registered pursuant to the re-quirements of subparagraph (A) shall be exempt from the following provisions of this title and the rules thereunder with respect to transactions in security futures products:

(i) Section 8. (ii) Section 11. (iii) Subsections (c)(3) and (c)(5) of this section. (iv) Section 15B. (v) Section 15C. (vi) Subsections (d), (e), (f ), (g), (h), and (i) [67] of

section 17. (12) [68] EXEMPTION FOR SECURITY FUTURES PRODUCT EX-

CHANGE MEMBERS.—(A) REGISTRATION EXEMPTION.—A natural person shall

be exempt from the registration requirements of this sec-tion if such person—

(i) is a member of a designated contract market registered with the Commission as an exchange pursu-ant to section 6(g);

(ii) effects transactions only in securities on the exchange of which such person is a member; and

(iii) does not directly accept or solicit orders from public customers or provide advice to public customers


69Subsection (i) of section 17 was struck out and subsec. (j) was redesignated (i) by Pub. L. 111-203, title VI, Sec. 617(a), July 21, 2010, 124 Stat. 1616.

in connection with the trading of security futures products. (B) OTHER EXEMPTIONS.—A natural person exempt

from registration pursuant to subparagraph (A) shall also be exempt from the following provisions of this title and the rules thereunder:

(i) Section 8. (ii) Section 11. (iii) Subsections (c)(3), (c)(5), and (e) of this sec-

tion. (iv) Section 15B. (v) Section 15C. (vi) Subsections (d), (e), (f ), (g), (h), and (i) [69] of

section 17. (c)(1)(A) No broker or dealer shall make use of the mails or any

means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other than commercial paper, bankers’ accept-ances, or commercial bills), or any security-based swap agreement, by means of any manipulative, deceptive, or other fraudulent de-vice or contrivance.

(B) No broker, dealer, or municipal securities dealer shall make use of the mails or any means or instrumentality of inter-state commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security or any se-curity-based swap agreement involving a municipal security by means of any manipulative, deceptive, or other fraudulent device or contrivance.

(C) No government securities broker or government securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or to attempt to induce the purchase or sale of, any government secu-rity or any security-based swap agreement involving a government security by means of any manipulative, deceptive, or other fraudu-lent device or contrivance.

(2)(A) No broker or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commer-cial paper, bankers’ acceptances, or commercial bills) otherwise than on a national securities exchange of which it is a member, in connection with which such broker or dealer engages in any fraud-ulent, deceptive, or manipulative act or practice, or makes any ficti-tious quotation.

(B) No broker, dealer, or municipal securities dealer shall make use of the mails or any means or instrumentality of inter-state commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in connec-tion with which such broker, dealer, or municipal securities dealer engages in any fraudulent, deceptive, or manipulative act or prac-tice, or makes any fictitious quotation.


(C) No government securities broker or government securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or induce or at-tempt to induce the purchase or sale of, any government security in connection with which such government securities broker or gov-ernment securities dealer engages in any fraudulent, deceptive, or manipulative act or practice, or makes any fictitious quotation.

(D) The Commission shall, for the purposes of this paragraph, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, de-ceptive, or manipulative and such quotations as are fictitious.

(E) The Commission shall, prior to adopting any rule or regula-tion under subparagraph (C), consult with and consider the views of the Secretary of the Treasury and each appropriate regulatory agency. If the Secretary of the Treasury or any appropriate regu-latory agency comments in writing on a proposed rule or regulation of the Commission under such subparagraph (C) that has been published for comment, the Commission shall respond in writing to such written comment before adopting the proposed rule. If the Secretary of the Treasury determines, and notifies the Commission, that such rule or regulation, if implemented, would, or as applied does (i) adversely affect the liquidity or efficiency of the market for government securities; or (ii) impose any burden on competition not necessary or appropriate in furtherance of the purposes of this sec-tion, the Commission shall, prior to adopting the proposed rule or regulation, find that such rule or regulation is necessary and ap-propriate in furtherance of the purposes of this section notwith-standing the Secretary’s determination.

(3)(A) No broker or dealer (other than a government securities broker or government securities dealer, except a registered broker or dealer) shall make use of the mails or any means or instrumen-tality of interstate commerce to effect any transaction in, or to in-duce or attempt to induce the purchase or sale of, any security (other than an exempted security (except a government security) or commercial paper, bankers’ acceptances, or commercial bills) in contravention of such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers including, but not limited to, the acceptance of custody and use of customers’ securities and the carrying and use of customers’ deposits or credit balances. Such rules and regulations shall (A) re-quire the maintenance of reserves with respect to customers’ depos-its or credit balances, and (B) no later than September 1, 1975, es-tablish minimum financial responsibility requirements for all bro-kers and dealers.

(B) Consistent with this title, the Commission, in consultation with the Commodity Futures Trading Commission, shall issue such rules, regulations, or orders as are necessary to avoid duplicative or conflicting regulations applicable to any broker or dealer reg-istered with the Commission pursuant to section 15(b) (except paragraph (11) thereof ), that is also registered with the Com-modity Futures Trading Commission pursuant to section 4f(a) of the Commodity Exchange Act (except paragraph (2) thereof ), with



respect to the application of: (i) the provisions of section 8, section 15(c)(3), and section 17 of this title and the rules and regulations thereunder related to the treatment of customer funds, securities, or property, maintenance of books and records, financial reporting, or other financial responsibility rules, involving security futures products; and (ii) similar provisions of the Commodity Exchange Act and rules and regulations thereunder involving security futures products.

(C) [70] Notwithstanding any provision of sections 2(a)(1)(C)(i) or 4d(a)(2) of the Commodity Exchange Act and the rules and regulations thereunder, and pursuant to an exemption granted by the Commission under section 36 of this title or pursuant to a rule or regulation, cash and securities may be held by a broker or dealer registered pursuant to subsection (b)(1) and also registered as a fu-tures commission merchant pursuant to section 4f(a)(1) of the Commodity Exchange Act, in a portfolio margining ac-count carried as a futures account subject to section 4d of the Commodity Exchange Act and the rules and regula-tions thereunder, pursuant to a portfolio margining pro-gram approved by the Commodity Futures Trading Com-mission, and subject to subchapter IV of chapter 7 of title 11 of the United States Code and the rules and regulations thereunder. The Commission shall consult with the Com-modity Futures Trading Commission to adopt rules to en-sure that such transactions and accounts are subject to comparable requirements to the extent practicable for similar products.

(4) If the Commission finds, after notice and opportunity for a hearing, that any person subject to the provisions of section 12, 13, 14, or subsection (d) of section 15 of this title or any rule or regula-tion thereunder has failed to comply with any such provision, rule, or regulation in any material respect, the Commission may publish its findings and issue an order requiring such person, and any per-son who was a cause of the failure to comply due to an act or omis-sion the person knew or should have known would contribute to the failure to comply, to comply, or to take steps to effect compli-ance, with such provision or such rule or regulation thereunder upon such terms and conditions and within such time as the Com-mission may specify in such order.

(5) No dealer (other than a specialist registered on a national securities exchange) acting in the capacity of market maker or oth-erwise shall make use of the mails or any means or instrumen-tality of interstate commerce to effect any transaction in, or to in-duce or attempt to induce the purchase or sale of, any security (other than an exempted security or a municipal security) in con-travention of such specified and appropriate standards with respect to dealing as the Commission, by rule, shall prescribe as necessary or appropriate in the public interest and for the protection of inves-tors, to maintain fair and orderly markets, or to remove impedi-ments to and perfect the mechanism of a national market system.


Under the rules of the Commission a dealer in a security may be prohibited from acting as broker in that security.

(6) No broker or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security, municipal security, commercial paper, bankers’ acceptances, or commercial bills) in contravention of such rules and regulations as the Com-mission shall prescribe as necessary or appropriate in the public in-terest and for the protection of investors or to perfect or remove im-pediments to a national system for the prompt and accurate clear-ance and settlement of securities transactions, with respect to the time and method of, and the form and format of documents used in connection with, making settlements of and payments for trans-actions in securities, making transfers and deliveries of securities, and closing accounts. Nothing in this paragraph shall be construed (A) to affect the authority of the Board of Governors of the Federal Reserve System, pursuant to section 7 of this title, to prescribe rules and regulations for the purpose of preventing the excessive use of credit for the purchase or carrying of securities, or (B) to au-thorize the Commission to prescribe rules or regulations for such purpose.

(7) In connection with any bid for or purchase of a government security related to an offering of government securities by or on be-half of an issuer, no government securities broker, government se-curities dealer, or bidder for or purchaser of securities in such of-fering shall knowingly or willfully make any false or misleading written statement or omit any fact necessary to make any written statement made not misleading.

(8) PROHIBITION OF REFERRAL FEES.—No broker or dealer, or person associated with a broker or dealer, may solicit or accept, di-rectly or indirectly, remuneration for assisting an attorney in ob-taining the representation of any person in any private action aris-ing under this title or under the Securities Act of 1933.

(d) SUPPLEMENTARY AND PERIODIC INFORMATION.—(1) IN GENERAL.—Each issuer which has filed a registra-

tion statement containing an undertaking which is or becomes operative under this subsection as in effect prior to the date of enactment of the Securities Acts Amendments of 1964, and each issuer which shall after such date file a registration state-ment which has become effective pursuant to the Securities Act of 1933, as amended, shall file with the Commission, in accord-ance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, such supplementary and peri-odic information, documents, and reports as may be required pursuant to section 13 of this title in respect of a security reg-istered pursuant to section 12 of this title. The duty to file under this subsection shall be automatically suspended if and so long as any issue of securities of such issuer is registered pursuant to section 12 of this title. The duty to file under this subsection shall also be automatically suspended as to any fis-cal year, other than the fiscal year within which such registra-tion statement became effective, if, at the beginning of such fis-


71So in original Probably should be preceded by ‘‘a’’. 72So in original.

cal year, the securities of each class, other than any class of asset-backed securities, to which the registration statement re-lates are held of record by less than 300 persons, or, in the case of bank [71] or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons persons. [72] For the purposes of this subsection, the term ‘‘class’’ shall be construed to in-clude all securities of an issuer which are of substantially simi-lar character and the holders of which enjoy substantially simi-lar rights and privileges. The Commission may, for the purpose of this subsection, define by rules and regulations the term ‘‘held of record’’ as it deems necessary or appropriate in the public interest or for the protection of investors in order to pre-vent circumvention of the provisions of this subsection. Noth-ing in this subsection shall apply to securities issued by a for-eign government or political subdivision thereof.

(2) ASSET-BACKED SECURITIES.—(A) SUSPENSION OF DUTY TO FILE.—The Commission

may, by rule or regulation, provide for the suspension or termination of the duty to file under this subsection for any class of asset-backed security, on such terms and con-ditions and for such period or periods as the Commission deems necessary or appropriate in the public interest or for the protection of investors.

(B) CLASSIFICATION OF ISSUERS.—The Commission may, for purposes of this subsection, classify issuers and prescribe requirements appropriate for each class of issuers of asset- backed securities.

(e) NOTICES TO CUSTOMERS REGARDING SECURITIES LENDING.—Every registered broker or dealer shall provide notice to its cus-tomers that they may elect not to allow their fully paid securities to be used in connection with short sales. If a broker or dealer uses a customer’s securities in connection with short sales, the broker or dealer shall provide notice to its customer that the broker or dealer may receive compensation in connection with lending the customer’s securities. The Commission, by rule, as it deems nec-essary or appropriate in the public interest and for the protection of investors, may prescribe the form, content, time, and manner of delivery of any notice required under this paragraph.

(f) The Commission, by rule, as it deems necessary or appro-priate in the public interest and for the protection of investors or to assure equal regulation, may require any member of a national securities exchange not required to register under section 15 of this title and any person associated with any such member to comply with any provision of this title (other than section 15(a)) or the rules or regulations thereunder which by its terms regulates or prohibits any act, practice, or course of business by a ‘‘broker or dealer’’ or ‘‘registered broker or dealer’’ or a ‘‘person associated with a broker or dealer,’’ respectively.

(g) Every registered broker or dealer shall establish, maintain, and enforce written policies and procedures reasonably designed,


taking into consideration the nature of such broker’s or dealer’s business, to prevent the misuse in violation of this title, or the rules or regulations thereunder, of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer. The Commission, as it deems necessary or appropriate in the public interest or for the protection of investors, shall adopt rules or regulations to require specific policies or procedures rea-sonably designed to prevent misuse in violation of this title (or the rules or regulations thereunder) of material, nonpublic information.

(h) REQUIREMENTS FOR TRANSACTIONS IN PENNY STOCKS.—(1) IN GENERAL.—No broker or dealer shall make use of

the mails or any means or instrumentality of interstate com-merce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any penny stock by any cus-tomer except in accordance with the requirements of this sub-section and the rules and regulations prescribed under this subsection.

(2) RISK DISCLOSURE WITH RESPECT TO PENNY STOCKS.— Prior to effecting any transaction in any penny stock, a broker or dealer shall give the customer a risk disclosure document that—

(A) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;

(B) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violations of such duties or other requirements of Federal securities laws;

(C) contains a brief, clear, narrative description of a dealer market, including ‘‘bid’’ and ‘‘ask’’ prices for penny stocks and the significance of the spread between the bid and ask prices;

(D) contains the toll free telephone number for inquir-ies on disciplinary actions established pursuant to section 15A(i) of this title;

(E) defines significant terms used in the disclosure document or in the conduct of trading in penny stocks; and

(F) contains such other information, and is in such form (including language, type size, and format), as the Commission shall require by rule or regulation. (3) COMMISSION RULES RELATING TO DISCLOSURE.—The

Commission shall adopt rules setting forth additional stand-ards for the disclosure by brokers and dealers to customers of information concerning transactions in penny stocks. Such rules—

(A) shall require brokers and dealers to disclose to each customer, prior to effecting any transaction in, and at the time of confirming any transaction with respect to any penny stock, in accordance with such procedures and methods as the Commission may require consistent with the public interest and the protection of investors—

(i) the bid and ask prices for penny stock, or such other information as the Commission may, by rule, re-


quire to provide customers with more useful and reli-able information relating to the price of such stock;

(ii) the number of shares to which such bid and ask prices apply, or other comparable information re-lating to the depth and liquidity of the market for such stock; and

(iii) the amount and a description of any com-pensation that the broker or dealer and the associated person thereof will receive or has received in connec-tion with such transaction; (B) shall require brokers and dealers to provide, to

each customer whose account with the broker or dealer contains penny stocks, a monthly statement indicating the market value of the penny stocks in that account or indi-cating that the market value of such stock cannot be deter-mined because of the unavailability of firm quotes; and

(C) may, as the Commission finds necessary or appro-priate in the public interest or for the protection of inves-tors, require brokers and dealers to disclose to customers additional information concerning transactions in penny stocks. (4) EXEMPTIONS.—The Commission, as it determines con-

sistent with the public interest and the protection of investors, may by rule, regulation, or order exempt in whole or in part, conditionally or unconditionally, any person or class of persons, or any transaction or class of transactions, from the require-ments of this subsection. Such exemptions shall include an ex-emption for brokers and dealers based on the minimal percent-age of the broker’s or dealer’s commissions, commission-equiva-lents, and markups received from transactions in penny stocks.

(5) REGULATIONS.—It shall be unlawful for any person to violate such rules and regulations as the Commission shall prescribe in the public interest or for the protection of inves-tors or to maintain fair and orderly markets—

(A) as necessary or appropriate to carry out this subsection; or

(B) as reasonably designed to prevent fraudulent, de-ceptive, or manipulative acts and practices with respect to penny stocks.

(i) LIMITATIONS ON STATE LAW.—(1) CAPITAL, MARGIN, BOOKS AND RECORDS, BONDING, AND

REPORTS.— No law, rule, regulation, or order, or other adminis-trative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or oper-ational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or govern-ment securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. The Commission shall consult periodically the securities com-missions (or any agency or office performing like functions) of the States concerning the adequacy of such requirements as es-tablished under this title.

(2) FUNDING PORTALS.—


(A) LIMITATION ON STATE LAWS.—Except as provided in subparagraph (B), no State or political subdivision thereof may enforce any law, rule, regulation, or other ad-ministrative action against a registered funding portal with respect to its business as such.

(B) EXAMINATION AND ENFORCEMENT AUTHORITY.—Subparagraph (A) does not apply with respect to the exam-ination and enforcement of any law, rule, regulation, or ad-ministrative action of a State or political subdivision there-of in which the principal place of business of a registered funding portal is located, provided that such law, rule, reg-ulation, or administrative action is not in addition to or different from the requirements for registered funding por-tals established by the Commission.

(C) DEFINITION.—For purposes of this paragraph, the term ‘‘State’’ includes the District of Columbia and the ter-ritories of the United States. (3) DE MINIMIS TRANSACTIONS BY ASSOCIATED PERSONS.—

No law, rule, regulation, or order, or other administrative ac-tion of any State or political subdivision thereof may prohibit an associated person of a broker or dealer from effecting a transaction described in paragraph (3) for a customer in such State if—

(A) such associated person is not ineligible to register with such State for any reason other than such a trans-action;

(B) such associated person is registered with a reg-istered securities association and at least one State; and

(C) the broker or dealer with which such person is as-sociated is registered with such State. (4) DESCRIBED TRANSACTIONS.—

(A) IN GENERAL.—A transaction is described in this paragraph if—

(i) such transaction is effected—(I) on behalf of a customer that, for 30 days

prior to the day of the transaction, maintained an account with the broker or dealer; and

(II) by an associated person of the broker or dealer—

(aa) to which the customer was assigned for 14 days prior to the day of the transaction; and

(bb) who is registered with a State in which the customer was a resident or was present for at least 30 consecutive days dur-ing the 1-year period prior to the day of the transaction; or

(ii) the transaction is effected—(I) on behalf of a customer that, for 30 days

prior to the day of the transaction, maintained an account with the broker or dealer; and

(II) during the period beginning on the date on which such associated person files an applica-tion for registration with the State in which the


73Two subsecs. (j) have been enacted.

transaction is effected and ending on the earlier of—

(aa) 60 days after the date on which the application is filed; or

(bb) the date on which such State notifies the associated person that it has denied the application for registration or has stayed the pendency of the application for cause.

(B) RULES OF CONSTRUCTION.—For purposes of sub-paragraph (A)(i)(II)—

(i) each of up to 3 associated persons of a broker or dealer who are designated to effect transactions during the absence or unavailability of the principal associated person for a customer may be treated as an associated person to which such customer is assigned; and

(ii) if the customer is present in another State for 30 or more consecutive days or has permanently changed his or her residence to another State, a trans-action is not described in this paragraph, unless the associated person of the broker or dealer files an appli-cation for registration with such State not later than 10 business days after the later of the date of the transaction, or the date of the discovery of the pres-ence of the customer in the other State for 30 or more consecutive days or the change in the customer’s resi-dence.

(j) [73] RULEMAKING TO EXTEND REQUIREMENTS TO NEW HYBRID PRODUCTS.—

(1) CONSULTATION.—Prior to commencing a rulemaking under this subsection, the Commission shall consult with and seek the concurrence of the Board concerning the imposition of broker or dealer registration requirements with respect to any new hybrid product. In developing and promulgating rules under this subsection, the Commission shall consider the views of the Board, including views with respect to the nature of the new hybrid product; the history, purpose, extent, and appro-priateness of the regulation of the new product under the Fed-eral banking laws; and the impact of the proposed rule on the banking industry.

(2) LIMITATION.—The Commission shall not—(A) require a bank to register as a broker or dealer

under this section because the bank engages in any trans-action in, or buys or sells, a new hybrid product; or

(B) bring an action against a bank for a failure to com-ply with a requirement described in subparagraph (A),

unless the Commission has imposed such requirement by rule or regulation issued in accordance with this section.

(3) CRITERIA FOR RULEMAKING.—The Commission shall not impose a requirement under paragraph (2) of this subsection with respect to any new hybrid product unless the Commission determines that—


(A) the new hybrid product is a security; and (B) imposing such requirement is necessary and ap-

propriate in the public interest and for the protection of in-vestors. (4) CONSIDERATIONS.—In making a determination under

paragraph (3), the Commission shall consider—(A) the nature of the new hybrid product; and (B) the history, purpose, extent, and appropriateness

of the regulation of the new hybrid product under the Fed-eral securities laws and under the Federal banking laws. (5) OBJECTION TO COMMISSION REGULATION.—

(A) FILING OF PETITION FOR REVIEW.—The Board may obtain review of any final regulation described in para-graph (2) in the United States Court of Appeals for the District of Columbia Circuit by filing in such court, not later than 60 days after the date of publication of the final regulation, a written petition requesting that the regula-tion be set aside. Any proceeding to challenge any such rule shall be expedited by the Court of Appeals.

(B) TRANSMITTAL OF PETITION AND RECORD.—A copy of a petition described in subparagraph (A) shall be trans-mitted as soon as possible by the Clerk of the Court to an officer or employee of the Commission designated for that purpose. Upon receipt of the petition, the Commission shall file with the court the regulation under review and any documents referred to therein, and any other relevant materials prescribed by the court.

(C) EXCLUSIVE JURISDICTION.—On the date of the fil-ing of the petition under subparagraph (A), the court has jurisdiction, which becomes exclusive on the filing of the materials set forth in subparagraph (B), to affirm and en-force or to set aside the regulation at issue.

(D) STANDARD OF REVIEW.—The court shall determine to affirm and enforce or set aside a regulation of the Com-mission under this subsection, based on the determination of the court as to whether—

(i) the subject product is a new hybrid product, as defined in this subsection;

(ii) the subject product is a security; and (iii) imposing a requirement to register as a

broker or dealer for banks engaging in transactions in such product is appropriate in light of the history, pur-pose, and extent of regulation under the Federal secu-rities laws and under the Federal banking laws, giving deference neither to the views of the Commission nor the Board. (E) JUDICIAL STAY.—The filing of a petition by the

Board pursuant to subparagraph (A) shall operate as a ju-dicial stay, until the date on which the determination of the court is final (including any appeal of such determina-tion).

(F) OTHER AUTHORITY TO CHALLENGE.—Any aggrieved party may seek judicial review of the Commission’s rule-


74Two subsecs. (j) have been enacted. 75Two subsecs. (k) and two subsecs. (l) have been enacted. 76Two subsecs. (k) and two subsecs. (l) have been enacted. 77Two subsecs. (k) and two subsecs. (l) have been enacted.

making under this subsection pursuant to section 25 of this title. (6) DEFINITIONS.—For purposes of this subsection:

(A) NEW HYBRID PRODUCT.—The term ‘‘new hybrid product’’ means a product that—

(i) was not subjected to regulation by the Commis-sion as a security prior to the date of the enactment of the Gramm-Leach-Bliley Act;

(ii) is not an identified banking product as such term is defined in section 206 of such Act; and

(iii) is not an equity swap within the meaning of section 206(a)(6) of such Act. (B) BOARD.—The term ‘‘Board’’ means the Board of

Governors of the Federal Reserve System. (j) [74] The authority of the Commission under this section with

respect to security-based swap agreements shall be subject to the restrictions and limitations of section 3A(b) of this title.

(k) [75] REGISTRATION OR SUCCESSION TO A UNITED STATES BROKER OR DEALER.—In determining whether to permit a foreign person or an affiliate of a foreign person to register as a United States broker or dealer, or succeed to the registration of a United States broker or dealer, the Commission may consider whether, for a foreign person, or an affiliate of a foreign person that presents a risk to the stability of the United States financial system, the home country of the foreign person has adopted, or made demon-strable progress toward adopting, an appropriate system of finan-cial regulation to mitigate such risk.

(l) [76] TERMINATION OF A UNITED STATES BROKER OR DEAL-ER.—For a foreign person or an affiliate of a foreign person that presents such a risk to the stability of the United States financial system, the Commission may determine to terminate the registra-tion of such foreign person or an affiliate of such foreign person as a broker or dealer in the United States, if the Commission deter-mines that the home country of the foreign person has not adopted, or made demonstrable progress toward adopting, an appropriate system of financial regulation to mitigate such risk.

(k) [77] STANDARD OF CONDUCT.—(1) IN GENERAL.—Notwithstanding any other provision of

this Act or the Investment Advisers Act of 1940, the Commis-sion may promulgate rules to provide that, with respect to a broker or dealer, when providing personalized investment ad-vice about securities to a retail customer (and such other cus-tomers as the Commission may by rule provide), the standard of conduct for such broker or dealer with respect to such cus-tomer shall be the same as the standard of conduct applicable to an investment adviser under section 211 of the Investment Advisers Act of 1940. The receipt of compensation based on commission or other standard compensation for the sale of se-curities shall not, in and of itself, be considered a violation of such standard applied to a broker or dealer. Nothing in this


78Two subsecs. (k) and two subsecs. (l) have been enacted. 79So in original. Probably should be followed by ‘‘the’’.

section shall require a broker or dealer or registered represent-ative to have a continuing duty of care or loyalty to the cus-tomer after providing personalized investment advice about se-curities.

(2) DISCLOSURE OF RANGE OF PRODUCTS OFFERED.—Where a broker or dealer sells only proprietary or other limited range of products, as determined by the Commission, the Commission may by rule require that such broker or dealer provide notice to each retail customer and obtain the consent or acknowledg-ment of the customer. The sale of only proprietary or other lim-ited range of products by a broker or dealer shall not, in and of itself, be considered a violation of the standard set forth in paragraph (1). (l) [78] OTHER MATTERS.—The Commission shall—

(1) facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with brokers, dealers, and investment advisers, including any mate-rial conflicts of interest; and

(2) examine and, where appropriate, promulgate rules pro-hibiting or restricting certain sales practices, conflicts of inter-est, and compensation schemes for brokers, dealers, and in-vestment advisers that the Commission deems contrary to the public interest and the protection of investors. (m) HARMONIZATION OF ENFORCEMENT.—The enforcement au-

thority of the Commission with respect to violations of the standard of conduct applicable to a broker or dealer providing personalized investment advice about securities to a retail customer shall in-clude—

(1) the enforcement authority of the Commission with re-spect to such violations provided under this Act; and

(2) the enforcement authority of the Commission with re-spect to violations of the standard of conduct applicable to an investment adviser under the Investment Advisers Act of 1940, including the authority to impose sanctions for such violations, and

the Commission shall seek to prosecute and sanction violators of the standard of conduct applicable to a broker or dealer providing personalized investment advice about securities to a retail cus-tomer under this Act to [79] same extent as the Commission pros-ecutes and sanctions violators of the standard of conduct applicable to an investment advisor under the Investment Advisers Act of 1940.

(n) DISCLOSURES TO RETAIL INVESTORS.—(1) IN GENERAL.—Notwithstanding any other provision of

the securities laws, the Commission may issue rules desig-nating documents or information that shall be provided by a broker or dealer to a retail investor before the purchase of an investment product or service by the retail investor.

(2) CONSIDERATIONS.—In developing any rules under para-graph (1), the Commission shall consider whether the rules


will promote investor protection, efficiency, competition, and capital formation.

(3) FORM AND CONTENTS OF DOCUMENTS AND INFORMA-TION.—Any documents or information designated under a rule promulgated under paragraph (1) shall—

(A) be in a summary format; and (B) contain clear and concise information about—

(i) investment objectives, strategies, costs, and risks; and

(ii) any compensation or other financial incentive received by a broker, dealer, or other intermediary in connection with the purchase of retail investment products.

(o) AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBI-TRATION.—The Commission, by rule, may prohibit, or impose condi-tions or limitations on the use of, agreements that require cus-tomers or clients of any broker, dealer, or municipal securities deal-er to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such pro-hibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.

(June 6, 1934, ch. 404, title I, Sec. 15, 48 Stat. 895; May 27, 1936, ch. 462, Sec. 3, 49 Stat. 1377; June 25, 1938, ch. 677, Sec. 2, 52 Stat. 1075; Aug. 20, 1964, Pub. L. 88-467, Sec. 6, 78 Stat. 570; Dec. 30, 1970, Pub. L. 91-598, Sec. 11(d), formerly Sec. 7(d), 84 Stat. 1653, renumbered Sec. 11(d), May 21, 1978, Pub. L. 95-283, Sec. 9, 92 Stat. 260; June 4, 1975, Pub. L. 94-29, Sec. 11, 89 Stat. 121; Dec. 19, 1977, Pub. L. 95-213, title II, Sec. 204, 91 Stat. 1500; June 6, 1983, Pub. L. 98-38, Sec. 3(a), 97 Stat. 206; Aug. 10, 1984, Pub. L. 98-376, Sec. 4, 6(b), 98 Stat. 1265; Oct. 28, 1986, Pub. L. 99-571, title I, Sec. 102(e), (f), 100 Stat. 3218; Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 317, 101 Stat. 1256; Nov. 19, 1988, Pub. L. 100-704, Sec. 3(b)(1), 102 Stat. 4679; Oct. 15, 1990, Pub. L. 101-429, title V, Sec. 504(a), 505, 104 Stat. 952, 953; Nov. 15, 1990, Pub. L. 101-550, title II, Sec. 203(a), (c)(1), 104 Stat. 2715, 2718; Dec. 17, 1993, Pub. L. 103-202, title I, Sec. 105, 106(b)(2)(B), 109(b)(2), 110, 107 Stat. 2348, 2350, 2353; Dec. 22, 1995, Pub. L. 104-67, title I, Sec. 103(a), 109 Stat. 756; Oct. 11, 1996, Pub. L. 104-290, title I, Sec. 103(a), 110 Stat. 3420; Nov. 3, 1998, Pub. L. 105-353, title III, Sec. 301(b)(8), 112 Stat. 3236; Nov. 12, 1999, Pub. L. 106-102, title II, Sec. 205, 113 Stat. 1391; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5)[title II, Secs. 203(a)(1), (b), 206(h), title III, Sec. 303(e), (f)], 114 Stat. 2763, 2763A-421, 2763A-422, 2763A-432, 2763A-454, 2763A-455; Pub. L. 107-204, title VI, Sec. 604(a), (c)(1)(B)(ii), July 30, 2002, 116 Stat. 795, 796; Pub. L. 109-291, Sec. 4(b)(1)(A), Sept. 29, 2006, 120 Stat. 1337; Pub. L. 111-203, title I, Sec. 173(c), title VII, Secs. 713(a), 762(d)(4), 766(d), title IX, Secs. 913(g)(1), (h)(1), 919, 921(a), 925(a)(1), 929L(3), 929X(c), 942(a), 975(g), 985(b)(5)(A), July 21, 2010, 124 Stat. 1440, 1646, 1761, 1799, 1828, 1829, 1837, 1841, 1850, 1861, 1870, 1896, 1923, 1933; Pub. L. 112-106, title III, Sec. 305(d)(1), title VI, Sec. 601(b), Apr. 5, 2012, 126 Stat. 323, 326.)


REGISTERED SECURITIES ASSOCIATIONS

SEC. 15A. (a) An association of brokers and dealers may be reg-istered as a national securities association pursuant to subsection (b), or as an affiliated securities association pursuant to subsection (d), under the terms and conditions hereinafter provided in this section and in accordance with the provisions of section 19(a) of this title, by filing with the Commission an application for registra-tion in such form as the Commission, by rule, may prescribe con-taining the rules of the association and such other information and documents as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of inves-tors.

(b) An association of brokers and dealers shall not be reg-istered as a national securities association unless the Commission determines that—

(1) By reason of the number and geographical distribution of its members and the scope of their transactions, such asso-ciation will be able to carry out the purposes of this section.

(2) Such association is so organized and has the capacity to be able to carry out the purposes of this title and to comply, and (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of this title) to enforce compliance by its members and persons associated with its members, with the provisions of this title, the rules and regulations there-under, the rules of the Municipal Securities Rulemaking Board, and the rules of the association.

(3) Subject to the provisions of subsection (g) of this sec-tion, the rules of the association provide that any registered broker or dealer may become a member of such association and any person may become associated with a member thereof.

(4) The rules of the association assure a fair representation of its members in the selection of its directors and administra-tion of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associ-ated with a member of the association, broker, or dealer.

(5) The rules of the association provide for the equitable al-location of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system which the association operates or controls.

(6) The rules of the association are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, set-tling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and per-fect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimi-nation between customers, issuers, brokers, or dealers, to fix minimum profits, to impose any schedule or fix rates of com-missions, allowances, discounts, or other fees to be charged by its members, or to regulate by virtue of any authority conferred


by this title matters not related to the purposes of this title or the administration of the association.

(7) The rules of the association provide that (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of this title) its members and persons associated with its members shall be appropriately disciplined for violation of any provision of this title, the rules or regulations thereunder, the rules of the Municipal Securities Rulemaking Board, or the rules of the association, by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being sus-pended or barred from being associated with a member, or any other fitting sanction.

(8) The rules of the association are in accordance with the provisions of subsection (h) of this section, and, in general, pro-vide a fair procedure for the disciplining of members and per-sons associated with members, the denial of membership to any person seeking membership therein, the barring of any person from becoming associated with a member thereof, and the prohibition or limitation by the association of any person with respect to access to services offered by the association or a member thereof.

(9) The rules of the association do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this title.

(10) The requirements of subsection (c), insofar as these may be applicable, are satisfied.

(11) The rules of the association include provisions gov-erning the form and content of quotations relating to securities sold otherwise than on a national securities exchange which may be distributed or published by any member or person as-sociated with a member, and the persons to whom such quotations may be supplied. Such rules relating to quotations shall be designed to produce fair and informative quotations, to prevent fictitious or misleading quotations, and to promote orderly procedures for collecting, distributing, and publishing quotations.

(12) The rules of the association to promote just and equi-table principles of trade, as required by paragraph (6), include rules to prevent members of the association from participating in any limited partnership rollup transaction (as such term is defined in paragraphs (4) and (5) of section 14(h)) unless such transaction was conducted in accordance with procedures de-signed to protect the rights of limited partners, including—

(A) the right of dissenting limited partners to one of the following:

(i) an appraisal and compensation; (ii) retention of a security under substantially the

same terms and conditions as the original issue; (iii) approval of the limited partnership rollup


(iv) the use of a committee that is independent, as determined in accordance with rules prescribed by the


association, of the general partner or sponsor, that has been approved by a majority of the outstanding securi-ties of each of the participating partnerships, and that has such authority as is necessary to protect the inter-est of limited partners, including the authority to hire independent advisors, to negotiate with the general partner or sponsor on behalf of the limited partners, and to make a recommendation to the limited partners with respect to the proposed transaction; or

(v) other comparable rights that are prescribed by rule by the association and that are designed to pro-tect dissenting limited partners; (B) the right not to have their voting power unfairly

reduced or abridged; (C) the right not to bear an unfair portion of the costs

of a proposed limited partnership rollup transaction that is rejected; and

(D) restrictions on the conversion of contingent inter-ests or fees into non-contingent interests or fees and re-strictions on the receipt of a non-contingent equity interest in exchange for fees for services which have not yet been provided.

As used in this paragraph, the term ‘‘dissenting limited part-ner’’ means a person who, on the date on which soliciting mate-rial is mailed to investors, is a holder of a beneficial interest in a limited partnership that is the subject of a limited part-nership rollup transaction, and who casts a vote against the transaction and complies with procedures established by the association, except that for purposes of an exchange or tender offer, such person shall file an objection in writing under the rules of the association during the period in which the offer is outstanding.

(13) The rules of the association prohibit the authorization for quotation on an automated interdealer quotation system sponsored by the association of any security designated by the Commission as a national market system security resulting from a limited partnership rollup transaction (as such term is defined in paragraphs (4) and (5) of section 14(h)), unless such transaction was conducted in accordance with procedures de-signed to protect the rights of limited partners, including—

(A) the right of dissenting limited partners to one of the following:

(i) an appraisal and compensation; (ii) retention of a security under substantially the

same terms and conditions as the original issue; (iii) approval of the limited partnership rollup


(iv) the use of a committee that is independent, as determined in accordance with rules prescribed by the association, of the general partner or sponsor, that has been approved by a majority of the outstanding securi-ties of each of the participating partnerships, and that


has such authority as is necessary to protect the inter-est of limited partners, including the authority to hire independent advisors, to negotiate with the general partner or sponsor on behalf of the limited partners, and to make a recommendation to the limited partners with respect to the proposed transaction; or

(v) other comparable rights that are prescribed by rule by the association and that are designed to pro-tect dissenting limited partners; (B) the right not to have their voting power unfairly

reduced or abridged; (C) the right not to bear an unfair portion of the costs

of a proposed limited partnership rollup transaction that is rejected; and

(D) restrictions on the conversion of contingent inter-ests or fees into non-contingent interests or fees and re-strictions on the receipt of a non-contingent equity interest in exchange for fees for services which have not yet been provided.

As used in this paragraph, the term ‘‘dissenting limited part-ner’’ means a person who, on the date on which soliciting mate-rial is mailed to investors, is a holder of a beneficial interest in a limited partnership that is the subject of a limited part-nership rollup transaction, and who casts a vote against the transaction and complies with procedures established by the association, except that for purposes of an exchange or tender offer, such person shall file an objection in writing under the rules of the association during the period during which the offer is outstanding.

(14) The rules of the association include provisions gov-erning the sales, or offers of sales, of securities on the premises of any military installation to any member of the Armed Forces or a dependent thereof, which rules require—

(A) the broker or dealer performing brokerage services to clearly and conspicuously disclose to potential inves-tors—

(i) that the securities offered are not being offered or provided by the broker or dealer on behalf of the Federal Government, and that its offer is not sanc-tioned, recommended, or encouraged by the Federal Government; and

(ii) the identity of the registered broker-dealer of-fering the securities; (B) such broker or dealer to perform an appropriate

suitability determination, including consideration of costs and knowledge about securities, prior to making a rec-ommendation of a security to a member of the Armed Forces or a dependent thereof; and

(C) that no person receive any referral fee or incentive compensation in connection with a sale or offer of sale of securities, unless such person is an associated person of a registered broker or dealer and is qualified pursuant to the rules of a self-regulatory organization.


80Paragraph (12) of subsection (b) of this section was omitted in the general amendment of subsec. (b) by Pub. L. 94-29, see par. (11) of subsec. (b). A new par. (12) was added by Pub. L. 103-302, Sec. 303(a).

(15) The rules of the association provide that the associa-tion shall—

(A) request guidance from the Municipal Securities Rulemaking Board in interpretation of the rules of the Mu-nicipal Securities Rulemaking Board; and

(B) provide information to the Municipal Securities Rulemaking Board about the enforcement actions and ex-aminations of the association under section 15B(b)(2)(E), so that the Municipal Securities Rulemaking Board may—

(i) assist in such enforcement actions and exami-nations; and

(ii) evaluate the ongoing effectiveness of the rules of the Board.

(c) The Commission may permit or require the rules of an asso-ciation applying for registration pursuant to subsection (b) of this section, to provide for the admission of an association registered as an affiliated securities association pursuant to subsection (d) of this section, to participation in said applicant association as an affiliate thereof, under terms permitting such powers and responsibilities to such affiliate, and under such other appropriate terms and condi-tions, as may be provided by the rules of said applicant association, if such rules appear to the Commission to be necessary or appro-priate in the public interest or for the protection of investors and to carry out the purposes of this section. The duties and powers of the Commission with respect to any national securities association or any affiliated securities association shall in no way be limited by reason of any such affiliation.

(d) An applicant association shall not be registered as an affili-ated securities association unless it appears to the Commission that—

(1) such association, notwithstanding that it does not sat-isfy the requirements set forth in paragraph (1) of subsection (b) of this section, will, forthwith upon the registration thereof, be admitted to affiliation with an association registered as a national securities association pursuant to subsection (b) of this section, in the manner and under the terms and conditions provided by the rules of said national securities association in accordance with subsection (c) of this section; and

(2) such association and its rules satisfy the requirements set forth in paragraphs (2) to (10), inclusive, and paragraph (12), [80] of subsection (b) of this section; except that in the case of any such association any restrictions upon membership therein of the type authorized by paragraph (3) of subsection (b) of this section shall not be less stringent than in the case of the national securities association with which such associa-tion is to be affiliated. (e)(1) The rules of a registered securities association may pro-

vide that no member thereof shall deal with any nonmember pro-fessional (as defined in paragraph (2) of this subsection) except at the same prices, for the same commissions or fees, and on the same


terms and conditions as are by such member accorded to the gen-eral public.

(2) For the purposes of this subsection, the term ‘‘nonmember professional’’ shall include (A) with respect to transactions in secu-rities other than municipal securities, any registered broker or dealer who is not a member of any registered securities association, except such a broker or dealer who deals exclusively in commercial paper, bankers’ acceptances, and commercial bills, and (B) with re-spect to transactions in municipal securities, any municipal securi-ties dealer (other than a bank or division or department of a bank) who is not a member of any registered securities association and any municipal securities broker who is not a member of any such association.

(3) Nothing in this subsection shall be so construed or applied as to prevent (A) any member of any registered securities associa-tion from granting to any other member of any registered securities association any dealer’s discount, allowance, commission, or special terms, in connection with the purchase or sale of securities, or (B) any member of a registered securities association or any municipal securities dealer which is a bank or a division or department of a bank from granting to any member of any registered securities as-sociation or any such municipal securities dealer any dealer’s dis-count, allowance, commission, or special terms in connection with the purchase or sale of municipal securities: Provided, however, That the granting of any such discount, allowance, commission, or special terms in connection with the purchase or sale of municipal securities shall be subject to rules of the Municipal Securities Rule-making Board adopted pursuant to section 15B(b)(2)(K) of this title.

(f) Nothing in subsection (b)(6) or (b)(11) of this section shall be construed to permit a registered securities association to make rules concerning any transaction by a registered broker or dealer in a municipal security.

(g)(1) A registered securities association shall deny member-ship to any person who is not a registered broker or dealer.

(2) A registered securities association may, and in cases in which the Commission, by order, directs as necessary or appro-priate in the public interest or for the protection of investors shall, deny membership to any registered broker or dealer, and bar from becoming associated with a member any person, who is subject to a statutory disqualification. A registered securities association shall file notice with the Commission not less than thirty days prior to admitting any registered broker or dealer to membership or permit-ting any person to become associated with a member, if the associa-tion knew, or in the exercise of reasonable care should have known, that such broker or dealer or person was subject to a statutory dis-qualification. The notice shall be in such form and contain such in-formation as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of inves-tors.

(3)(A) A registered securities association may deny member-ship to, or condition the membership of, a registered broker or deal-er if (i) such broker or dealer does not meet such standards of fi-nancial responsibility or operational capability or such broker or


dealer or any natural person associated with such broker or dealer does not meet such standards of training, experience, and com-petence as are prescribed by the rules of the association or (ii) such broker or dealer or person associated with such broker or dealer has engaged and there is a reasonable likelihood he will again en-gage in acts or practices inconsistent with just and equitable prin-ciples of trade. A registered securities association may examine and verify the qualifications of an applicant to become a member and the natural persons associated with such an applicant in accord-ance with procedures established by the rules of the association.

(B) A registered securities association may bar a natural per-son from becoming associated with a member or condition the asso-ciation of a natural person with a member if such natural person (i) does not meet such standards of training, experience, and com-petence as are prescribed by the rules of the association or (ii) has engaged and there is a reasonable likelihood he will again engage in acts or practices inconsistent with just and equitable principles of trade. A registered securities association may examine and verify the qualifications of an applicant to become a person associated with a member in accordance with procedures established by the rules of the association and require a natural person associated with a member, or any class of such natural persons, to be reg-istered with the association in accordance with procedures so estab-lished.

(C) A registered securities association may bar any person from becoming associated with a member if such person does not agree (i) to supply the association with such information with re-spect to its relationship and dealings with the member as may be specified in the rules of the association and (ii) to permit examina-tion of its books and records to verify the accuracy of any informa-tion so supplied.

(D) Nothing in subparagraph (A), (B), or (C) of this paragraph shall be construed to permit a registered securities association to deny membership to or condition the membership of, or bar any person from becoming associated with or condition the association of any person with, a broker or dealer that engages exclusively in transactions in municipal securities.

(4) A registered securities association may deny membership to a registered broker or dealer not engaged in a type of business in which the rules of the association require members to be engaged: Provided, however, That no registered securities association may deny membership to a registered broker or dealer by reason of the amount of such type of business done by such broker or dealer or the other types of business in which he is engaged.

(h)(1) In any proceeding by a registered securities association to determine whether a member or person associated with a mem-ber should be disciplined (other than a summary proceeding pursu-ant to paragraph (3) of this subsection) the association shall bring specific charges, notify such member or person of, and give him an opportunity to defend against, such charges, and keep a record. A determination by the association to impose a disciplinary sanction shall be supported by a statement setting forth—


(A) any act or practice in which such member or person as-sociated with a member has been found to have engaged, or which such member or person has been found to have omitted;

(B) the specific provision of this title, the rules or regula-tions thereunder, the rules of the Municipal Securities Rule- making Board, or the rules of the association which any such act or practice, or omission to act, is deemed to violate; and

(C) the sanction imposed and the reason therefor. (2) In any proceeding by a registered securities association to

determine whether a person shall be denied membership, barred from becoming associated with a member, or prohibited or limited with respect to access to services offered by the association or a member thereof (other than a summary proceeding pursuant to paragraph (3) of this subsection), the association shall notify such person of and give him an opportunity to be heard upon, the spe-cific grounds for denial, bar, or prohibition or limitation under con-sideration and keep a record. A determination by the association to deny membership, bar a person from becoming associated with a member, or prohibit or limit a person with respect to access to services offered by the association or a member thereof shall be supported by a statement setting forth the specific grounds on which the denial, bar, or prohibition or limitation is based.

(3) A registered securities association may summarily (A) sus-pend a member or person associated with a member who has been and is expelled or suspended from any self-regulatory organization or barred or suspended from being associated with a member of any self-regulatory organization, (B) suspend a member who is in such financial or operating difficulty that the association deter-mines and so notifies the Commission that the member cannot be permitted to continue to do business as a member with safety to investors, creditors, other members, or the association, or (C) limit or prohibit any person with respect to access to services offered by the association if subparagraph (A) or (B) of this paragraph is ap-plicable to such person or, in the case of a person who is not a member, if the association determines that such person does not meet the qualification requirements or other prerequisites for such access and such person cannot be permitted to continue to have such access with safety to investors, creditors, members, or the as-sociation. Any person aggrieved by any such summary action shall be promptly afforded an opportunity for a hearing by the associa-tion in accordance with the provisions of paragraph (1) or (2) of this subsection. The Commission, by order, may stay any such summary action on its own motion or upon application by any person ag-grieved thereby, if the Commission determines summarily or after notice and opportunity for hearing (which hearing may consist sole-ly of the submission of affidavits or presentation of oral arguments) that such stay is consistent with the public interest and the protec-tion of investors.

(i) OBLIGATION TO MAINTAIN REGISTRATION, DISCIPLINARY, AND OTHER DATA.—

(1) MAINTENANCE OF SYSTEM TO RESPOND TO INQUIRIES.—A registered securities association shall—

(A) establish and maintain a system for collecting and retaining registration information;


81Probably should read ‘‘4(a)(2)’’. 82Probably should read ‘‘4(a)(6)’’.

(B) establish and maintain a toll-free telephone listing, and a readily accessible electronic or other process, to re-ceive and promptly respond to inquiries regarding—

(i) registration information on its members and their associated persons; and

(ii) registration information on the members and their associated persons of any registered national se-curities exchange that uses the system described in subparagraph (A) for the registration of its members and their associated persons; and (C) adopt rules governing the process for making in-

quiries and the type, scope, and presentation of informa-tion to be provided in response to such inquiries in con-sultation with any registered national securities exchange providing information pursuant to subparagraph (B)(ii). (2) RECOVERY OF COSTS.—A registered securities associa-

tion may charge persons making inquiries described in para-graph (1)(B), other than individual investors, reasonable fees for responses to such inquiries.

(3) PROCESS FOR DISPUTED INFORMATION.—Each registered securities association shall adopt rules establishing an admin-istrative process for disputing the accuracy of information pro-vided in response to inquiries under this subsection in con-sultation with any registered national securities exchange pro-viding information pursuant to paragraph (1)(B)(ii).

(4) LIMITATION ON LIABILITY.—A registered securities asso-ciation, or an exchange reporting information to such an asso-ciation, shall not have any liability to any person for any ac-tions taken or omitted in good faith under this subsection.

(5) DEFINITION.—For purposes of this subsection, the term ‘‘registration information’’ means the information reported in connection with the registration or licensing of brokers and dealers and their associated persons, including disciplinary ac-tions, regulatory, judicial, and arbitration proceedings, and other information required by law, or exchange or association rule, and the source and status of such information. (j) REGISTRATION FOR SALES OF PRIVATE SECURITIES OFFER-

INGS.—A registered securities association shall create a limited qualification category for any associated person of a member who effects sales as part of a primary offering of securities not involving a public offering, pursuant to section 3(b), 4(2), [81] or 4(6) [82] of the Securities Act of 1933 and the rules and regulations thereunder, and shall deem qualified in such limited qualification category, without testing, any bank employee who, in the six month period preceding the date of the enactment of the Gramm-Leach-Bliley Act, engaged in effecting such sales.

(k) LIMITED PURPOSE NATIONAL SECURITIES ASSOCIATION.—(1) REGULATION OF MEMBERS WITH RESPECT TO SECURITY

FUTURES PRODUCTS.—A futures association registered under section 17 of the Commodity Exchange Act shall be a reg-istered national securities association for the limited purpose


of regulating the activities of members who are registered as brokers or dealers in security futures products pursuant to sec-tion 15(b)(11).

(2) REQUIREMENTS FOR REGISTRATION.—Such a securities association shall—

(A) be so organized and have the capacity to carry out the purposes of the securities laws applicable to security futures products and to comply, and (subject to any rule or order of the Commission pursuant to section 19(g)(2)) to enforce compliance by its members and persons associated with its members, with the provisions of the securities laws applicable to security futures products, the rules and regulations thereunder, and its rules;

(B) have rules that—(i) are designed to prevent fraudulent and ma-

nipulative acts and practices, to promote just and eq-uitable principles of trade, and, in general, to protect investors and the public interest, including rules gov-erning sales practices and the advertising of security futures products reasonably comparable to those of other national securities associations registered pursu-ant to subsection (a) that are applicable to security fu-tures products; and

(ii) are not designed to regulate by virtue of any authority conferred by this title matters not related to the purposes of this title or the administration of the association; (C) have rules that provide that (subject to any rule or

order of the Commission pursuant to section 19(g)(2)) its members and persons associated with its members shall be appropriately disciplined for violation of any provision of the securities laws applicable to security futures products, the rules or regulations thereunder, or the rules of the as-sociation, by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction; and

(D) have rules that ensure that members and natural persons associated with members meet such standards of training, experience, and competence necessary to effect transactions in security futures products and are tested for their knowledge of securities and security futures prod-ucts. (3) EXEMPTION FROM RULE CHANGE SUBMISSION.—Such a

securities association shall be exempt from submitting pro-posed rule changes pursuant to section 19(b) of this title, ex-cept that—

(A) the association shall file proposed rule changes re-lated to higher margin levels, fraud or manipulation, rec-ordkeeping, reporting, listing standards, or decimal pricing for security futures products, sales practices for, adver-tising of, or standards of training, experience, competence, or other qualifications for security futures products for per-sons who effect transactions in security futures products,


83Subsection (k) of section 17 was redesignated (j) by Pub. L. 111-203, title VI, Sec. 617(a)(2), July 21, 2010, 124 Stat. 1616.

or rules effectuating the association’s obligation to enforce the securities laws pursuant to section 19(b)(7);

(B) the association shall file pursuant to sections 19(b)(1) and 19(b)(2) proposed rule changes related to mar-gin, except for changes resulting in higher margin levels; and

(C) the association shall file pursuant to section 19(b)(1) proposed rule changes that have been abrogated by the Commission pursuant to section 19(b)(7)(C). (4) OTHER EXEMPTIONS.—Such a securities association

shall be exempt from and shall not be required to enforce com-pliance by its members, and its members shall not, solely with respect to their transactions effected in security futures prod-ucts, be required to comply, with the following provisions of this title and the rules thereunder:

(A) Section 8. (B) Subsections (b)(1), (b)(3), (b)(4), (b)(5), (b)(8),

(b)(10), (b)(11), (b)(12), (b)(13), (c), (d), (e), (f ), (g), (h), and (i) of this section.

(C) Subsections (d), (f), and (k) [83] of section 17. (D) Subsections (a), (f), and (h) of section 19.

(l) Consistent with this title, each national securities associa-tion registered pursuant to subsection (a) of this section shall issue such rules as are necessary to avoid duplicative or conflicting rules applicable to any broker or dealer registered with the Commission pursuant to section 15(b) (except paragraph (11) thereof ), that is also registered with the Commodity Futures Trading Commission pursuant to section 4f(a) of the Commodity Exchange Act (except paragraph (2) thereof ), with respect to the application of—

(1) rules of such national securities association of the type specified in section 15(c)(3)(B) involving security futures prod-ucts; and

(2) similar rules of national securities associations reg-istered pursuant to subsection (k) of this section and national securities exchanges registered pursuant to section 6(g) involv-ing security futures products. (m) PROCEDURES AND RULES FOR SECURITY FUTURE PROD-

UCTS.—A national securities association registered pursuant to sub-section (a) shall, not later than 8 months after the date of the en-actment of the Commodity Futures Modernization Act of 2000, im-plement the procedures specified in section 6(h)(5)(A) of this title and adopt the rules specified in subparagraphs (B) and (C) of sec-tion 6(h)(5) of this title.

(June 6, 1934, ch. 404, title I, Sec. 15A, as added June 25, 1938, ch. 677, Sec. 1, 52 Stat. 1070; amended Pub. L. 88-467, Sec. 7, Aug. 20, 1964, 78 Stat. 574; Pub. L. 94-29, Sec. 12, June 4, 1975, 89 Stat. 127; Pub. L. 99-571, title I, Sec. 102(g), Oct. 28, 1986, 100 Stat. 3218; Pub. L. 101-429, title V, Sec. 509, Oct. 15, 1990, 104 Stat. 957; Pub. L. 103-202, title I, Sec. 106(b)(1), title III, Sec. 303(a), (c), Dec. 17, 1993, 107 Stat. 2350, 2364, 2366; Pub. L. 106-


84Margin so in law.

102, title II, Sec. 203, Nov. 12, 1999, 113 Stat. 1391; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 203(c), 206(j), (k)(1)), Dec. 21, 2000, 114 Stat. 2763, 2763A-422, 2763A-433; Pub. L. 109-290, Secs. 5, 6, Sept. 29, 2006, 120 Stat. 1319, 1320; Pub. L. 111-203, title IX, Sec. 975(f), July 21, 2010, 124 Stat. 1923.)

MUNICIPAL SECURITIES

SEC. 15B. (a)(1)(A) It shall be unlawful for any municipal secu-rities dealer (other than one registered as a broker or dealer under section 15 of this title) to make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any mu-nicipal security unless such municipal securities dealer is reg-istered in accordance with this subsection.

(B) [84] It shall be unlawful for a municipal advisor to provide advice to or on behalf of a municipal entity or obli-gated person with respect to municipal financial products or the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, un-less the municipal advisor is registered in accordance with this subsection.

(2) A municipal securities dealer or municipal advisor may be registered by filing with the Commission an application for reg-istration in such form and containing such information and docu-ments concerning such municipal securities dealer or municipal ad-visor and any person associated with such municipal securities dealer or municipal advisor as the Commission, by rule, may pre-scribe as necessary or appropriate in the public interest or for the protection of investors. Within forty-five days of the date of the fil-ing of such application (or within such longer period as to which the applicant consents), the Commission shall—


should be denied. Such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing and shall be concluded within one hundred twenty days of the date of the filing of the application for registration. At the conclusion of such proceedings the Commission, by order, shall grant or deny such registration. The Commission may extend the time for the conclusion of such proceedings for up to ninety days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the applicant consents.

The Commission shall grant the registration of a municipal securi-ties dealer or municipal advisor if the Commission finds that the requirements of this section are satisfied. The Commission shall deny such registration if it does not make such a finding or if it finds that if the applicant were so registered, its registration would be subject to suspension or revocation under subsection (c) of this section.


85Margin so in law. 86So in original.

(3) Any provision of this title (other than section 5 or para-graph (1) of this subsection) which prohibits any act, practice, or course of business if the mails or any means or instrumentality of interstate commerce is used in connection therewith shall also pro-hibit any such act, practice, or course of business by any registered municipal securities dealer or municipal advisor or any person act-ing on behalf of such municipal securities dealer or municipal advi-sor, irrespective of any use of the mails or any means or instru-mentality of interstate commerce in connection therewith.

(4) The Commission, by rule or order, upon its own motion or upon application, may conditionally or unconditionally exempt any broker, dealer, municipal securities dealer, or municipal advisor, or class of brokers, dealers, municipal securities dealers, or municipal advisors from any provision of this section or the rules or regula-tions thereunder, if the Commission finds that such exemption is consistent with the public interest, the protection of investors, and the purposes of this section.

(5) [85] No municipal advisor shall make use of the mails or any means or instrumentality of interstate commerce to pro-vide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products, the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, in connection with which such municipal advisor engages in any fraudulent, de-ceptive, or manipulative act or practice. (b)(1) The Municipal Securities Rulemaking Board shall be

composed of 15 members, or such other number of members as specified by rules of the Board pursuant to paragraph (2)(B),, [86] which shall perform the duties set forth in this section. The mem-bers of the Board shall serve as members for a term of 3 years or for such other terms as specified by rules of the Board pursuant to paragraph (2)(B), and shall consist of (A) 8 individuals who are independent of any municipal securities broker, municipal securi-ties dealer, or municipal advisor, at least 1 of whom shall be rep-resentative of institutional or retail investors in municipal securi-ties, at least 1 of whom shall be representative of municipal enti-ties, and at least 1 of whom shall be a member of the public with knowledge of or experience in the municipal industry (which mem-bers are hereinafter referred to as ‘‘public representatives’’); and (B) 7 individuals who are associated with a broker, dealer, munic-ipal securities dealer, or municipal advisor, including at least 1 in-dividual who is associated with and representative of brokers, deal-ers, or municipal securities dealers that are not banks or subsidi-aries or departments or divisions of banks (which members are hereinafter referred to as ‘‘broker-dealer representatives’’), at least 1 individual who is associated with and representative of municipal securities dealers which are banks or subsidiaries or departments or divisions of banks (which members are hereinafter referred to as ‘‘bank representatives’’), and at least 1 individual who is associated with a municipal advisor (which members are hereinafter referred to as ‘‘advisor representatives’’ and, together with the broker-dealer


representatives and the bank representatives, are referred to as ‘‘regulated representatives’’). Each member of the board shall be knowledgeable of matters related to the municipal securities mar-kets. Prior to the expiration of the terms of office of the members of the Board, an election shall be held under rules adopted by the Board (pursuant to subsection (b)(2)(B) of this section) of the mem-bers to succeed such initial members.

(2) The Board shall propose and adopt rules to effect the pur-poses of this title with respect to transactions in municipal securi-ties effected by brokers, dealers, and municipal securities dealers and advice provided to or on behalf of municipal entities or obli-gated persons by brokers, dealers, municipal securities dealers, and municipal advisors with respect to municipal financial products, the issuance of municipal securities, and solicitations of municipal entities or obligated persons undertaken by brokers, dealers, mu-nicipal securities dealers, and municipal advisors. The rules of the Board, as a minimum, shall:

(A) provide that no municipal securities broker or munic-ipal securities dealer shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal se-curity, and no broker, dealer, municipal securities dealer, or municipal advisor shall provide advice to or on behalf of a mu-nicipal entity or obligated person with respect to municipal fi-nancial products or the issuance of municipal securities, unless such municipal securities broker or municipal securities dealer meets such standards of operational capability and such mu-nicipal securities broker or municipal securities dealer and every natural person associated with such municipal securities broker or municipal securities dealer meets such standards of training, experience, competence, and such other qualifications as the Board finds necessary or appropriate in the public inter-est or for the protection of investors and municipal entities or obligated persons. In connection with the definition and appli-cation of such standards the Board may—

(i) appropriately classify municipal securities brokers, municipal securities dealers, and municipal advisors (tak-ing into account relevant matters, including types of busi-ness done, nature of securities other than municipal secu-rities sold, and character of business organization), and persons associated with municipal securities brokers, mu-nicipal securities dealers, and municipal advisors;

(ii) specify that all or any portion of such standards shall be applicable to any such class; and

(iii) require persons in any such class to pass tests ad-ministered in accordance with subsection (c)(7) of this sec-tion. (B) establish fair procedures for the nomination and elec-

tion of members of the Board and assure fair representation in such nominations and elections of public representatives, broker dealer representatives, bank representatives, and advi-sor representatives. Such rules—

(i) shall provide that the number of public representa-tives of the Board shall at all times exceed the total num-ber of regulated representatives and that the membership


shall at all times be as evenly divided in number as pos-sible between public representatives and regulated rep-resentatives;

(ii) shall specify the length or lengths of terms mem-bers shall serve;

(iii) may increase the number of members which shall constitute the whole Board, provided that such number is an odd number; and

(iv) shall establish requirements regarding the inde-pendence of public representatives. (C) be designed to prevent fraudulent and manipulative

acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons en-gaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal secu-rities and municipal financial products, to remove impediments to and perfect the mechanism of a free and open market in mu-nicipal securities and municipal financial products, and, in general, to protect investors, municipal entities, obligated per-sons, and the public interest; and not be designed to permit unfair discrimination among customers, municipal entities, ob-ligated persons, municipal securities brokers, municipal securi-ties dealers, or municipal advisors, to fix minimum profits, to impose any schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by municipal securities brokers, municipal securities dealers, or municipal advisors, to regulate by virtue of any authority conferred by this title mat-ters not related to the purpose of this title or the administra-tion of the Board, or to impose any burden on competition not necessary or appropriate in furtherance of the purposes of this title.

(D) if the Board deems appropriate, provide for the arbitra-tion of claims, disputes, and controversies relating to trans-actions in municipal securities and advice concerning munic-ipal financial products: Provided, however, that no person other than a municipal securities broker, municipal securities dealer, municipal advisor, or person associated with such a municipal securities broker, municipal securities dealer, or mu-nicipal advisor may be compelled to submit to such arbitration except at his instance and in accordance with section 29 of this title.

(E) provide for the periodic examination in accordance with subsection (c)(7) of this section of municipal securities brokers, municipal securities dealers, and municipal advisors to deter-mine compliance with applicable provisions of this title, the rules and regulations thereunder, and the rules of the Board. Such rules shall specify the minimum scope and frequency of such examinations and shall be designed to avoid unnecessary regulatory duplication or undue regulatory burdens for any such municipal securities broker, municipal securities dealer, or municipal advisor.

(F) include provisions governing the form and content of quotations relating to municipal securities which may be dis-tributed or published by any municipal securities broker, mu-


87Margin so in law.

nicipal securities dealer, or person associated with such a mu-nicipal securities broker or municipal securities dealer, and the persons to whom such quotations may be supplied. Such rules relating to quotations shall be designed to produce fair and in-formative quotations, to prevent fictitious or misleading quotations, and to promote orderly procedures for collecting, distributing, and publishing quotations.

(G) prescribe records to be made and kept by municipal se-curities brokers, municipal securities dealers, and municipal advisors and the periods for which such records shall be pre-served.

(H) define the term ‘‘separately identifiable department or division’’, as that term is used in section 3(a)(30) of this title, in accordance with specified and appropriate standards to as-sure that a bank is not deemed to be engaged in the business of buying and selling municipal securities through a separately identifiable department or division unless such department or division is organized and administered so as to permit inde-pendent examination and enforcement of applicable provisions of this title, the rules and regulations thereunder, and the rules of the Board. A separately identifiable department or di-vision of a bank may be engaged in activities other than those relating to municipal securities.

(I) provide for the operation and administration of the Board, including the selection of a Chairman from among the members of the Board, the compensation of the members of the Board, and the appointment and compensation of such employ-ees, attorneys, and consultants as may be necessary or appro-priate to carry out the Board’s functions under this section.

(J) provide that each municipal securities broker, munic-ipal securities dealer, and municipal advisor shall pay to the Board such reasonable fees and charges as may be necessary or appropriate to defray the costs and expenses of operating and administering the Board. Such rules shall specify the amount of such fees and charges, which may include charges for failure to submit to the Board, or to any information system operated by the Board, within the prescribed timeframes, any items of information or documents required to be submitted under any rule issued by the Board.

(K) establish the terms and conditions under which any broker, dealer, or municipal securities dealer may sell, or pro-hibit any broker, dealer, or municipal securities dealer from selling, any part of a new issue of municipal securities to a re-lated account of a broker, dealer, or municipal securities dealer during the underwriting period.

(L) [87] with respect to municipal advisors—(i) prescribe means reasonably designed to prevent

acts, practices, and courses of business as are not con-sistent with a municipal advisor’s fiduciary duty to its clients;

(ii) provide continuing education requirements for municipal advisors;


88Margin so in law. 89Margin so in law. 90Margin so in law.

(iii) provide professional standards; and (iv) not impose a regulatory burden on small mu-

nicipal advisors that is not necessary or appropriate in the public interest and for the protection of investors, municipal entities, and obligated persons, provided that there is robust protection of investors against fraud.

(3) [88] The Board, in conjunction with or on behalf of any Federal financial regulator or self-regulatory organization, may—

(A) establish information systems; and (B) assess such reasonable fees and charges for the

submission of information to, or the receipt of information from, such systems from any persons which systems may be developed for the purposes of serving as a repository of information from municipal market participants or other-wise in furtherance of the purposes of the Board, a Federal financial regulator, or a self-regulatory organization, ex-cept that the Board—

(i) may not charge a fee to municipal entities or obligated persons to submit documents or other infor-mation to the Board or charge a fee to any person to obtain, directly from the Internet site of the Board, documents or information submitted by municipal en-tities, obligated persons, brokers, dealers, municipal securities dealers, or municipal advisors, including documents submitted under the rules of the Board or the Commission; and

(ii) shall not be prohibited from charging commer-cially reasonable fees for automated subscription- based feeds or similar services, or for charging for other data or document-based services customized upon request of any person, made available to com-mercial enterprises, municipal securities market pro-fessionals, or the general public, whether delivered through the Internet or any other means, that contain all or part of the documents or information, subject to approval of the fees by the Commission under section 19(b).

(4) [89] The Board may provide guidance and assistance in the enforcement of, and examination for, compliance with the rules of the Board to the Commission, a registered securities association under section 15A, or any other appropriate regu-latory agency, as applicable.

(5) [90] The Board, the Commission, and a registered securi-ties association under section 15A, or the designees of the Board, the Commission, or such association, shall meet not less frequently than 2 times a year—

(A) to describe the work of the Board, the Commission, and the registered securities association involving the reg-ulation of municipal securities; and


91So in original. Probably should be ‘‘(6)’’. 92So in original. Reference to (H) probably should follow reference to (G). 93So in original. ‘‘Person’’ probably should be plural.

(B) to share information about—(i) the interpretation of the Board, the Commis-

sion, and the registered securities association of Board rules; and

(ii) examination and enforcement of compliance with Board rules.

(7) [91] Nothing in this section shall be construed to impair or limit the power of the Commission under this title.

(c)(1) No broker, dealer, or municipal securities dealer shall make use of the mails or any means or instrumentality of inter-state commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security, and no broker, dealer, municipal securities dealer, or municipal advisor shall make use of the mails or any means or instrumentality of interstate commerce to provide advice to or on behalf of a munic-ipal entity or obligated person with respect to municipal financial products, the issuance of municipal securities, or to undertake a so-licitation of a municipal entity or obligated person, in contravention of any rule of the Board. A municipal advisor and any person asso-ciated with such municipal advisor shall be deemed to have a fidu-ciary duty to any municipal entity for whom such municipal advi-sor acts as a municipal advisor, and no municipal advisor may en-gage in any act, practice, or course of business which is not con-sistent with a municipal advisor’s fiduciary duty or that is in con-travention of any rule of the Board.

(2) The Commission, by order, shall censure, place limitations on the activities, functions, or operations, suspend for a period not exceeding twelve months, or revoke the registration of any munic-ipal securities dealer or municipal advisor, if it finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, denial, suspension, or revocation, is in the public in-terest and that such municipal securities dealer or municipal advi-sor has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), (E), (H) [92], or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) within ten years of the commencement of the proceedings under this paragraph, or is enjoined from any action, conduct, or practice specified in subparagraph (C) or such paragraph (4).

(3) Pending final determination whether any registration under this section shall be revoked, the Commission, by order, may suspend such registration, if such suspension appears to the Com-mission, after notice and opportunity for hearing, to be necessary or appropriate in the public interest or for the protection of inves-tors or municipal entities or obligated person. [93] Any registered municipal securities dealer or municipal advisor may, upon such terms and conditions as the Commission may deem necessary in the public interest or for the protection of investors or municipal entities or obligated person, withdraw from registration by filing a written notice of withdrawal with the Commission. If the Commis-sion finds that any registered municipal securities dealer or munic-


ipal advisor is no longer in existence or has ceased to do business as a municipal securities dealer or municipal advisor, the Commis-sion, by order, shall cancel the registration of such municipal secu-rities dealer or municipal advisor.

(4) The Commission, by order, shall censure or place limita-tions on the activities or functions of any person associated, seek-ing to become associated, or, at the time of the alleged misconduct, associated or seeking to become associated with a municipal securi-ties dealer, or suspend for a period not exceeding 12 months or bar any such person from being associated with a broker, dealer, in-vestment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organiza-tion, if the Commission finds, on the record after notice and oppor-tunity for hearing, that such censure, placing of limitations, sus-pension, or bar is in the public interest and that such person has committed any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) within 10 years of the com-mencement of the proceedings under this paragraph, or is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4). It shall be unlawful for any person as to whom an order entered pursuant to this paragraph or paragraph (5) of this subsection suspending or barring him from being associ-ated with a municipal securities dealer is in effect willfully to be-come, or to be, associated with a municipal securities dealer with-out the consent of the Commission, and it shall be unlawful for any municipal securities dealer to permit such a person to become, or remain, a person associated with him without the consent of the Commission, if such municipal securities dealer knew, or, in the ex-ercise of reasonable care should have known, of such order.

(5) With respect to any municipal securities dealer for which the Commission is not the appropriate regulatory agency, the ap-propriate regulatory agency for such municipal securities dealer may sanction any such municipal securities dealer in the manner and for the reasons specified in paragraph (2) of this subsection and any person associated with such municipal securities dealer in the manner and for the reasons specified in paragraph (4) of this subsection. In addition, such appropriate regulatory agency may, in accordance with section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), enforce compliance by such municipal securities deal-er or any person associated with such municipal securities dealer with the provisions of this section, section 17 of this title, the rules of the Board, and the rules of the Commission pertaining to munic-ipal securities dealers, persons associated with municipal securities dealers, and transactions in municipal securities. For purposes of the preceding sentence, any violation of any such provision shall constitute adequate basis for the issuance of any order under sec-tion 8(b) or 8(c) of the Federal Deposit Insurance Act, and the cus-tomers of any such municipal securities dealer shall be deemed to be ‘‘depositors’’ as that term is used in section 8(c) of that Act. Nothing in this paragraph shall be construed to affect in any way the powers of such appropriate regulatory agency to proceed


against such municipal securities dealer under any other provision of law.

(6)(A) The Commission, prior to the entry of an order of inves-tigation, or commencement of any proceedings, against any munic-ipal securities dealer, or person associated with any municipal se-curities dealer, for which the Commission is not the appropriate regulatory agency, for violation of any provision of this section, sec-tion 15(c)(1) or 15(c)(2) of this title, any rule or regulation under any such section or any rule of the Board, shall (i) give notice to the appropriate regulatory agency for such municipal securities dealer of the identity of such municipal securities dealer or person associated with such municipal securities dealer, the nature of and basis for such proposed action, and whether the Commission is seeking a monetary penalty against such municipal securities deal-er or such associated person pursuant to section 21B of this title; and (ii) consult with such appropriate regulatory agency concerning the effect of such proposed action on sound banking practices and the feasibility and desirability of coordinating such action with any proceeding or proposed proceeding by such appropriate regulatory agency against such municipal securities dealer or associated per-son.

(B) The appropriate regulatory agency for a municipal securi-ties dealer (if other than the Commission), prior to the entry of an order of investigation, or commencement of any proceedings, against such municipal securities dealer or person associated with such municipal securities dealer, for violation of any provision of this section, the rules of the Board, or the rules or regulations of the Commission pertaining to municipal securities dealers, persons associated with municipal securities dealers, or transactions in mu-nicipal securities shall (i) give notice to the Commission of the identity of such municipal securities dealer or person associated with such municipal securities dealer and the nature of and basis for such proposed action and (ii) consult with the Commission con-cerning the effect of such proposed action on the protection of in-vestors or municipal entities or obligated person and the feasibility and desirability of coordinating such action with any proceeding or proposed proceeding by the Commission against such municipal se-curities dealer or associated person.

(C) Nothing in this paragraph shall be construed to impair or limit (other than by the requirement of prior consultation) the power of the Commission or the appropriate regulatory agency for a municipal securities dealer to initiate any action of a class de-scribed in this paragraph or to affect in any way the power of the Commission or such appropriate regulatory agency to initiate any other action pursuant to this title or any other provision of law.

(7)(A) Tests required pursuant to subsection (b)(2)(A)(iii) of this section shall be administered by or on behalf of and periodic exami-nations pursuant to subsection (b)(2)(E) of this section shall be con-ducted by—

(i) a registered securities association, in the case of munic-ipal securities brokers and municipal securities dealers who are members of such association;

(ii) the appropriate regulatory agency for any municipal se-curities broker or municipal securities dealer, in the case of all


94Margin so in law. 95Margin so in law. 96So in original. Probably should be ‘‘15A(b)(7)’’.

other municipal securities brokers and municipal securities dealers; and

(iii) [94] the Commission, or its designee, in the case of municipal advisors.

(B) A registered securities association shall make a report of any examination conducted pursuant to subsection (b)(2)(E) of this section and promptly furnish the Commission a copy thereof and any data supplied to it in connection with such examination. Sub-ject to such limitations as the Commission, by rule, determines to be necessary or appropriate in the public interest or for the protec-tion of investors or municipal entities or obligated person, the Com-mission shall, on request, make available to the Board a copy of any report of an examination of a municipal securities broker or municipal securities dealer made by or furnished to the Commis-sion pursuant to this paragraph or section 17(c)(3) of this title.

(8) The Commission is authorized, by order, if in its opinion such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise, in furtherance of the pur-poses of this title, to remove from office or censure any person who is, or at the time of the alleged violation or abuse was, a member or employee of the Board, who, the Commission finds, on the record after notice and opportunity for hearing, has willfully (A) violated any provision of this title, the rules and regulations thereunder, or the rules of the Board or (B) abused his authority.

(9)(A) [95] Fines collected by the Commission for violations of the rules of the Board shall be equally divided between the Commission and the Board.

(B) Fines collected by a registered securities association under section 15A(7) [96] with respect to violations of the rules of the Board shall be accounted for by such registered securi-ties association separately from other fines collected under sec-tion 15A(7) and shall be allocated between such registered se-curities association and the Board, and such allocation shall re-quire the registered securities association to pay to the Board 1⁄3 of all fines collected by the registered securities association reasonably allocable to violations of the rules of the Board, or such other portion of such fines as may be directed by the Commission upon agreement between the registered securities association and the Board. (d)(1) Neither the Commission nor the Board is authorized

under this title, by rule or regulation, to require any issuer of mu-nicipal securities, directly or indirectly through a purchaser or pro-spective purchaser of securities from the issuer, to file with the Commission or the Board prior to the sale of such securities by the issuer any application, report, or document in connection with the issuance, sale, or distribution of such securities.

(2) The Board is not authorized under this title to require any issuer of municipal securities, directly or indirectly through a mu-nicipal securities broker, municipal securities dealer, municipal ad-visor, or otherwise, to furnish to the Board or to a purchaser or a prospective purchaser of such securities any application, report,


97So in original. Subpar. (A) does not contain a cl. (iii). 98So in original. Probably should be ‘‘(as defined in section 2(a)(11) of the Securities Act of

1933 (15 U.S.C. 77b(a)(11)),’’.

document, or information with respect to such issuer: Provided, however, That the Board may require municipal securities brokers and municipal securities dealers or municipal advisors to furnish to the Board or purchasers or prospective purchasers of municipal securities applications, reports, documents, and information with respect to the issuer thereof which is generally available from a source other than such issuer. Nothing in this paragraph shall be construed to impair or limit the power of the Commission under any provision of this title.

(e) DEFINITIONS.—For purposes of this section—(1) the term ‘‘Board’’ means the Municipal Securities Rule-

making Board established under subsection (b)(1); (2) the term ‘‘guaranteed investment contract’’ includes

any investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, and also includes any agreement to supply investments on 2 or more future dates, such as a forward supply contract;

(3) the term ‘‘investment strategies’’ includes plans or pro-grams for the investment of the proceeds of municipal securi-ties that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of munic-ipal escrow investments;

(4) the term ‘‘municipal advisor’’—(A) means a person (who is not a municipal entity or

an employee of a municipal entity) that—(i) provides advice to or on behalf of a municipal

entity or obligated person with respect to municipal fi-nancial products or the issuance of municipal securi-ties, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or

(ii) undertakes a solicitation of a municipal entity; (B) includes financial advisors, guaranteed investment

contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors, if such persons are described in any of clauses (i) through (iii) [97] of subpara-graph (A); and

(C) does not include a broker, dealer, or municipal se-curities dealer serving as an underwriter (as defined in section 2(a)(11) of the Securities Act of 1933) (15 U.S.C. 77b(a)(11)), [98] any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing invest-ment advice, any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing ad-vice related to swaps, attorneys offering legal advice or providing services that are of a traditional legal nature, or engineers providing engineering advice;


(5) the term ‘‘municipal financial product’’ means munic-ipal derivatives, guaranteed investment contracts, and invest-ment strategies;

(6) the term ‘‘rules of the Board’’ means the rules proposed and adopted by the Board under subsection (b)(2);

(7) the term ‘‘person associated with a municipal advisor’’ or ‘‘associated person of an advisor’’ means—

(A) any partner, officer, director, or branch manager of such municipal advisor (or any person occupying a similar status or performing similar functions);

(B) any other employee of such municipal advisor who is engaged in the management, direction, supervision, or performance of any activities relating to the provision of advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities; and

(C) any person directly or indirectly controlling, con-trolled by, or under common control with such municipal advisor; (8) the term ‘‘municipal entity’’ means any State, political

subdivision of a State, or municipal corporate instrumentality of a State, including—

(A) any agency, authority, or instrumentality of the State, political subdivision, or municipal corporate instru-mentality;

(B) any plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or in-strumentality thereof; and

(C) any other issuer of municipal securities; (9) the term ‘‘solicitation of a municipal entity or obligated

person’’ means a direct or indirect communication with a mu-nicipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, munic-ipal securities dealer, municipal advisor, or investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person of a broker, dealer, munic-ipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity; and

(10) the term ‘‘obligated person’’ means any person, includ-ing an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person, com-mitted by contract or other arrangement to support the pay-ment of all or part of the obligations on the municipal securi-ties to be sold in an offering of municipal securities.

(June 6, 1934, ch. 404, title I, Sec. 15B, as added June 4, 1975, Pub. L. 94-29, Sec. 13, 89 Stat. 131; amended June 6, 1983, Pub. L. 98-38, Sec. 4, 97 Stat. 207; Dec. 4, 1987, Pub. L. 100-181, title


III, Secs. 318-320, 101 Stat. 1256, 1257; Oct. 15, 1990, Pub. L. 101-429, title II, Sec. 205, 104 Stat. 941; Nov. 15, 1990, Pub. L. 101-550, title II, Sec. 203(c)(1), 104 Stat. 2718; Nov. 3, 1998, Pub. L. 105-353, title III, Sec. 301(b)(9), 112 Stat. 3236; Pub. L. 107-204, title VI, Sec. 604(c)(1)(B), July 30, 2002, 116 Stat. 796; Pub. L. 111-203, title IX, Secs. 925(a)(2), 929F(a), 975(a)-(e), July 21, 2010, 124 Stat. 1850, 1853, 1915-1921.)

GOVERNMENT SECURITIES BROKERS AND DEALERS

SEC. 15C. (a)(1)(A) It shall be unlawful for any government se-curities broker or government securities dealer (other than a reg-istered broker or dealer or a financial institution) to make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any government security unless such govern-ment securities broker or government securities dealer is registered in accordance with paragraph (2) of this subsection.

(B)(i) It shall be unlawful for any government securities broker or government securities dealer that is a registered broker or deal-er or a financial institution to make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any government security unless such government securities broker or government securities dealer has filed with the appropriate regu-latory agency written notice that it is a government securities broker or government securities dealer. When such a government securities broker or government securities dealer ceases to act as such it shall file with the appropriate regulatory agency a written notice that it is no longer acting as a government securities broker or government securities dealer.

(ii) Such notices shall be in such form and contain such infor-mation concerning a government securities broker or government securities dealer that is a financial institution and any persons as-sociated with such government securities broker or government se-curities dealer as the Board of Governors of the Federal Reserve System shall, by rule, after consultation with each appropriate reg-ulatory agency (including the Commission), prescribe as necessary or appropriate in the public interest or for the protection of inves-tors. Such notices shall be in such form and contain such informa-tion concerning a government securities broker or government se-curities dealer that is a registered broker or dealer and any per-sons associated with such government securities broker or govern-ment securities dealer as the Commission shall, by rule, prescribe as necessary or appropriate in the public interest or for the protec-tion of investors.

(iii) Each appropriate regulatory agency (other than the Com-mission) shall make available to the Commission the notices which have been filed with it under this subparagraph, and the Commis-sion shall maintain and make available to the public such notices and the notices it receives under this subparagraph.

(2) A government securities broker or a government securities dealer subject to the registration requirement of paragraph (1)(A) of this subsection may be registered by filing with the Commission


an application for registration in such form and containing such in-formation and documents concerning such government securities broker or government securities dealer and any persons associated with such government securities broker or government securities dealer as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. Within 45 days of the date of filing of such application (or within such longer period as to which the applicant consents), the Com-mission shall—


should be denied. Such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing and shall be concluded within 120 days of the date of the filing of the application for registration. At the conclusion of such proceedings, the Commission, by order, shall grant or deny such registration. The Commission may extend the time for the conclusion of such proceedings for up to 90 days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the appli-cant consents.

The Commission shall grant the registration of a government secu-rities broker or a government securities dealer if the Commission finds that the requirements of this section are satisfied. The order granting registration shall not be effective until such government securities broker or government securities dealer has become a member of a national securities exchange registered under section 6 of this title, or a securities association registered under section 15A of this title, unless the Commission has exempted such govern-ment securities broker or government securities dealer, by rule or order, from such membership. The Commission shall deny such registration if it does not make such a finding or if it finds that if the applicant were so registered, its registration would be subject to suspension or revocation under subsection (c) of this section.

(3) Any provision of this title (other than section 5 or para-graph (1) of this subsection) which prohibits any act, practice, or course of business if the mails or any means or instrumentality of interstate commerce is used in connection therewith shall also pro-hibit any such act, practice, or course of business by any govern-ment securities broker or government securities dealer registered or having filed notice under paragraph (1) of this subsection or any person acting on behalf of such government securities broker or government securities dealer, irrespective of any use of the mails or any means or instrumentality of interstate commerce in connec-tion therewith.

(4) No government securities broker or government securities dealer that is required to register under paragraph (1)(A) and that is not a member of the Securities Investor Protection Corporation shall effect any transaction in any security in contravention of such rules as the Commission shall prescribe pursuant to this subsection to assure that its customers receive complete, accurate, and timely disclosure of the inapplicability of Securities Investor Protection Corporation coverage to their accounts.


(5) The Secretary of the Treasury (hereinafter in this section referred to as the ‘‘Secretary’’), by rule or order, upon the Sec-retary’s own motion or upon application, may conditionally or un-conditionally exempt any government securities broker or govern-ment securities dealer, or class of government securities brokers or government securities dealers, from any provision of subsection (a), (b), or (d) of this section, other than subsection (d)(3), or the rules thereunder, if the Secretary finds that such exemption is consistent with the public interest, the protection of investors, and the pur-poses of this title.

(b)(1) The Secretary shall propose and adopt rules to effect the purposes of this title with respect to transactions in government se-curities effected by government securities brokers and government securities dealers as follows:

(A) Such rules shall provide safeguards with respect to the financial responsibility and related practices of government se-curities brokers and government securities dealers including, but not limited to, capital adequacy standards, the acceptance of custody and use of customers’ securities, the carrying and use of customers’ deposits or credit balances, and the transfer and control of government securities subject to repurchase agreements and in similar transactions.

(B) Such rules shall require every government securities broker and government securities dealer to make reports to and furnish copies of records to the appropriate regulatory agency, and to file with the appropriate regulatory agency, an-nually or more frequently, a balance sheet and income state-ment certified by an independent public accountant, prepared on a calendar or fiscal year basis, and such other financial statements (which shall, as the Secretary specifies, be certified) and information concerning its financial condition as required by such rules.

(C) Such rules shall require records to be made and kept by government securities brokers and government securities dealers and shall specify the periods for which such records shall be preserved. (2) RISK ASSESSMENT FOR HOLDING COMPANY SYSTEMS.—

(A) OBLIGATIONS TO OBTAIN, MAINTAIN, AND REPORT INFOR-MATION.— Every person who is registered as a government se-curities broker or government securities dealer under this sec-tion shall obtain such information and make and keep such records as the Secretary by rule prescribes concerning the reg-istered person’s policies, procedures, or systems for monitoring and controlling financial and operational risks to it resulting from the activities of any of its associated persons, other than a natural person. Such records shall describe, in the aggregate, each of the financial and securities activities conducted by, and customary sources of capital and funding of, those of its associ-ated persons whose business activities are reasonably likely to have a material impact on the financial or operational condi-tion of such registered person, including its capital, its liquid-ity, or its ability to conduct or finance its operations. The Sec-retary, by rule, may require summary reports of such informa-


tion to be filed with the registered person’s appropriate regu-latory agency no more frequently than quarterly.

(B) AUTHORITY TO REQUIRE ADDITIONAL INFORMATION.—If, as a result of adverse market conditions or based on reports provided pursuant to subparagraph (A) of this paragraph or other available information, the appropriate regulatory agency reasonably concludes that it has concerns regarding the finan-cial or operational condition of any government securities broker or government securities dealer registered under this section, such agency may require the registered person to make reports concerning the financial and securities activities of any of such person’s associated persons, other than a natural person, whose business activities are reasonably likely to have a material impact on the financial or operational condition of such registered person. The appropriate regulatory agency, in requiring reports pursuant to this subparagraph, shall specify the information required, the period for which it is required, the time and date on which the information must be furnished, and whether the information is to be furnished directly to the appropriate regulatory agency or to a self-regulatory organiza-tion with primary responsibility for examining the registered person’s financial and operational condition.

(C) SPECIAL PROVISIONS WITH RESPECT TO ASSOCIATED PER-SONS SUBJECT TO FEDERAL BANKING AGENCY REGULATION.—

(i) COOPERATION IN IMPLEMENTATION.—In developing and implementing reporting requirements pursuant to subparagraph (A) of this paragraph with respect to associ-ated persons subject to examination by or reporting re-quirements of a Federal banking agency, the Secretary shall consult with and consider the views of each such Federal banking agency. If a Federal banking agency com-ments in writing on a proposed rule of the Secretary under this paragraph that has been published for comment, the Secretary shall respond in writing to such written com-ment before adopting the proposed rule. The Secretary shall, at the request of a Federal banking agency, publish such comment and response in the Federal Register at the time of publishing the adopted rule.

(ii) USE OF BANKING AGENCY REPORTS.—A registered government securities broker or government securities dealer shall be in compliance with any recordkeeping or re-porting requirement adopted pursuant to subparagraph (A) of this paragraph concerning an associated person that is subject to examination by or reporting requirements of a Federal banking agency if such government securities broker or government securities dealer utilizes for such recordkeeping or reporting requirement copies of reports filed by the associated person with the Federal banking agency pursuant to section 5211 of the Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b) of the Home Owners’ Loan Act, or section 8 of the Bank Holding Com-pany Act of 1956. The Secretary may, however, by rule adopted pursuant to subparagraph (A), require any reg-


istered government securities broker or government securi-ties dealer filing such reports with the appropriate regu-latory agency to obtain, maintain, or report supplemental information if the Secretary makes an explicit finding, based on information provided by the appropriate regu-latory agency, that such supplemental information is nec-essary to inform the appropriate regulatory agency regard-ing potential risks to such government securities broker or government securities dealer. Prior to requiring any such supplemental information, the Secretary shall first request the Federal banking agency to expand its reporting re-quirements to include such information.

(iii) PROCEDURE FOR REQUIRING ADDITIONAL INFORMA-TION.—Prior to making a request pursuant to subpara-graph (B) of this paragraph for information with respect to an associated person that is subject to examination by or reporting requirements of a Federal banking agency, the appropriate regulatory agency shall—

(I) notify such banking agency of the information required with respect to such associated person; and

(II) consult with such agency to determine wheth-er the information required is available from such agency and for other purposes, unless the appropriate regulatory agency determines that any delay resulting from such consultation would be inconsistent with en-suring the financial and operational condition of the government securities broker or government securities dealer or the stability or integrity of the securities markets. (iv) EXCLUSION FOR EXAMINATION REPORTS.—Nothing

in this subparagraph shall be construed to permit the Sec-retary or an appropriate regulatory agency to require any registered government securities broker or government se-curities dealer to obtain, maintain, or furnish any exam-ination report of any Federal banking agency or any super-visory recommendations or analysis contained therein.

(v) CONFIDENTIALITY OF INFORMATION PROVIDED.—No information provided to or obtained by an appropriate reg-ulatory agency from any Federal banking agency pursuant to a request under clause (iii) of this subparagraph regard-ing any associated person which is subject to examination by or reporting requirements of a Federal banking agency may be disclosed to any other person (other than a self-regulatory organization), without the prior written ap-proval of the Federal banking agency. Nothing in this clause shall authorize the Secretary or any appropriate regulatory agency to withhold information from Congress, or prevent the Secretary or any appropriate regulatory agency from complying with a request for information from any other Federal department or agency requesting the in-formation for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commis-sion.


(vi) NOTICE TO BANKING AGENCIES CONCERNING FINAN-CIAL AND OPERATIONAL CONDITION CONCERNS.—The Sec-retary or appropriate regulatory agency shall notify the Federal banking agency of any concerns of the Secretary or the appropriate regulatory agency regarding significant fi-nancial or operational risks resulting from the activities of any government securities broker or government securities dealer to any associated person thereof which is subject to examination by or reporting requirements of the Federal banking agency.

(vii) DEFINITION.—For purposes of this subparagraph, the term ‘‘Federal banking agency’’ shall have the same meaning as the term ‘‘appropriate Federal banking agen-cy’’ in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)). (D) EXEMPTIONS.—The Secretary by rule or order may ex-

empt any person or class of persons, under such terms and conditions and for such periods as the Secretary shall provide in such rule or order, from the provisions of this paragraph, and the rules thereunder. In granting such exemptions, the Secretary shall consider, among other factors—

(i) whether information of the type required under this paragraph is available from a supervisory agency (as de-fined in section 1101(6) of the Right to Financial Privacy Act of 1978 (12 U.S.C. 3401(6))), a State insurance com-mission or similar State agency, the Commodity Futures Trading Commission, or a similar foreign regulator;

(ii) the primary business of any associated person; (iii) the nature and extent of domestic or foreign regu-

lation of the associated person’s activities; (iv) the nature and extent of the registered person’s

securities transactions; and (v) with respect to the registered person and its associ-

ated persons, on a consolidated basis, the amount and pro-portion of assets devoted to, and revenues derived from, activities in the United States securities markets. (E) CONFORMITY WITH REQUIREMENTS UNDER SECTION

17(H).—In exercising authority pursuant to subparagraph (A) of this paragraph concerning information with respect to associ-ated persons of government securities brokers and government securities dealers who are also associated persons of registered brokers or dealers reporting to the Commission pursuant to section 17(h) of this title, the requirements relating to such as-sociated persons shall conform, to the greatest extent prac-ticable, to the requirements under section 17(h).

(F) AUTHORITY TO LIMIT DISCLOSURE OF INFORMATION.— Notwithstanding any other provision of law, the Secretary and any appropriate regulatory agency shall not be compelled to disclose any information required to be reported under this paragraph, or any information supplied to the Secretary or any appropriate regulatory agency by any domestic or foreign regu-latory agency that relates to the financial or operational condi-tion of any associated person of a registered government secu-rities broker or a government securities dealer. Nothing in this


paragraph shall authorize the Secretary or any appropriate regulatory agency to withhold information from Congress, or prevent the Secretary or any appropriate regulatory agency from complying with a request for information from any other Federal department or agency requesting the information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of sec-tion 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552. (3)(A) With respect to any financial institution that has filed

notice as a government securities broker or government securities dealer or that is required to file notice under subsection (a)(1)(B), the appropriate regulatory agency for such government securities broker or government securities dealer may issue such rules and regulations with respect to transactions in government securities as may be necessary to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade. If the Secretary of the Treasury determines, and notifies the appro-priate regulatory agency, that such rule or regulation, if imple-mented, would, or as applied does (i) adversely affect the liquidity or efficiency of the market for government securities; or (ii) impose any burden on competition not necessary or appropriate in further-ance of the purposes of this section, the appropriate regulatory agency shall, prior to adopting the proposed rule or regulation, find that such rule or regulation is necessary and appropriate in fur-therance of the purposes of this section notwithstanding the Sec-retary’s determination.

(B) The appropriate regulatory agency shall consult with and consider the views of the Secretary prior to approving or amending a rule or regulation under this paragraph, except where the appro-priate regulatory agency determines that an emergency exists re-quiring expeditious and summary action and publishes its reasons therefor. If the Secretary comments in writing to the appropriate regulatory agency on a proposed rule or regulation that has been published for comment, the appropriate regulatory agency shall re-spond in writing to such written comment before approving the proposed rule or regulation.

(C) In promulgating rules under this section, the appropriate regulatory agency shall consider the sufficiency and appropriate-ness of then existing laws and rules applicable to government secu-rities brokers, government securities dealers, and persons associ-ated with government securities brokers and government securities dealers.

(4) Rules promulgated and orders issued under this section shall—

(A) be designed to prevent fraudulent and manipulative acts and practices and to protect the integrity, liquidity, and efficiency of the market for government securities, investors, and the public interest; and

(B) not be designed to permit unfair discrimination be-tween customers, issuers, government securities brokers, or government securities dealers, or to impose any burden on


competition not necessary or appropriate in furtherance of the purposes of this title. (5) In promulgating rules and issuing orders under this sec-

tion, the Secretary—(A) may appropriately classify government securities bro-

kers and government securities dealers (taking into account relevant matters, including types of business done, nature of securities other than government securities purchased or sold, and character of business organization) and persons associated with government securities brokers and government securities dealers;

(B) may determine, to the extent consistent with para-graph (2) of this subsection and with the public interest, the protection of investors, and the purposes of this title, not to apply, in whole or in part, certain rules under this section, or to apply greater, lesser, or different standards, to certain class-es of government securities brokers, government securities dealers, or persons associated with government securities bro-kers or government securities dealers;

(C) shall consider the sufficiency and appropriateness of then existing laws and rules applicable to government securi-ties brokers, government securities dealers, and persons associ-ated with government securities brokers and government secu-rities dealers; and

(D) shall consult with and consider the views of the Com-mission and the Board of Governors of the Federal Reserve System, except where the Secretary determines that an emer-gency exists requiring expeditious or summary action and pub-lishes its reasons for such determination. (6) If the Commission or the Board of Governors of the Federal

Reserve System comments in writing on a proposed rule of the Sec-retary that has been published for comment, the Secretary shall re-spond in writing to such written comment before approving the proposed rule.

(7) No government securities broker or government securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any government security in contravention of any rule under this section.

(c)(1) With respect to any government securities broker or gov-ernment securities dealer registered or required to register under subsection (a)(1)(A) of this section—

(A) The Commission, by order, shall censure, place limita-tions on the activities, functions, or operations of, suspend for a period not exceeding 12 months, or revoke the registration of such government securities broker or government securities dealer, if it finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or revocation is in the public interest and that such govern-ment securities broker or government securities dealer, or any person associated with such government securities broker or government securities dealer (whether prior or subsequent to becoming so associated), has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph


(A), (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subpara-graph (B) of such paragraph (4) within 10 years of the com-mencement of the proceedings under this paragraph, or is en-joined from any action, conduct, or practice specified in sub-paragraph (C) of such paragraph (4).

(B) Pending final determination whether registration of any government securities broker or government securities dealer shall be revoked, the Commission, by order, may sus-pend such registration, if such suspension appears to the Com-mission, after notice and opportunity for hearing, to be nec-essary or appropriate in the public interest or for the protec-tion of investors. Any registered government securities broker or registered government securities dealer may, upon such terms and conditions as the Commission may deem necessary in the public interest or for the protection of investors, with-draw from registration by filing a written notice of withdrawal with the Commission. If the Commission finds that any reg-istered government securities broker or registered government securities dealer is no longer in existence or has ceased to do business as a government securities broker or government se-curities dealer, the Commission, by order, shall cancel the reg-istration of such government securities broker or government securities dealer.

(C) The Commission, by order, shall censure or place limi-tations on the activities or functions of any person who is, or at the time of the alleged misconduct was, associated or seek-ing to become associated with a government securities broker or government securities dealer registered or required to reg-ister under subsection (a)(1)(A) of this section or suspend for a period not exceeding 12 months or bar any such person from being associated with such a government securities broker or government securities dealer, if the Commission finds, on the record after notice and opportunity for hearing, that such cen-sure, placing of limitations, suspension, or bar is in the public interest and that such person has committed or omitted any act, or is subject to an order or finding, enumerated in sub-paragraph (A), (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) within 10 years of the commencement of the proceedings under this paragraph, or is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4). (2)(A) With respect to any government securities broker or gov-

ernment securities dealer which is not registered or required to register under subsection (a)(1)(A) of this section, the appropriate regulatory agency for such government securities broker or govern-ment securities dealer may, in the manner and for the reasons specified in paragraph (1)(A) of this subsection, censure, place limi-tations on the activities, functions, or operations of, suspend for a period not exceeding 12 months, or bar from acting as a govern-ment securities broker or government securities dealer any such government securities broker or government securities dealer, and may sanction any person associated, seeking to become associated,


or, at the time of the alleged misconduct, associated or seeking to become associated with such government securities broker or gov-ernment securities dealer in the manner and for the reasons speci-fied in paragraph (1)(C) of this subsection.

(B) In addition, where applicable, such appropriate regulatory agency may, in accordance with section 8 of the Federal Deposit In-surance Act (12 U.S.C. 1818), section 5 of the Home Owners’ Loan Act of 1933 (12 U.S.C. 1464), or section 407 of the National Hous-ing Act (12 U.S.C. 1730), enforce compliance by such government securities broker or government securities dealer or any person as-sociated, seeking to become associated, or, at the time of the al-leged misconduct, associated or seeking to become associated with such government securities broker or government securities dealer with the provisions of this section and the rules thereunder.

(C) For purposes of subparagraph (B) of this paragraph, any violation of any such provision shall constitute adequate basis for the issuance of any order under section 8(b) or 8(c) of the Federal Deposit Insurance Act, section 5(d)(2) or 5(d)(3) of the Home Own-ers’ Loan Act of 1933, or section 407(e) or 407(f) of the National Housing Act, and the customers of any such government securities broker or government securities dealer shall be deemed, respec-tively, ‘‘depositors’’ as that term is used in section 8(c) of the Fed-eral Deposit Insurance Act, ‘‘savings account holders’’ as that term is used in section 5(d)(3) of the Home Owners’ Loan Act of 1933, or ‘‘insured members’’ as that term is used in section 407(f) of the National Housing Act.

(D) Nothing in this paragraph shall be construed to affect in any way the powers of such appropriate regulatory agency to pro-ceed against such government securities broker or government se-curities dealer under any other provision of law.

(E) Each appropriate regulatory agency (other than the Com-mission) shall promptly notify the Commission after it has imposed any sanction under this paragraph on a government securities broker or government securities dealer, or a person associated with a government securities broker or government securities dealer, and the Commission shall maintain, and make available to the public, a record of such sanctions and any sanctions imposed by it under this subsection.

(3) It shall be unlawful for any person as to whom an order en-tered pursuant to paragraph (1) or (2) of this subsection sus-pending or barring him from being associated with a government securities broker or government securities dealer is in effect will-fully to become, or to be, associated with a government securities broker or government securities dealer without the consent of the appropriate regulatory agency, and it shall be unlawful for any gov-ernment securities broker or government securities dealer to per-mit such a person to become, or remain, a person associated with it without the consent of the appropriate regulatory agency, if such government securities broker or government securities dealer knew, or, in the exercise of reasonable care should have known, of such order.

(d)(1) All records of a government securities broker or govern-ment securities dealer are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by


representatives of the appropriate regulatory agency for such gov-ernment securities broker or government securities dealer as such appropriate regulatory agency deems necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title.

(2) Information received by an appropriate regulatory agency, the Secretary, or the Commission from or with respect to any gov-ernment securities broker, government securities dealer, any per-son associated with a government securities broker or government securities dealer, or any other person subject to this section or rules promulgated thereunder, may be made available by the Sec-retary or the recipient agency to the Commission, the Secretary, the Department of Justice, the Commodity Futures Trading Com-mission, any appropriate regulatory agency, any self-regulatory or-ganization, or any Federal Reserve Bank.

(3) GOVERNMENT SECURITIES TRADE RECONSTRUCTION.—(A) FURNISHING RECORDS.—Every government securities

broker and government securities dealer shall furnish to the Commission on request such records of government securities transactions, including records of the date and time of execu-tion of trades, as the Commission may require to reconstruct trading in the course of a particular inquiry or investigation being conducted by the Commission for enforcement or surveil-lance purposes. In requiring information pursuant to this para-graph, the Commission shall specify the information required, the period for which it is required, the time and date on which the information must be furnished, and whether the informa-tion is to be furnished directly to the Commission, to the Fed-eral Reserve Bank of New York, or to an appropriate regu-latory agency or self-regulatory organization with responsi-bility for examining the government securities broker or gov-ernment securities dealer. The Commission may require that such information be furnished in machine readable form not-withstanding any limitation in subparagraph (B). In utilizing its authority to require information in machine readable form, the Commission shall minimize the burden such requirement may place on small government securities brokers and dealers.

(B) LIMITATION; CONSTRUCTION.—The Commission shall not utilize its authority under this paragraph to develop reg-ular reporting requirements, except that the Commission may require information to be furnished under this paragraph as frequently as necessary for particular inquiries or investiga-tions for enforcement or surveillance purposes. This paragraph shall not be construed as requiring, or as authorizing the Com-mission to require, any government securities broker or gov-ernment securities dealer to obtain or maintain any informa-tion for purposes of this paragraph which is not otherwise maintained by such broker or dealer in accordance with any other provision of law or usual and customary business prac-tice. The Commission shall, where feasible, avoid requiring any information to be furnished under this paragraph that the Commission may obtain from the Federal Reserve Bank of New York.


(C) PROCEDURES FOR REQUIRING INFORMATION.—At the time the Commission requests any information pursuant to subparagraph (A) with respect to any government securities broker or government securities dealer for which the Commis-sion is not the appropriate regulatory agency, the Commission shall notify the appropriate regulatory agency for such govern-ment securities broker or government securities dealer and, upon request, furnish to the appropriate regulatory agency any information supplied to the Commission.

(D) CONSULTATION.—Within 90 days after the date of en-actment of this paragraph, and annually thereafter, or upon the request of any other appropriate regulatory agency, the Commission shall consult with the other appropriate regu-latory agencies to determine the availability of records that may be required to be furnished under this paragraph and, for those records available directly from the other appropriate reg-ulatory agencies, to develop a procedure for furnishing such records expeditiously upon the Commission’s request.

(E) EXCLUSION FOR EXAMINATION REPORTS.—Nothing in this paragraph shall be construed so as to permit the Commis-sion to require any government securities broker or govern-ment securities dealer to obtain, maintain, or furnish any ex-amination report of any appropriate regulatory agency other than the Commission or any supervisory recommendations or analysis contained in any such examination report.

(F) AUTHORITY TO LIMIT DISCLOSURE OF INFORMATION.— Notwithstanding any other provision of law, the Commission and the appropriate regulatory agencies shall not be compelled to disclose any information required or obtained under this paragraph. Nothing in this paragraph shall authorize the Com-mission or any appropriate regulatory agency to withhold infor-mation from Congress, or prevent the Commission or any ap-propriate regulatory agency from complying with a request for information from any other Federal department or agency re-questing information for purposes within the scope of its juris-diction, or from complying with an order of a court of the United States in an action brought by the United States, the Commission, or the appropriate regulatory agency. For pur-poses of section 552 of title 5, United States Code, this sub-paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552. (e)(1) It shall be unlawful for any government securities broker

or government securities dealer registered or required to register with the Commission under subsection (a)(1)(A) to effect any trans-action in, or induce or attempt to induce the purchase or sale of, any government security, unless such government securities broker or government securities dealer is a member of a national securi-ties exchange registered under section 6 of this title or a securities association registered under section 15A of this title.

(2) The Commission, after consultation with the Secretary, by rule or order, as it deems consistent with the public interest and the protection of investors, may conditionally or unconditionally ex-empt from paragraph (1) of this subsection any government securi-ties broker or government securities dealer or class of government


securities brokers or government securities dealers specified in such rule or order.

(f) LARGE POSITION REPORTING.—(1) REPORTING REQUIREMENTS.—The Secretary may adopt

rules to require specified persons holding, maintaining, or con-trolling large positions in to-be-issued or recently issued Treas-ury securities to file such reports regarding such positions as the Secretary determines to be necessary and appropriate for the purpose of monitoring the impact in the Treasury securi-ties market of concentrations of positions in Treasury securi-ties and for the purpose of otherwise assisting the Commission in the enforcement of this title, taking into account any impact of such rules on the efficiency and liquidity of the Treasury se-curities market and the cost to taxpayers of funding the Fed-eral debt. Unless otherwise specified by the Secretary, reports required under this subsection shall be filed with the Federal Reserve Bank of New York, acting as agent for the Secretary. Such reports shall, on a timely basis, be provided directly to the Commission by the person with whom they are filed.

(2) RECORDKEEPING REQUIREMENTS.—Rules under this sub-section may require persons holding, maintaining, or control-ling large positions in Treasury securities to make and keep for prescribed periods such records as the Secretary determines are necessary or appropriate to ensure that such persons can comply with reporting requirements under this subsection.

(3) AGGREGATION RULES.—Rules under this subsection—(A) may prescribe the manner in which positions and

accounts shall be aggregated for the purpose of this subsection, including aggregation on the basis of common ownership or control; and

(B) may define which persons (individually or as a group) hold, maintain, or control large positions. (4) DEFINITIONAL AUTHORITY; DETERMINATION OF REPORT-

ING THRESHOLD.—(A) In prescribing rules under this subsection, the Sec-

retary may, consistent with the purpose of this subsection, define terms used in this subsection that are not otherwise defined in section 3 of this title.

(B) Rules under this subsection shall specify—(i) the minimum size of positions subject to report-

ing under this subsection, which shall be no less than the size that provides the potential for manipulation or control of the supply or price, or the cost of financ-ing arrangements, of an issue or the portion thereof that is available for trading;

(ii) the types of positions (which may include fi-nancing arrangements) to be reported;

(iii) the securities to be covered; and (iv) the form and manner in which reports shall

be transmitted, which may include transmission in machine readable form.

(5) EXEMPTIONS.—Consistent with the public interest and the protection of investors, the Secretary by rule or order may exempt in whole or in part, conditionally or unconditionally,


99So in law. Probably should be followed by a comma.

any person or class of persons, or any transaction or class of transactions, from the requirements of this subsection.

(6) LIMITATION ON DISCLOSURE OF INFORMATION.—Notwith-standing any other provision of law, the Secretary and the Commission shall not be compelled to disclose any information required to be kept or reported under this subsection. Nothing in this subsection shall authorize the Secretary or the Commis-sion to withhold information from Congress, or prevent the Secretary or the Commission from complying with a request for information from any other Federal department or agency re-questing information for purposes within the scope of its juris-diction, or from complying with an order of a court of the United States in an action brought by the United States, the Secretary, or the Commission. For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552. (g)(1) Nothing in this section except paragraph (2) of this sub-

section shall be construed to impair or limit the authority under any other provision of law of the Commission, the Secretary of the Treasury, the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Secretary of Housing and Urban Development, and the Government National Mortgage Association.

(2) Notwithstanding any other provision of this title, the Com-mission shall not have any authority to make investigations of, re-quire the filing of a statement by, or take any other action under this title against a government securities broker or government se-curities dealer, or any person associated with a government securi-ties broker or government securities dealer, for any violation or threatened violation of the provisions of this section, other than subsection (d)(3) [99] or the rules or regulations thereunder, unless the Commission is the appropriate regulatory agency for such gov-ernment securities broker or government securities dealer. Nothing in the preceding sentence shall be construed to limit the authority of the Commission with respect to violations or threatened viola-tions of any provision of this title other than this section (except subsection (d)(3)), the rules or regulations under any such other provision, or investigations pursuant to section 21(a)(2) of this title to assist a foreign securities authority.

(h) EMERGENCY AUTHORITY.—The Secretary may, by order, take any action with respect to a matter or action subject to regula-tion by the Secretary under this section, or the rules of the Sec-retary under this section, involving a government security or a market therein (or significant portion or segment of that market), that the Commission may take under section 12(k)(2) with respect to transactions in securities (other than exempted securities) or a market therein (or significant portion or segment of that market).

(June 6, 1934, ch. 404, title I, Sec. 15C, as added Oct. 28, 1986, Pub. L. 99-571, title I, Sec. 101, 100 Stat. 3208; amended Dec. 4, 1987, Pub. L. 100-181, title VIII, Sec. 801(a), 101 Stat. 1265; Aug. 9, 1989, Pub. L. 101-73, title VII, Sec. 744(u)(3), 103 Stat. 441; Oct.


16, 1990, Pub. L. 101-432, Sec. 4(b), 104 Stat. 970; Nov. 15, 1990, Pub. L. 101-550, title II, Sec. 203(c), 104 Stat. 2718; Dec. 17, 1993, Pub. L. 103-202, title I, Sec. 102-104, 106(a), 108, 109(b)(1), (c), 107 Stat. 2345, 2346, 2349, 2351-2353; Nov. 3, 1998, Pub. L. 105-353, title III, Sec. 301(b)(10), 112 Stat. 3236; Pub. L. 107-204, title VI, Sec. 604(c)(1)(B), July 30, 2002, 116 Stat. 796; Pub. L. 108-458, title VII, Sec. 7803(d), Dec. 17, 2004, 118 Stat. 3863; Pub. L. 111-203, title III, Sec. 376(3), title IX, Secs. 929F(b), 985(b)(6), July 21, 2010, 124 Stat. 1569, 1854, 1934.)

SEC. 15D. SECURITIES ANALYSTS AND RESEARCH REPORTS.

(a) ANALYST PROTECTIONS.—The Commission, or upon the au-thorization and direction of the Commission, a registered securities association or national securities exchange, shall have adopted, not later than 1 year after the date of enactment of this section, rules reasonably designed to address conflicts of interest that can arise when securities analysts recommend equity securities in research reports and public appearances, in order to improve the objectivity of research and provide investors with more useful and reliable in-formation, including rules designed—

(1) to foster greater public confidence in securities research, and to protect the objectivity and independence of secu-rities analysts, by—

(A) restricting the prepublication clearance or approval of research reports by persons employed by the broker or dealer who are engaged in investment banking activities, or persons not directly responsible for investment research, other than legal or compliance staff;

(B) limiting the supervision and compensatory evalua-tion of securities analysts to officials employed by the broker or dealer who are not engaged in investment bank-ing activities; and

(C) requiring that a broker or dealer and persons em-ployed by a broker or dealer who are involved with invest-ment banking activities may not, directly or indirectly, re-taliate against or threaten to retaliate against any securi-ties analyst employed by that broker or dealer or its affili-ates as a result of an adverse, negative, or otherwise unfa-vorable research report that may adversely affect the present or prospective investment banking relationship of the broker or dealer with the issuer that is the subject of the research report, except that such rules may not limit the authority of a broker or dealer to discipline a securities analyst for causes other than such research report in ac-cordance with the policies and procedures of the firm; (2) to define periods during which brokers or dealers who

have participated, or are to participate, in a public offering of securities as underwriters or dealers should not publish or oth-erwise distribute research reports relating to such securities or to the issuer of such securities;

(3) to establish structural and institutional safeguards within registered brokers or dealers to assure that securities analysts are separated by appropriate informational partitions


within the firm from the review, pressure, or oversight of those whose involvement in investment banking activities might po-tentially bias their judgment or supervision; and

(4) to address such other issues as the Commission, or such association or exchange, determines appropriate. (b) DISCLOSURE.—The Commission, or upon the authorization

and direction of the Commission, a registered securities association or national securities exchange, shall have adopted, not later than 1 year after the date of enactment of this section, rules reasonably designed to require each securities analyst to disclose in public ap-pearances, and each registered broker or dealer to disclose in each research report, as applicable, conflicts of interest that are known or should have been known by the securities analyst or the broker or dealer, to exist at the time of the appearance or the date of dis-tribution of the report, including—

(1) the extent to which the securities analyst has debt or equity investments in the issuer that is the subject of the ap-pearance or research report;

(2) whether any compensation has been received by the registered broker or dealer, or any affiliate thereof, including the securities analyst, from the issuer that is the subject of the appearance or research report, subject to such exemptions as the Commission may determine appropriate and necessary to prevent disclosure by virtue of this paragraph of material non-public information regarding specific potential future invest-ment banking transactions of such issuer, as is appropriate in the public interest and consistent with the protection of inves-tors;

(3) whether an issuer, the securities of which are rec-ommended in the appearance or research report, currently is, or during the 1-year period preceding the date of the appear-ance or date of distribution of the report has been, a client of the registered broker or dealer, and if so, stating the types of services provided to the issuer;

(4) whether the securities analyst received compensation with respect to a research report, based upon (among any other factors) the investment banking revenues (either generally or specifically earned from the issuer being analyzed) of the reg-istered broker or dealer; and

(5) such other disclosures of conflicts of interest that are material to investors, research analysts, or the broker or dealer as the Commission, or such association or exchange, deter-mines appropriate. (c) LIMITATION.—Notwithstanding subsection (a) or any other

provision of law, neither the Commission nor any national securi-ties association registered under section 15A may adopt or main-tain any rule or regulation in connection with an initial public of-fering of the common equity of an emerging growth company—

(1) restricting, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between a securi-ties analyst and a potential investor; or

(2) restricting a securities analyst from participating in any communications with the management of an emerging


growth company that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as a securities analyst. (d) DEFINITIONS.—In this section—

(1) the term ‘‘securities analyst’’ means any associated per-son of a registered broker or dealer that is principally respon-sible for, and any associated person who reports directly or in-directly to a securities analyst in connection with, the prepara-tion of the substance of a research report, whether or not any such person has the job title of ‘‘securities analyst’’; and

(2) the term ‘‘research report’’ means a written or elec-tronic communication that includes an analysis of equity secu-rities of individual companies or industries, and that provides information reasonably sufficient upon which to base an invest-ment decision.

(June 6, 1934, ch. 404, title I, Sec. 15D, as added Pub. L. 107-204, title V, Sec. 501(a), July 30, 2002, 116 Stat. 791; amended Pub. L. 112-106, title I, Sec. 105(b), Apr. 5, 2012, 126 Stat. 311.)

SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATIS-TICAL RATING ORGANIZATIONS.

(a) REGISTRATION PROCEDURES.—(1) APPLICATION FOR REGISTRATION.—

(A) IN GENERAL.—A credit rating agency that elects to be treated as a nationally recognized statistical rating or-ganization for purposes of this title (in this section referred to as the ‘‘applicant’’), shall furnish to the Commission an application for registration, in such form as the Commis-sion shall require, by rule or regulation issued in accord-ance with subsection (n), and containing the information described in subparagraph (B).

(B) REQUIRED INFORMATION.—An application for reg-istration under this section shall contain information re-garding—

(i) credit ratings performance measurement statis-tics over short-term, mid-term, and long-term periods (as applicable) of the applicant;

(ii) the procedures and methodologies that the ap-plicant uses in determining credit ratings;

(iii) policies or procedures adopted and imple-mented by the applicant to prevent the misuse, in vio-lation of this title (or the rules and regulations here-under), of material, nonpublic information;

(iv) the organizational structure of the applicant; (v) whether or not the applicant has in effect a

code of ethics, and if not, the reasons therefor; (vi) any conflict of interest relating to the issuance

of credit ratings by the applicant; (vii) the categories described in any of clauses (i)

through (v) of section 3(a)(62)(B) with respect to which the applicant intends to apply for registration under this section;


(viii) on a confidential basis, a list of the 20 larg-est issuers and subscribers that use the credit rating services of the applicant, by amount of net revenues received therefrom in the fiscal year immediately pre-ceding the date of submission of the application;

(ix) on a confidential basis, as to each applicable category of obligor described in any of clauses (i) through (v) of section 3(a)(62)(B), written certifications described in subparagraph (C), except as provided in subparagraph (D); and

(x) any other information and documents con-cerning the applicant and any person associated with such applicant as the Commission, by rule, may pre-scribe as necessary or appropriate in the public inter-est or for the protection of investors. (C) WRITTEN CERTIFICATIONS.—Written certifications

required by subparagraph (B)(ix)—(i) shall be provided from not fewer than 10 quali-

fied institutional buyers, none of which is affiliated with the applicant;

(ii) may address more than one category of obli-gors described in any of clauses (i) through (v) of sec-tion 3(a)(62)(B);

(iii) shall include not fewer than 2 certifications for each such category of obligor; and

(iv) shall state that the qualified institutional buyer—

(I) meets the definition of a qualified institu-tional buyer under section 3(a)(64); and

(II) has used the credit ratings of the appli-cant for at least the 3 years immediately pre-ceding the date of the certification in the subject category or categories of obligors.

(D) EXEMPTION FROM CERTIFICATION REQUIREMENT.—A written certification under subparagraph (B)(ix) is not re-quired with respect to any credit rating agency which has received, or been the subject of, a no-action letter from the staff of the Commission prior to August 2, 2006, stating that such staff would not recommend enforcement action against any broker or dealer that considers credit ratings issued by such credit rating agency to be ratings from a nationally recognized statistical rating organization.

(E) LIMITATION ON LIABILITY OF QUALIFIED INSTITU-TIONAL BUYERS.—No qualified institutional buyer shall be liable in any private right of action for any opinion or statement expressed in a certification made pursuant to subparagraph (B)(ix). (2) REVIEW OF APPLICATION.—

(A) INITIAL DETERMINATION.—Not later than 90 days after the date on which the application for registration is furnished to the Commission under paragraph (1) (or with-in such longer period as to which the applicant consents) the Commission shall—


(i) by order, grant such registration for ratings in the subject category or categories of obligors, as de-scribed in clauses (i) through (v) of section 3(a)(62)(B); or

(ii) institute proceedings to determine whether registration should be denied. (B) CONDUCT OF PROCEEDINGS.—

(i) CONTENT.—Proceedings referred to in subpara-graph (A)(ii) shall—

(I) include notice of the grounds for denial under consideration and an opportunity for hear-ing; and

(II) be concluded not later than 120 days after the date on which the application for registration is furnished to the Commission under paragraph (1). (ii) DETERMINATION.—At the conclusion of such

proceedings, the Commission, by order, shall grant or deny such application for registration.

(iii) EXTENSION AUTHORIZED.—The Commission may extend the time for conclusion of such pro-ceedings for not longer than 90 days, if it finds good cause for such extension and publishes its reasons for so finding, or for such longer period as to which the applicant consents. (C) GROUNDS FOR DECISION.—The Commission shall

grant registration under this subsection—(i) if the Commission finds that the requirements

of this section are satisfied; and (ii) unless the Commission finds (in which case

the Commission shall deny such registration) that—(I) the applicant does not have adequate fi-

nancial and managerial resources to consistently produce credit ratings with integrity and to mate-rially comply with the procedures and methodolo-gies disclosed under paragraph (1)(B) and with subsections (g), (h), (i), and (j); or

(II) if the applicant were so registered, its reg-istration would be subject to suspension or revoca-tion under subsection (d).

(3) PUBLIC AVAILABILITY OF INFORMATION.—Subject to sec-tion 24, the Commission shall, by rule, require a nationally rec-ognized statistical rating organization, upon the granting of registration under this section, to make the information and documents submitted to the Commission in its completed ap-plication for registration, or in any amendment submitted under paragraph (1) or (2) of subsection (b), publicly available on its website, or through another comparable, readily acces-sible means, except as provided in clauses (viii) and (ix) of paragraph (1)(B). (b) UPDATE OF REGISTRATION.—

(1) UPDATE.—Each nationally recognized statistical rating organization shall promptly amend its application for registra-tion under this section if any information or document pro-


vided therein becomes materially inaccurate, except that a na-tionally recognized statistical rating organization is not re-quired to amend—

(A) the information required to be filed under sub-section (a)(1)(B)(i) by filing information under this para-graph, but shall amend such information in the annual submission of the organization under paragraph (2) of this subsection; or

(B) the certifications required to be provided under subsection (a)(1)(B)(ix) by filing information under this paragraph. (2) CERTIFICATION.—Not later than 90 days after the end

of each calendar year, each nationally recognized statistical rating organization shall file with the Commission an amend-ment to its registration, in such form as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors—

(A) certifying that the information and documents in the application for registration of such nationally recog-nized statistical rating organization (other than the certifi-cations required under subsection (a)(1)(B)(ix)) continue to be accurate; and

(B) listing any material change that occurred to such information or documents during the previous calendar year.

(c) ACCOUNTABILITY FOR RATINGS PROCEDURES.—(1) AUTHORITY.—The Commission shall have exclusive au-

thority to enforce the provisions of this section in accordance with this title with respect to any nationally recognized statis-tical rating organization, if such nationally recognized statis-tical rating organization issues credit ratings in material con-travention of those procedures relating to such nationally rec-ognized statistical rating organization, including procedures re-lating to the prevention of misuse of nonpublic information and conflicts of interest, that such nationally recognized statistical rating organization—

(A) includes in its application for registration under subsection (a)(1)(B)(ii); or

(B) makes and disseminates in reports pursuant to section 17(a) or the rules and regulations thereunder. (2) LIMITATION.—The rules and regulations that the Com-

mission may prescribe pursuant to this title, as they apply to nationally recognized statistical rating organizations, shall be narrowly tailored to meet the requirements of this title appli-cable to nationally recognized statistical rating organizations. Notwithstanding any other provision of this section, or any other provision of law, neither the Commission nor any State (or political subdivision thereof) may regulate the substance of credit ratings or the procedures and methodologies by which any nationally recognized statistical rating organization deter-mines credit ratings. Nothing in this paragraph may be con-strued to afford a defense against any action or proceeding brought by the Commission to enforce the antifraud provisions of the securities laws.


(3) INTERNAL CONTROLS OVER PROCESSES FOR DETERMINING CREDIT RATINGS.—

(A) IN GENERAL.—Each nationally recognized statis-tical rating organization shall establish, maintain, enforce, and document an effective internal control structure gov-erning the implementation of and adherence to policies, procedures, and methodologies for determining credit rat-ings, taking into consideration such factors as the Commis-sion may prescribe, by rule.

(B) ATTESTATION REQUIREMENT.—The Commission shall prescribe rules requiring each nationally recognized statistical rating organization to submit to the Commission an annual internal controls report, which shall contain—

(i) a description of the responsibility of the man-agement of the nationally recognized statistical rating organization in establishing and maintaining an effec-tive internal control structure under subparagraph (A);

(ii) an assessment of the effectiveness of the inter-nal control structure of the nationally recognized sta-tistical rating organization; and

(iii) the attestation of the chief executive officer, or equivalent individual, of the nationally recognized sta-tistical rating organization.

(d) CENSURE, DENIAL, OR SUSPENSION OF REGISTRATION; NO-TICE AND HEARING.—

(1) IN GENERAL.—The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding 12 months, or revoke the registration of any nationally recognized statistical rating orga-nization, or with respect to any person who is associated with, who is seeking to become associated with, or, at the time of the alleged misconduct, who was associated or was seeking to be-come associated with a nationally recognized statistical rating organization, the Commission, by order, shall censure, place limitations on the activities or functions of such person, sus-pend for a period not exceeding 1 year, or bar such person from being associated with a nationally recognized statistical rating organization, if the Commission finds, on the record after no-tice and opportunity for hearing, that such censure, placing of limitations, suspension, bar or revocation is necessary for the protection of investors and in the public interest and that such nationally recognized statistical rating organization, or any person associated with such an organization, whether prior to or subsequent to becoming so associated—

(A) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), (E), (H), or (G) of section 15(b)(4), has been convicted of any offense specified in section 15(b)(4)(B), or is enjoined from any action, conduct, or practice specified in subpara-graph (C) of section 15(b)(4), during the 10-year period pre-ceding the date of commencement of the proceedings under this subsection, or at any time thereafter;


100So in original. Probably should be followed by ‘‘or’’.

(B) has been convicted during the 10-year period pre-ceding the date on which an application for registration is filed with the Commission under this section, or at any time thereafter, of—

(i) any crime that is punishable by imprisonment for 1 or more years, and that is not described in sec-tion 15(b)(4)(B); or

(ii) a substantially equivalent crime by a foreign court of competent jurisdiction; (C) is subject to any order of the Commission barring

or suspending the right of the person to be associated with a nationally recognized statistical rating organization;

(D) fails to file the certifications required under sub-section (b)(2);

(E) fails to maintain adequate financial and manage-rial resources to consistently produce credit ratings with integrity; [100]

(F) has failed reasonably to supervise, with a view to preventing a violation of the securities laws, an individual who commits such a violation, if the individual is subject to the supervision of that person. (2) SUSPENSION OR REVOCATION FOR PARTICULAR CLASS OF

SECURITIES.—(A) IN GENERAL.—The Commission may temporarily

suspend or permanently revoke the registration of a na-tionally recognized statistical rating organization with re-spect to a particular class or subclass of securities, if the Commission finds, on the record after notice and oppor-tunity for hearing, that the nationally recognized statis-tical rating organization does not have adequate financial and managerial resources to consistently produce credit ratings with integrity.

(B) CONSIDERATIONS.—In making any determination under subparagraph (A), the Commission shall consider—

(i) whether the nationally recognized statistical rating organization has failed over a sustained period of time, as determined by the Commission, to produce ratings that are accurate for that class or subclass of securities; and

(ii) such other factors as the Commission may de-termine.

(e) TERMINATION OF REGISTRATION.—(1) VOLUNTARY WITHDRAWAL.—A nationally recognized sta-

tistical rating organization may, upon such terms and condi-tions as the Commission may establish as necessary in the public interest or for the protection of investors, withdraw from registration by furnishing a written notice of withdrawal to the Commission.

(2) COMMISSION AUTHORITY.—In addition to any other au-thority of the Commission under this title, if the Commission finds that a nationally recognized statistical rating organiza-tion is no longer in existence or has ceased to do business as


a credit rating agency, the Commission, by order, shall cancel the registration under this section of such nationally recog-nized statistical rating organization. (f) REPRESENTATIONS.—

(1) BAN ON REPRESENTATIONS OF SPONSORSHIP BY UNITED STATES OR AGENCY THEREOF.—It shall be unlawful for any na-tionally recognized statistical rating organization to represent or imply in any manner whatsoever that such nationally recog-nized statistical rating organization has been designated, spon-sored, recommended, or approved, or that the abilities or quali-fications thereof have in any respect been passed upon, by the United States or any agency, officer, or employee thereof.

(2) BAN ON REPRESENTATION AS NRSRO OF UNREGISTERED CREDIT RATING AGENCIES.—It shall be unlawful for any credit rating agency that is not registered under this section as a na-tionally recognized statistical rating organization to state that such credit rating agency is a nationally recognized statistical rating organization registered under this title.

(3) STATEMENT OF REGISTRATION UNDER SECURITIES EX-CHANGE ACT OF 1934 PROVISIONS.—No provision of paragraph (1) shall be construed to prohibit a statement that a nationally recognized statistical rating organization is a nationally recog-nized statistical rating organization under this title, if such statement is true in fact and if the effect of such registration is not misrepresented. (g) PREVENTION OF MISUSE OF NONPUBLIC INFORMATION.—

(1) ORGANIZATION POLICIES AND PROCEDURES.—Each na-tionally recognized statistical rating organization shall estab-lish, maintain, and enforce written policies and procedures rea-sonably designed, taking into consideration the nature of the business of such nationally recognized statistical rating organi-zation, to prevent the misuse in violation of this title, or the rules or regulations hereunder, of material, nonpublic informa-tion by such nationally recognized statistical rating organiza-tion or any person associated with such nationally recognized statistical rating organization.

(2) COMMISSION AUTHORITY.—The Commission shall issue final rules in accordance with subsection (n) to require specific policies or procedures that are reasonably designed to prevent misuse in violation of this title (or the rules or regulations hereunder) of material, nonpublic information. (h) MANAGEMENT OF CONFLICTS OF INTEREST.—

(1) ORGANIZATION POLICIES AND PROCEDURES.—Each na-tionally recognized statistical rating organization shall estab-lish, maintain, and enforce written policies and procedures rea-sonably designed, taking into consideration the nature of the business of such nationally recognized statistical rating organi-zation and affiliated persons and affiliated companies thereof, to address and manage any conflicts of interest that can arise from such business.

(2) COMMISSION AUTHORITY.—The Commission shall issue final rules in accordance with subsection (n) to prohibit, or re-quire the management and disclosure of, any conflicts of inter-est relating to the issuance of credit ratings by a nationally


recognized statistical rating organization, including, without limitation, conflicts of interest relating to—

(A) the manner in which a nationally recognized sta-tistical rating organization is compensated by the obligor, or any affiliate of the obligor, for issuing credit ratings or providing related services;

(B) the provision of consulting, advisory, or other serv-ices by a nationally recognized statistical rating organiza-tion, or any person associated with such nationally recog-nized statistical rating organization, to the obligor, or any affiliate of the obligor;

(C) business relationships, ownership interests, or any other financial or personal interests between a nationally recognized statistical rating organization, or any person associated with such nationally recognized statistical rat-ing organization, and the obligor, or any affiliate of the ob-ligor;

(D) any affiliation of a nationally recognized statistical rating organization, or any person associated with such nationally recognized statistical rating organization, with any person that underwrites the securities or money mar-ket instruments that are the subject of a credit rating; and

(E) any other potential conflict of interest, as the Com-mission deems necessary or appropriate in the public in-terest or for the protection of investors. (3) SEPARATION OF RATINGS FROM SALES AND MARKETING.—

(A) RULES REQUIRED.—The Commission shall issue rules to prevent the sales and marketing considerations of a nationally recognized statistical rating organization from influencing the production of ratings by the nationally rec-ognized statistical rating organization.

(B) CONTENTS OF RULES.—The rules issued under sub-paragraph (A) shall provide for—

(i) exceptions for small nationally recognized sta-tistical rating organizations with respect to which the Commission determines that the separation of the pro-duction of ratings and sales and marketing activities is not appropriate; and

(ii) suspension or revocation of the registration of a nationally recognized statistical rating organization, if the Commission finds, on the record, after notice and opportunity for a hearing, that—

(I) the nationally recognized statistical rating organization has committed a violation of a rule issued under this subsection; and

(II) the violation of a rule issued under this subsection affected a rating.

(4) LOOK-BACK REQUIREMENT.—(A) REVIEW BY THE NATIONALLY RECOGNIZED STATIS-

TICAL RATING ORGANIZATION.—Each nationally recognized statistical rating organization shall establish, maintain, and enforce policies and procedures reasonably designed to ensure that, in any case in which an employee of a person subject to a credit rating of the nationally recognized sta-


tistical rating organization or the issuer, underwriter, or sponsor of a security or money market instrument subject to a credit rating of the nationally recognized statistical rating organization was employed by the nationally recog-nized statistical rating organization and participated in any capacity in determining credit ratings for the person or the securities or money market instruments during the 1-year period preceding the date an action was taken with respect to the credit rating, the nationally recognized sta-tistical rating organization shall—

(i) conduct a review to determine whether any conflicts of interest of the employee influenced the credit rating; and

(ii) take action to revise the rating if appropriate, in accordance with such rules as the Commission shall prescribe. (B) REVIEW BY COMMISSION.—

(i) IN GENERAL.—The Commission shall conduct periodic reviews of the policies described in subpara-graph (A) and the implementation of the policies at each nationally recognized statistical rating organiza-tion to ensure they are reasonably designed and imple-mented to most effectively eliminate conflicts of inter-est.

(ii) TIMING OF REVIEWS.—The Commission shall review the code of ethics and conflict of interest policy of each nationally recognized statistical rating organi-zation—

(I) not less frequently than annually; and (II) whenever such policies are materially

modified or amended. (5) REPORT TO COMMISSION ON CERTAIN EMPLOYMENT TRAN-

SITIONS.—(A) REPORT REQUIRED.—Each nationally recognized

statistical rating organization shall report to the Commis-sion any case such organization knows or can reasonably be expected to know where a person associated with such organization within the previous 5 years obtains employ-ment with any obligor, issuer, underwriter, or sponsor of a security or money market instrument for which the orga-nization issued a credit rating during the 12-month period prior to such employment, if such employee—

(i) was a senior officer of such organization; (ii) participated in any capacity in determining

credit ratings for such obligor, issuer, underwriter, or sponsor; or

(iii) supervised an employee described in clause (ii). (B) PUBLIC DISCLOSURE.—Upon receiving such a re-

port, the Commission shall make such information publicly available.

(i) PROHIBITED CONDUCT.—(1) PROHIBITED ACTS AND PRACTICES.—The Commission

shall issue final rules in accordance with subsection (n) to pro-


hibit any act or practice relating to the issuance of credit rat-ings by a nationally recognized statistical rating organization that the Commission determines to be unfair, coercive, or abu-sive, including any act or practice relating to—

(A) conditioning or threatening to condition the issuance of a credit rating on the purchase by the obligor or an affiliate thereof of other services or products, includ-ing pre- credit rating assessment products, of the nation-ally recognized statistical rating organization or any per-son associated with such nationally recognized statistical rating organization;

(B) lowering or threatening to lower a credit rating on, or refusing to rate, securities or money market instru-ments issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction, unless a portion of the assets within such pool or part of such transaction, as applicable, also is rated by the nationally recognized statistical rating organization; or

(C) modifying or threatening to modify a credit rating or otherwise departing from its adopted systematic proce-dures and methodologies in determining credit ratings, based on whether the obligor, or an affiliate of the obligor, purchases or will purchase the credit rating or any other service or product of the nationally recognized statistical rating organization or any person associated with such or-ganization. (2) RULE OF CONSTRUCTION.—Nothing in paragraph (1), or

in any rules or regulations adopted thereunder, may be con-strued to modify, impair, or supersede the operation of any of the antitrust laws (as defined in the first section of the Clayton Act, except that such term includes section 5 of the Federal Trade Commission Act, to the extent that such section 5 ap-plies to unfair methods of competition). (j) DESIGNATION OF COMPLIANCE OFFICER.—

(1) IN GENERAL.—Each nationally recognized statistical rating organization shall designate an individual responsible for administering the policies and procedures that are required to be established pursuant to subsections (g) and (h), and for ensuring compliance with the securities laws and the rules and regulations thereunder, including those promulgated by the Commission pursuant to this section.

(2) LIMITATIONS.—(A) IN GENERAL.—Except as provided in subparagraph

(B), an individual designated under paragraph (1) may not, while serving in the designated capacity—

(i) perform credit ratings; (ii) participate in the development of ratings

methodologies or models; (iii) perform marketing or sales functions; or (iv) participate in establishing compensation lev-

els, other than for employees working for that indi-vidual. (B) EXCEPTION.—The Commission may exempt a small

nationally recognized statistical rating organization from


the limitations under this paragraph, if the Commission finds that compliance with such limitations would impose an unreasonable burden on the nationally recognized sta-tistical rating organization. (3) OTHER DUTIES.—Each individual designated under

paragraph (1) shall establish procedures for the receipt, reten-tion, and treatment of—

(A) complaints regarding credit ratings, models, meth-odologies, and compliance with the securities laws and the policies and procedures developed under this section; and

(B) confidential, anonymous complaints by employees or users of credit ratings. (4) COMPENSATION.—The compensation of each compliance

officer appointed under paragraph (1) shall not be linked to the financial performance of the nationally recognized statistical rating organization and shall be arranged so as to ensure the independence of the officer’s judgment.

(5) ANNUAL REPORTS REQUIRED.—(A) ANNUAL REPORTS REQUIRED.—Each individual des-

ignated under paragraph (1) shall submit to the nationally recognized statistical rating organization an annual report on the compliance of the nationally recognized statistical rating organization with the securities laws and the poli-cies and procedures of the nationally recognized statistical rating organization that includes—

(i) a description of any material changes to the code of ethics and conflict of interest policies of the na-tionally recognized statistical rating organization; and

(ii) a certification that the report is accurate and complete. (B) SUBMISSION OF REPORTS TO THE COMMISSION.—

Each nationally recognized statistical rating organization shall file the reports required under subparagraph (A) to-gether with the financial report that is required to be sub-mitted to the Commission under this section.

(k) STATEMENTS OF FINANCIAL CONDITION.—Each nationally recognized statistical rating organization shall, on a confidential basis, file with the Commission, at intervals determined by the Commission, such financial statements, certified (if required by the rules or regulations of the Commission) by an independent public accountant, and information concerning its financial condition, as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(l) SOLE METHOD OF REGISTRATION.—(1) IN GENERAL.—On and after the effective date of this

section, a credit rating agency may only be registered as a na-tionally recognized statistical rating organization for any pur-pose in accordance with this section.

(2) PROHIBITION ON RELIANCE ON NO-ACTION RELIEF.—On and after the effective date of this section—

(A) an entity that, before that date, received advice, approval, or a no-action letter from the Commission or staff thereof to be treated as a nationally recognized statis-tical rating organization pursuant to the Commission rule


at section 240.15c3-1 of title 17, Code of Federal Regula-tions, may represent itself or act as a nationally recognized statistical rating organization only—

(i) during Commission consideration of the appli-cation, if such entity has filed an application for reg-istration under this section; and

(ii) on and after the date of approval of its applica-tion for registration under this section; and (B) the advice, approval, or no-action letter described

in subparagraph (A) shall be void. (3) NOTICE TO OTHER AGENCIES.—Not later than 30 days

after the date of enactment of this section, the Commission shall give notice of the actions undertaken pursuant to this section to each Federal agency which employs in its rules and regulations the term ’nationally recognized statistical rating organization’ (as that term is used under Commission rule 15c3-1 (17 C.F.R. 240.15c3-1), as in effect on the date of enact-ment of this section). (m) ACCOUNTABILITY.—

(1) IN GENERAL.—The enforcement and penalty provisions of this title shall apply to statements made by a credit rating agency in the same manner and to the same extent as such provisions apply to statements made by a registered public ac-counting firm or a securities analyst under the securities laws, and such statements shall not be deemed forward-looking statements for the purposes of section 21E.

(2) RULEMAKING.—The Commission shall issue such rules as may be necessary to carry out this subsection. (n) REGULATIONS.—

(1) NEW PROVISIONS.—Such rules and regulations as are required by this section or are otherwise necessary to carry out this section, including the application form required under sub-section (a)—

(A) shall be issued by the Commission in final form, not later than 270 days after the date of enactment of this section; and

(B) shall become effective not later than 270 days after the date of enactment of this section. (2) REVIEW OF EXISTING REGULATIONS.—Not later than 270

days after the date of enactment of this section, the Commis-sion shall—

(A) review its existing rules and regulations which em-ploy the term ‘‘nationally recognized statistical rating orga-nization’’ or ‘‘NRSRO’’; and

(B) amend or revise such rules and regulations in ac-cordance with the purposes of this section, as the Commis-sion may prescribe as necessary or appropriate in the pub-lic interest or for the protection of investors.

(o) NRSROS SUBJECT TO COMMISSION AUTHORITY.—(1) IN GENERAL.—No provision of the laws of any State or

political subdivision thereof requiring the registration, licens-ing, or qualification as a credit rating agency or a nationally recognized statistical rating organization shall apply to any na-tionally recognized statistical rating organization or person em-


ployed by or working under the control of a nationally recog-nized statistical rating organization.

(2) LIMITATION.—Nothing in this subsection prohibits the securities commission (or any agency or office performing like functions) of any State from investigating and bringing an en-forcement action with respect to fraud or deceit against any nationally recognized statistical rating organization or person associated with a nationally recognized statistical rating orga-nization. (p) REGULATION OF NATIONALLY RECOGNIZED STATISTICAL RAT-

ING ORGANIZATIONS.—(1) ESTABLISHMENT OF OFFICE OF CREDIT RATINGS.—

(A) OFFICE ESTABLISHED.—The Commission shall es-tablish within the Commission an Office of Credit Ratings (referred to in this subsection as the ‘‘Office’’) to administer the rules of the Commission—

(i) with respect to the practices of nationally rec-ognized statistical rating organizations in determining ratings, for the protection of users of credit ratings and in the public interest;

(ii) to promote accuracy in credit ratings issued by nationally recognized statistical rating organizations; and

(iii) to ensure that such ratings are not unduly in-fluenced by conflicts of interest. (B) DIRECTOR OF THE OFFICE.—The head of the Office

shall be the Director, who shall report to the Chairman. (2) STAFFING.—The Office established under this sub-

section shall be staffed sufficiently to carry out fully the re-quirements of this section. The staff shall include persons with knowledge of and expertise in corporate, municipal, and struc-tured debt finance.

(3) COMMISSION EXAMINATIONS.—(A) ANNUAL EXAMINATIONS REQUIRED.—The Office

shall conduct an examination of each nationally recognized statistical rating organization at least annually.

(B) CONDUCT OF EXAMINATIONS.—Each examination under subparagraph (A) shall include a review of—

(i) whether the nationally recognized statistical rating organization conducts business in accordance with the policies, procedures, and rating methodologies of the nationally recognized statistical rating organiza-tion;

(ii) the management of conflicts of interest by the nationally recognized statistical rating organization;

(iii) implementation of ethics policies by the na-tionally recognized statistical rating organization;

(iv) the internal supervisory controls of the nation-ally recognized statistical rating organization;

(v) the governance of the nationally recognized statistical rating organization;

(vi) the activities of the individual designated by the nationally recognized statistical rating organiza-tion under subsection (j)(1);


(vii) the processing of complaints by the nationally recognized statistical rating organization; and

(viii) the policies of the nationally recognized sta-tistical rating organization governing the post- em-ployment activities of former staff of the nationally recognized statistical rating organization. (C) INSPECTION REPORTS.—The Commission shall

make available to the public, in an easily understandable format, an annual report summarizing—

(i) the essential findings of all examinations con-ducted under subparagraph (A), as deemed appro-priate by the Commission;

(ii) the responses by the nationally recognized sta-tistical rating organizations to any material regulatory deficiencies identified by the Commission under clause (i); and

(iii) whether the nationally recognized statistical rating organizations have appropriately addressed the recommendations of the Commission contained in pre-vious reports under this subparagraph.

(4) RULEMAKING AUTHORITY.—The Commission shall—(A) establish, by rule, fines, and other penalties appli-

cable to any nationally recognized statistical rating organi-zation that violates the requirements of this section and the rules thereunder; and

(B) issue such rules as may be necessary to carry out this section.

(q) TRANSPARENCY OF RATINGS PERFORMANCE.—(1) RULEMAKING REQUIRED.—The Commission shall, by

rule, require that each nationally recognized statistical rating organization publicly disclose information on the initial credit ratings determined by the nationally recognized statistical rat-ing organization for each type of obligor, security, and money market instrument, and any subsequent changes to such credit ratings, for the purpose of allowing users of credit ratings to evaluate the accuracy of ratings and compare the performance of ratings by different nationally recognized statistical rating organizations.

(2) CONTENT.—The rules of the Commission under this subsection shall require, at a minimum, disclosures that—

(A) are comparable among nationally recognized sta-tistical rating organizations, to allow users of credit rat-ings to compare the performance of credit ratings across nationally recognized statistical rating organizations;

(B) are clear and informative for investors having a wide range of sophistication who use or might use credit ratings;

(C) include performance information over a range of years and for a variety of types of credit ratings, including for credit ratings withdrawn by the nationally recognized statistical rating organization;

(D) are published and made freely available by the na-tionally recognized statistical rating organization, on an


easily accessible portion of its website, and in writing, when requested;

(E) are appropriate to the business model of a nation-ally recognized statistical rating organization; and

(F) each nationally recognized statistical rating organi-zation include an attestation with any credit rating it issues affirming that no part of the rating was influenced by any other business activities, that the rating was based solely on the merits of the instruments being rated, and that such rating was an independent evaluation of the risks and merits of the instrument.

(r) CREDIT RATINGS METHODOLOGIES.—The Commission shall prescribe rules, for the protection of investors and in the public in-terest, with respect to the procedures and methodologies, including qualitative and quantitative data and models, used by nationally recognized statistical rating organizations that require each nation-ally recognized statistical rating organization—

(1) to ensure that credit ratings are determined using pro-cedures and methodologies, including qualitative and quan-titative data and models, that are—

(A) approved by the board of the nationally recognized statistical rating organization, a body performing a func-tion similar to that of a board; and

(B) in accordance with the policies and procedures of the nationally recognized statistical rating organization for the development and modification of credit rating proce-dures and methodologies; (2) to ensure that when material changes to credit rating

procedures and methodologies (including changes to qualitative and quantitative data and models) are made, that—

(A) the changes are applied consistently to all credit ratings to which the changed procedures and methodolo-gies apply;

(B) to the extent that changes are made to credit rat-ing surveillance procedures and methodologies, the changes are applied to then-current credit ratings by the nationally recognized statistical rating organization within a reasonable time period determined by the Commission, by rule; and

(C) the nationally recognized statistical rating organi-zation publicly discloses the reason for the change; and (3) to notify users of credit ratings—

(A) of the version of a procedure or methodology, in-cluding the qualitative methodology or quantitative inputs, used with respect to a particular credit rating;

(B) when a material change is made to a procedure or methodology, including to a qualitative model or quan-titative inputs;

(C) when a significant error is identified in a proce-dure or methodology, including a qualitative or quan-titative model, that may result in credit rating actions; and


(D) of the likelihood of a material change described in subparagraph (B) resulting in a change in current credit ratings.

(s) TRANSPARENCY OF CREDIT RATING METHODOLOGIES AND IN-FORMATION REVIEWED.—

(1) FORM FOR DISCLOSURES.—The Commission shall re-quire, by rule, each nationally recognized statistical rating or-ganization to prescribe a form to accompany the publication of each credit rating that discloses—

(A) information relating to—(i) the assumptions underlying the credit rating

procedures and methodologies; (ii) the data that was relied on to determine the

credit rating; and (iii) if applicable, how the nationally recognized

statistical rating organization used servicer or remit-tance reports, and with what frequency, to conduct surveillance of the credit rating; and (B) information that can be used by investors and

other users of credit ratings to better understand credit ratings in each class of credit rating issued by the nation-ally recognized statistical rating organization. (2) FORMAT.—The form developed under paragraph (1)

shall—(A) be easy to use and helpful for users of credit rat-

ings to understand the information contained in the re-port;

(B) require the nationally recognized statistical rating organization to provide the content described in paragraph (3)(B) in a manner that is directly comparable across types of securities; and

(C) be made readily available to users of credit rat-ings, in electronic or paper form, as the Commission may, by rule, determine. (3) CONTENT OF FORM.—

(A) QUALITATIVE CONTENT.—Each nationally recog-nized statistical rating organization shall disclose on the form developed under paragraph (1)—

(i) the credit ratings produced by the nationally recognized statistical rating organization;

(ii) the main assumptions and principles used in constructing procedures and methodologies, including qualitative methodologies and quantitative inputs and assumptions about the correlation of defaults across underlying assets used in rating structured products;

(iii) the potential limitations of the credit ratings, and the types of risks excluded from the credit ratings that the nationally recognized statistical rating organi-zation does not comment on, including liquidity, mar-ket, and other risks;

(iv) information on the uncertainty of the credit rating, including—


(I) information on the reliability, accuracy, and quality of the data relied on in determining the credit rating; and

(II) a statement relating to the extent to which data essential to the determination of the credit rating were reliable or limited, including—

(aa) any limits on the scope of historical data; and

(bb) any limits in accessibility to certain documents or other types of information that would have better informed the credit rating;

(v) whether and to what extent third party due diligence services have been used by the nationally recognized statistical rating organization, a description of the information that such third party reviewed in conducting due diligence services, and a description of the findings or conclusions of such third party;

(vi) a description of the data about any obligor, issuer, security, or money market instrument that were relied upon for the purpose of determining the credit rating;

(vii) a statement containing an overall assessment of the quality of information available and considered in producing a rating for an obligor, security, or money market instrument, in relation to the quality of infor-mation available to the nationally recognized statis-tical rating organization in rating similar issuances;

(viii) information relating to conflicts of interest of the nationally recognized statistical rating organiza-tion; and

(ix) such additional information as the Commis-sion may require. (B) QUANTITATIVE CONTENT.—Each nationally recog-

nized statistical rating organization shall disclose on the form developed under this subsection—

(i) an explanation or measure of the potential vol-atility of the credit rating, including—

(I) any factors that might lead to a change in the credit ratings; and

(II) the magnitude of the change that a user can expect under different market conditions; (ii) information on the content of the rating, in-

cluding—(I) the historical performance of the rating;

and (II) the expected probability of default and the

expected loss in the event of default; (iii) information on the sensitivity of the rating to

assumptions made by the nationally recognized statis-tical rating organization, including—

(I) 5 assumptions made in the ratings process that, without accounting for any other factor, would have the greatest impact on a rating if the assumptions were proven false or inaccurate; and


101So in original. The word ‘‘and’’ probably should appear.

(II) an analysis, using specific examples, of how each of the 5 assumptions identified under subclause (I) impacts a rating; [101] (iv) such additional information as may be re-

quired by the Commission. (4) DUE DILIGENCE SERVICES FOR ASSET-BACKED SECURI-

TIES.—(A) FINDINGS.—The issuer or underwriter of any asset-

backed security shall make publicly available the findings and conclusions of any third-party due diligence report ob-tained by the issuer or underwriter.

(B) CERTIFICATION REQUIRED.—In any case in which third- party due diligence services are employed by a na-tionally recognized statistical rating organization, an issuer, or an underwriter, the person providing the due diligence services shall provide to any nationally recog-nized statistical rating organization that produces a rating to which such services relate, written certification, as pro-vided in subparagraph (C).

(C) FORMAT AND CONTENT.—The Commission shall es-tablish the appropriate format and content for the written certifications required under subparagraph (B), to ensure that providers of due diligence services have conducted a thorough review of data, documentation, and other rel-evant information necessary for a nationally recognized statistical rating organization to provide an accurate rat-ing.

(D) DISCLOSURE OF CERTIFICATION.—The Commission shall adopt rules requiring a nationally recognized statis-tical rating organization, at the time at which the nation-ally recognized statistical rating organization produces a rating, to disclose the certification described in subpara-graph (B) to the public in a manner that allows the public to determine the adequacy and level of due diligence serv-ices provided by a third party.

(t) CORPORATE GOVERNANCE, ORGANIZATION, AND MANAGE-MENT OF CONFLICTS OF INTEREST.—

(1) BOARD OF DIRECTORS.—Each nationally recognized sta-tistical rating organization shall have a board of directors.

(2) INDEPENDENT DIRECTORS.—(A) IN GENERAL.—At least 1⁄2 of the board of directors,

but not fewer than 2 of the members thereof, shall be inde-pendent of the nationally recognized statistical rating agency. A portion of the independent directors shall in-clude users of ratings from a nationally recognized statis-tical rating organization.

(B) INDEPENDENCE DETERMINATION.—In order to be considered independent for purposes of this subsection, a member of the board of directors of a nationally recognized statistical rating organization—


(i) may not, other than in his or her capacity as a member of the board of directors or any committee thereof—

(I) accept any consulting, advisory, or other compensatory fee from the nationally recognized statistical rating organization; or

(II) be a person associated with the nationally recognized statistical rating organization or with any affiliated company thereof; and (ii) shall be disqualified from any deliberation in-

volving a specific rating in which the independent board member has a financial interest in the outcome of the rating. (C) COMPENSATION AND TERM.—The compensation of

the independent members of the board of directors of a na-tionally recognized statistical rating organization shall not be linked to the business performance of the nationally recognized statistical rating organization, and shall be ar-ranged so as to ensure the independence of their judgment. The term of office of the independent directors shall be for a pre-agreed fixed period, not to exceed 5 years, and shall not be renewable. (3) DUTIES OF BOARD OF DIRECTORS.—In addition to the

overall responsibilities of the board of directors, the board shall oversee—

(A) the establishment, maintenance, and enforcement of policies and procedures for determining credit ratings;

(B) the establishment, maintenance, and enforcement of policies and procedures to address, manage, and disclose any conflicts of interest;

(C) the effectiveness of the internal control system with respect to policies and procedures for determining credit ratings; and

(D) the compensation and promotion policies and prac-tices of the nationally recognized statistical rating organi-zation. (4) TREATMENT OF NRSRO SUBSIDIARIES.—If a nationally

recognized statistical rating organization is a subsidiary of a parent entity, the board of the directors of the parent entity may satisfy the requirements of this subsection by assigning to a committee of such board of directors the duties under para-graph (3), if—

(A) at least 1⁄2 of the members of the committee (in-cluding the chairperson of the committee) are independent, as defined in this section; and

(B) at least 1 member of the committee is a user of ratings from a nationally recognized statistical rating orga-nization. (5) EXCEPTION AUTHORITY.—If the Commission finds that

compliance with the provisions of this subsection present an unreasonable burden on a small nationally recognized statis-tical rating organization, the Commission may permit the na-tionally recognized statistical rating organization to delegate such responsibilities to a committee that includes at least one

240Sec. 15F SECURITIES EXCHANGE ACT OF 1934

individual who is a user of ratings of a nationally recognized statistical rating organization. (u) DUTY TO REPORT TIPS ALLEGING MATERIAL VIOLATIONS OF

LAW.—(1) DUTY TO REPORT.—Each nationally recognized statis-

tical rating organization shall refer to the appropriate law en-forcement or regulatory authorities any information that the nationally recognized statistical rating organization receives from a third party and finds credible that alleges that an issuer of securities rated by the nationally recognized statis-tical rating organization has committed or is committing a ma-terial violation of law that has not been adjudicated by a Fed-eral or State court.

(2) RULE OF CONSTRUCTION.—Nothing in paragraph (1) may be construed to require a nationally recognized statistical rating organization to verify the accuracy of the information described in paragraph (1). (v) INFORMATION FROM SOURCES OTHER THAN THE ISSUER.—In

producing a credit rating, a nationally recognized statistical rating organization shall consider information about an issuer that the nationally recognized statistical rating organization has, or receives from a source other than the issuer or underwriter, that the na-tionally recognized statistical rating organization finds credible and potentially significant to a rating decision.

(June 6, 1934, ch. 404, title I, Sec. 15E, as added Pub. L. 109-291, Sec. 4(a), Sept. 29 2006, 120 Stat. 1329; amended Pub. L. 111-203, title IX, Secs. 932(a), 933(a), 934, 935, July 21, 2010, 124 Stat. 1872, 1883, 1884.)

SEC. 15F. REGISTRATION AND REGULATION OF SECURITY-BASED SWAP DEALERS AND MAJOR SECURITY-BASED SWAP PAR-TICIPANTS.

(a) REGISTRATION.—(1) SECURITY-BASED SWAP DEALERS.—It shall be unlawful

for any person to act as a security-based swap dealer unless the person is registered as a security-based swap dealer with the Commission.

(2) MAJOR SECURITY-BASED SWAP PARTICIPANTS.—It shall be unlawful for any person to act as a major security-based swap participant unless the person is registered as a major security- based swap participant with the Commission. (b) REQUIREMENTS.—

(1) IN GENERAL.—A person shall register as a security-based swap dealer or major security-based swap participant by filing a registration application with the Commission.

(2) CONTENTS.—(A) IN GENERAL.—The application shall be made in

such form and manner as prescribed by the Commission, and shall contain such information, as the Commission considers necessary concerning the business in which the applicant is or will be engaged.

(B) CONTINUAL REPORTING.—A person that is reg-istered as a security-based swap dealer or major security-

241 Sec. 15FSECURITIES EXCHANGE ACT OF 1934

based swap participant shall continue to submit to the Commission reports that contain such information per-taining to the business of the person as the Commission may require. (3) EXPIRATION.—Each registration under this section shall

expire at such time as the Commission may prescribe by rule or regulation.

(4) RULES.—Except as provided in subsections (d) and (e), the Commission may prescribe rules applicable to security-based swap dealers and major security-based swap partici-pants, including rules that limit the activities of non-bank se-curity-based swap dealers and major security-based swap par-ticipants.

(5) TRANSITION.—Not later than 1 year after the date of enactment of the Wall Street Transparency and Accountability Act of 2010, the Commission shall issue rules under this sec-tion to provide for the registration of security-based swap deal-ers and major security-based swap participants.

(6) STATUTORY DISQUALIFICATION.—Except to the extent otherwise specifically provided by rule, regulation, or order of the Commission, it shall be unlawful for a security-based swap dealer or a major security-based swap participant to permit any person associated with a security-based swap dealer or a major security-based swap participant who is subject to a stat-utory disqualification to effect or be involved in effecting secu-rity-based swaps on behalf of the security-based swap dealer or major security-based swap participant, if the security-based swap dealer or major security-based swap participant knew, or in the exercise of reasonable care should have known, of the statutory disqualification. (c) DUAL REGISTRATION.—

(1) SECURITY-BASED SWAP DEALER.—Any person that is re-quired to be registered as a security-based swap dealer under this section shall register with the Commission, regardless of whether the person also is registered with the Commodity Fu-tures Trading Commission as a swap dealer.

(2) MAJOR SECURITY-BASED SWAP PARTICIPANT.—Any per-son that is required to be registered as a major security-based swap participant under this section shall register with the Commission, regardless of whether the person also is reg-istered with the Commodity Futures Trading Commission as a major swap participant. (d) RULEMAKING.—

(1) IN GENERAL.—The Commission shall adopt rules for persons that are registered as security-based swap dealers or major security-based swap participants under this section.

(2) EXCEPTION FOR PRUDENTIAL REQUIREMENTS.—(A) IN GENERAL.—The Commission may not prescribe

rules imposing prudential requirements on security-based swap dealers or major security-based swap participants for which there is a prudential regulator.

(B) APPLICABILITY.—Subparagraph (A) does not limit the authority of the Commission to prescribe rules as di-rected under this section.


(e) CAPITAL AND MARGIN REQUIREMENTS.—(1) IN GENERAL.—

(A) SECURITY-BASED SWAP DEALERS AND MAJOR SECU-RITY-BASED SWAP PARTICIPANTS THAT ARE BANKS.—Each registered security- based swap dealer and major security-based swap participant for which there is not a prudential regulator shall meet such minimum capital requirements and minimum initial and variation margin requirements as the prudential regulator shall by rule or regulation pre-scribe under paragraph (2)(A).

(B) SECURITY-BASED SWAP DEALERS AND MAJOR SECU-RITY-BASED SWAP PARTICIPANTS THAT ARE NOT BANKS.—Each registered security-based swap dealer and major se-curity-based swap participant for which there is not a pru-dential regulator shall meet such minimum capital re-quirements and minimum initial and variation margin re-quirements as the Commission shall by rule or regulation prescribe under paragraph (2)(B). (2) RULES.—

(A) SECURITY-BASED SWAP DEALERS AND MAJOR SECU-RITY-BASED SWAP PARTICIPANTS THAT ARE BANKS.—The prudential regulators, in consultation with the Commission and the Commodity Futures Trading Commission, shall adopt rules for security-based swap dealers and major se-curity-based swap participants, with respect to their activi-ties as a swap dealer or major swap participant, for which there is a prudential regulator imposing—

(i) capital requirements; and (ii) both initial and variation margin requirements

on all security-based swaps that are not cleared by a registered clearing agency. (B) SECURITY-BASED SWAP DEALERS AND MAJOR SECU-

RITY-BASED SWAP PARTICIPANTS THAT ARE NOT BANKS.—The Commission shall adopt rules for security-based swap deal-ers and major security- based swap participants, with re-spect to their activities as a swap dealer or major swap participant, for which there is not a prudential regulator imposing—

(i) capital requirements; and (ii) both initial and variation margin requirements

on all swaps that are not cleared by a registered clear-ing agency. (C) CAPITAL.—In setting capital requirements for a

person that is designated as a security-based swap dealer or a major security-based swap participant for a single type or single class or category of security-based swap or activities, the prudential regulator and the Commission shall take into account the risks associated with other types of security-based swaps or classes of security-based swaps or categories of security-based swaps engaged in and the other activities conducted by that person that are not otherwise subject to regulation applicable to that per-son by virtue of the status of the person. (3) STANDARDS FOR CAPITAL AND MARGIN.—


(A) IN GENERAL.—To offset the greater risk to the se-curity-based swap dealer or major security-based swap participant and the financial system arising from the use of security-based swaps that are not cleared, the require-ments imposed under paragraph (2) shall —

(i) help ensure the safety and soundness of the se-curity-based swap dealer or major security-based swap participant; and

(ii) be appropriate for the risk associated with the non-cleared security-based swaps held as a security-based swap dealer or major security-based swap par-ticipant. (B) RULE OF CONSTRUCTION.—

(i) IN GENERAL.—Nothing in this section shall limit, or be construed to limit, the authority—

(I) of the Commission to set financial respon-sibility rules for a broker or dealer registered pur-suant to section 15(b) (except for section 15(b)(11) thereof) in accordance with section 15(c)(3); or

(II) of the Commodity Futures Trading Com-mission to set financial responsibility rules for a futures commission merchant or introducing broker registered pursuant to section 4f(a) of the Commodity Exchange Act (except for section 4f(a)(3) thereof) in accordance with section 4f(b) of the Commodity Exchange Act. (ii) FUTURES COMMISSION MERCHANTS AND OTHER

DEALERS.—A futures commission merchant, intro-ducing broker, broker, or dealer shall maintain suffi-cient capital to comply with the stricter of any applica-ble capital requirements to which such futures com-mission merchant, introducing broker, broker, or deal-er is subject to under this title or the Commodity Ex-change Act. (C) MARGIN REQUIREMENTS.—In prescribing margin re-

quirements under this subsection, the prudential regulator with respect to security-based swap dealers and major security- based swap participants that are depository insti-tutions, and the Commission with respect to security-based swap dealers and major security-based swap participants that are not depository institutions shall permit the use of noncash collateral, as the regulator or the Commission de-termines to be consistent with—

(i) preserving the financial integrity of markets trading security-based swaps; and

(ii) preserving the stability of the United States fi-nancial system. (D) COMPARABILITY OF CAPITAL AND MARGIN REQUIRE-

MENTS.—(i) IN GENERAL.—The prudential regulators, the

Commission, and the Securities and Exchange Com-mission shall periodically (but not less frequently than annually) consult on minimum capital requirements


and minimum initial and variation margin require-ments.

(ii) COMPARABILITY.—The entities described in clause (i) shall, to the maximum extent practicable, es-tablish and maintain comparable minimum capital re-quirements and minimum initial and variation margin requirements, including the use of noncash collateral, for—

(I) security-based swap dealers; and (II) major security-based swap participants.

(f) REPORTING AND RECORDKEEPING.—(1) IN GENERAL.—Each registered security-based swap

dealer and major security-based swap participant—(A) shall make such reports as are required by the

Commission, by rule or regulation, regarding the trans-actions and positions and financial condition of the reg-istered security-based swap dealer or major security-based swap participant;

(B)(i) for which there is a prudential regulator, shall keep books and records of all activities related to the busi-ness as a security-based swap dealer or major security- based swap participant in such form and manner and for such period as may be prescribed by the Commission by rule or regulation; and

(ii) for which there is no prudential regulator, shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation; and

(C) shall keep books and records described in subpara-graph (B) open to inspection and examination by any rep-resentative of the Commission. (2) RULES.—The Commission shall adopt rules governing

reporting and recordkeeping for security-based swap dealers and major security-based swap participants. (g) DAILY TRADING RECORDS.—

(1) IN GENERAL.—Each registered security-based swap dealer and major security-based swap participant shall main-tain daily trading records of the security-based swaps of the registered security-based swap dealer and major security-based swap participant and all related records (including related cash or forward transactions) and recorded communications, includ-ing electronic mail, instant messages, and recordings of tele-phone calls, for such period as may be required by the Com-mission by rule or regulation.

(2) INFORMATION REQUIREMENTS.—The daily trading records shall include such information as the Commission shall require by rule or regulation.

(3) COUNTERPARTY RECORDS.—Each registered security-based swap dealer and major security-based swap participant shall maintain daily trading records for each counterparty in a manner and form that is identifiable with each security-based swap transaction.

(4) AUDIT TRAIL.—Each registered security-based swap dealer and major security-based swap participant shall main-


102So in original. Probably should be followed by ‘‘a’’.

tain a complete audit trail for conducting comprehensive and accurate trade reconstructions.

(5) RULES.—The Commission shall adopt rules governing daily trading records for security-based swap dealers and major security- based swap participants. (h) BUSINESS CONDUCT STANDARDS.—

(1) IN GENERAL.—Each registered security-based swap dealer and major security-based swap participant shall con-form with such business conduct standards as prescribed in paragraph (3) and as may be prescribed by the Commission by rule or regulation that relate to—

(A) fraud, manipulation, and other abusive practices involving security-based swaps (including security-based swaps that are offered but not entered into);

(B) diligent supervision of the business of the reg-istered security-based swap dealer and major security-based swap participant;

(C) adherence to all applicable position limits; and (D) such other matters as the Commission determines

to be appropriate. (2) RESPONSIBILITIES WITH RESPECT TO SPECIAL ENTITIES.—

(A) ADVISING SPECIAL ENTITIES.—A security-based swap dealer or major security-based swap participant that acts as an advisor to [102] special entity regarding a secu-rity-based swap shall comply with the requirements of paragraph (4) with respect to such special entity.

(B) ENTERING OF SECURITY-BASED SWAPS WITH RESPECT TO SPECIAL ENTITIES.—A security-based swap dealer that enters into or offers to enter into security-based swap with a special entity shall comply with the requirements of paragraph (5) with respect to such special entity.

(C) SPECIAL ENTITY DEFINED.—For purposes of this subsection, the term ‘‘special entity’’ means—

(i) a Federal agency; (ii) a State, State agency, city, county, munici-

pality, or other political subdivision of a State or; (iii) any employee benefit plan, as defined in sec-

tion 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002);

(iv) any governmental plan, as defined in section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002); or

(v) any endowment, including an endowment that is an organization described in section 501(c)(3) of the Internal Revenue Code of 1986.

(3) BUSINESS CONDUCT REQUIREMENTS.—Business conduct requirements adopted by the Commission shall—

(A) establish a duty for a security-based swap dealer or major security-based swap participant to verify that any counterparty meets the eligibility standards for an eligible contract participant;


(B) require disclosure by the security-based swap deal-er or major security-based swap participant to any counterparty to the transaction (other than a security-based swap dealer, major security-based swap participant, security-based swap dealer, or major security-based swap participant) of—

(i) information about the material risks and char-acteristics of the security-based swap;

(ii) any material incentives or conflicts of interest that the security-based swap dealer or major security-based swap participant may have in connection with the security- based swap; and

(iii)(I) for cleared security-based swaps, upon the request of the counterparty, receipt of the daily mark of the transaction from the appropriate derivatives clearing organization; and

(II) for uncleared security-based swaps, receipt of the daily mark of the transaction from the security-based swap dealer or the major security-based swap participant; (C) establish a duty for a security-based swap dealer

or major security-based swap participant to communicate in a fair and balanced manner based on principles of fair dealing and good faith; and

(D) establish such other standards and requirements as the Commission may determine are appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this Act. (4) SPECIAL REQUIREMENTS FOR SECURITY-BASED SWAP

DEALERS ACTING AS ADVISORS.—(A) IN GENERAL.—It shall be unlawful for a security-

based swap dealer or major security-based swap partici-pant—

(i) to employ any device, scheme, or artifice to de-fraud any special entity or prospective customer who is a special entity;

(ii) to engage in any transaction, practice, or course of business that operates as a fraud or deceit on any special entity or prospective customer who is a special entity; or

(iii) to engage in any act, practice, or course of business that is fraudulent, deceptive, or manipula-tive. (B) DUTY.—Any security-based swap dealer that acts

as an advisor to a special entity shall have a duty to act in the best interests of the special entity.

(C) REASONABLE EFFORTS.—Any security-based swap dealer that acts as an advisor to a special entity shall make reasonable efforts to obtain such information as is necessary to make a reasonable determination that any se-curity-based swap recommended by the security-based swap dealer is in the best interests of the special entity, including information relating to—

(i) the financial status of the special entity;


103So in original. Probably should be capitalized.

(ii) the tax status of the special entity; (iii) the investment or financing objectives of the

special entity; and (iv) any other information that the Commission

may prescribe by rule or regulation. (5) SPECIAL REQUIREMENTS FOR SECURITY-BASED SWAP

DEALERS AS COUNTERPARTIES TO SPECIAL ENTITIES.—(A) IN GENERAL.—Any security-based swap dealer or

major security-based swap participant that offers to or en-ters into a security-based swap with a special entity shall—

(i) comply with any duty established by the Com-mission for a security-based swap dealer or major se-curity-based swap participant, with respect to a counterparty that is an eligible contract participant within the meaning of subclause (I) or (II) of clause (vii) of section 1a(18) of the Commodity Exchange Act, that requires the security-based swap dealer or major security- based swap participant to have a reasonable basis to believe that the counterparty that is a special entity has an independent representative that—

(I) has sufficient knowledge to evaluate the transaction and risks;

(II) is not subject to a statutory disqualifica-tion;

(III) is independent of the security-based swap dealer or major security-based swap participant;

(IV) undertakes a duty to act in the best in-terests of the counterparty it represents;

(V) makes appropriate disclosures; (VI) will provide written representations to

the special entity regarding fair pricing and the appropriateness of the transaction; and

(VII) in the case of employee benefit plans subject to the Employee Retirement Income Secu-rity act [103] of 1974, is a fiduciary as defined in section 3 of that Act (29 U.S.C. 1002); and (ii) before the initiation of the transaction, disclose

to the special entity in writing the capacity in which the security-based swap dealer is acting. (B) COMMISSION AUTHORITY.—The Commission may

establish such other standards and requirements under this paragraph as the Commission may determine are ap-propriate in the public interest, for the protection of inves-tors, or otherwise in furtherance of the purposes of this Act. (6) RULES.—The Commission shall prescribe rules under

this subsection governing business conduct standards for secu-rity-based swap dealers and major security-based swap partici-pants.

(7) APPLICABILITY.—This subsection shall not apply with respect to a transaction that is—


104So in original. The quotation marks probably should not appear.

(A) initiated by a special entity on an exchange or se-curity-based swaps execution facility; and

(B) the security-based swap dealer or major security-based swap participant does not know the identity of the counterparty to the transaction.’’ [104]

(i) DOCUMENTATION STANDARDS.—(1) IN GENERAL.—Each registered security-based swap

dealer and major security-based swap participant shall con-form with such standards as may be prescribed by the Com-mission, by rule or regulation, that relate to timely and accu-rate confirmation, processing, netting, documentation, and valuation of all security- based swaps.

(2) RULES.—The Commission shall adopt rules governing documentation standards for security-based swap dealers and major security-based swap participants. (j) DUTIES.—Each registered security-based swap dealer and

major security-based swap participant shall, at all times, comply with the following requirements:

(1) MONITORING OF TRADING.—The security-based swap dealer or major security-based swap participant shall monitor its trading in security-based swaps to prevent violations of ap-plicable position limits.

(2) RISK MANAGEMENT PROCEDURES.—The security-based swap dealer or major security-based swap participant shall es-tablish robust and professional risk management systems ade-quate for managing the day-to-day business of the security-based swap dealer or major security-based swap participant.

(3) DISCLOSURE OF GENERAL INFORMATION.—The security-based swap dealer or major security-based swap participant shall disclose to the Commission and to the prudential regu-lator for the security-based swap dealer or major security-based swap participant, as applicable, information con-cerning—

(A) terms and conditions of its security-based swaps; (B) security-based swap trading operations, mecha-

nisms, and practices; (C) financial integrity protections relating to security-

based swaps; and (D) other information relevant to its trading in secu-

rity-based swaps. (4) ABILITY TO OBTAIN INFORMATION.—The security-based

swap dealer or major security-based swap participant shall—(A) establish and enforce internal systems and proce-

dures to obtain any necessary information to perform any of the functions described in this section; and

(B) provide the information to the Commission and to the prudential regulator for the security-based swap dealer or major security-based swap participant, as applicable, on request. (5) CONFLICTS OF INTEREST.—The security-based swap

dealer and major security-based swap participant shall imple-ment conflict- of-interest systems and procedures that—


(A) establish structural and institutional safeguards to ensure that the activities of any person within the firm re-lating to research or analysis of the price or market for any security-based swap or acting in a role of providing clearing activities or making determinations as to accept-ing clearing customers are separated by appropriate infor-mational partitions within the firm from the review, pres-sure, or oversight of persons whose involvement in pricing, trading, or clearing activities might potentially bias their judgment or supervision and contravene the core principles of open access and the business conduct standards de-scribed in this title; and

(B) address such other issues as the Commission de-termines to be appropriate. (6) ANTITRUST CONSIDERATIONS.—Unless necessary or ap-

propriate to achieve the purposes of this title, the security- based swap dealer or major security-based swap participant shall not—

(A) adopt any process or take any action that results in any unreasonable restraint of trade; or

(B) impose any material anticompetitive burden on trading or clearing. (7) RULES.—The Commission shall prescribe rules under

this subsection governing duties of security-based swap dealers and major security-based swap participants. (k) DESIGNATION OF CHIEF COMPLIANCE OFFICER.—

(1) IN GENERAL.—Each security-based swap dealer and major security-based swap participant shall designate an indi-vidual to serve as a chief compliance officer.

(2) DUTIES.—The chief compliance officer shall—(A) report directly to the board or to the senior officer

of the security-based swap dealer or major security-based swap participant;

(B) review the compliance of the security-based swap dealer or major security-based swap participant with re-spect to the security-based swap dealer and major security-based swap participant requirements described in this sec-tion;

(C) in consultation with the board of directors, a body performing a function similar to the board, or the senior officer of the organization, resolve any conflicts of interest that may arise;

(D) be responsible for administering each policy and procedure that is required to be established pursuant to this section;

(E) ensure compliance with this title (including regula-tions) relating to security-based swaps, including each rule prescribed by the Commission under this section;

(F) establish procedures for the remediation of non-compliance issues identified by the chief compliance officer through any—

(i) compliance office review; (ii) look-back; (iii) internal or external audit finding;


(iv) self-reported error; or (v) validated complaint; and

(G) establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. (3) ANNUAL REPORTS.—

(A) IN GENERAL.—In accordance with rules prescribed by the Commission, the chief compliance officer shall an-nually prepare and sign a report that contains a descrip-tion of—

(i) the compliance of the security-based swap deal-er or major swap participant with respect to this title (including regulations); and

(ii) each policy and procedure of the security-based swap dealer or major security-based swap participant of the chief compliance officer (including the code of ethics and conflict of interest policies). (B) REQUIREMENTS.—A compliance report under sub-

paragraph (A) shall—(i) accompany each appropriate financial report of

the security-based swap dealer or major security-based swap participant that is required to be furnished to the Commission pursuant to this section; and

(ii) include a certification that, under penalty of law, the compliance report is accurate and complete.

(l) ENFORCEMENT AND ADMINISTRATIVE PROCEEDING AUTHOR-ITY.—

(1) PRIMARY ENFORCEMENT AUTHORITY.—(A) SECURITIES AND EXCHANGE COMMISSION.—Except

as provided in subparagraph (B), (C), or (D), the Commis-sion shall have primary authority to enforce subtitle B, and the amendments made by subtitle B of the Wall Street Transparency and Accountability Act of 2010, with respect to any person.

(B) PRUDENTIAL REGULATORS.—The prudential regu-lators shall have exclusive authority to enforce the provi-sions of subsection (e) and other prudential requirements of this title (including risk management standards), with respect to security-based swap dealers or major security-based swap participants for which they are the prudential regulator.

(C) REFERRAL.—(i) VIOLATIONS OF NONPRUDENTIAL REQUIRE-

MENTS.—If the appropriate Federal banking agency for security-based swap dealers or major security-based swap participants that are depository institutions has cause to believe that such security-based swap dealer or major security-based swap participant may have en-gaged in conduct that constitutes a violation of the nonprudential requirements of this section or rules adopted by the Commission thereunder, the agency may recommend in writing to the Commission that the Commission initiate an enforcement proceeding as au-thorized under this title. The recommendation shall be


105So in original. Probably should be ‘‘constitutes’’. 106So in original. Probably should be ‘‘subparagraph’’.

accompanied by a written explanation of the concerns giving rise to the recommendation.

(ii) VIOLATIONS OF PRUDENTIAL REQUIREMENTS.—If the Commission has cause to believe that a securities-based swap dealer or major securities-based swap par-ticipant that has a prudential regulator may have en-gaged in conduct that constitute [105] a violation of the prudential requirements of subsection (e) or rules adopted thereunder, the Commission may recommend in writing to the prudential regulator that the pruden-tial regulator initiate an enforcement proceeding as authorized under this title. The recommendation shall be accompanied by a written explanation of the con-cerns giving rise to the recommendation. (D) BACKSTOP ENFORCEMENT AUTHORITY.—

(i) INITIATION OF ENFORCEMENT PROCEEDING BY PRUDENTIAL REGULATOR.—If the Commission does not initiate an enforcement proceeding before the end of the 90-day period beginning on the date on which the Commission receives a written report under sub-section [106] (C)(i), the prudential regulator may ini-tiate an enforcement proceeding.

(ii) INITIATION OF ENFORCEMENT PROCEEDING BY COMMISSION.—If the prudential regulator does not ini-tiate an enforcement proceeding before the end of the 90-day period beginning on the date on which the pru-dential regulator receives a written report under sub-section (C)(ii), the Commission may initiate an en-forcement proceeding.

(2) CENSURE, DENIAL, SUSPENSION; NOTICE AND HEARING.—The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, or revoke the reg-istration of any security-based swap dealer or major security-based swap participant that has registered with the Commis-sion pursuant to subsection (b) if the Commission finds, on the record after notice and opportunity for hearing, that such cen-sure, placing of limitations, or revocation is in the public inter-est and that such security-based swap dealer or major security-based swap participant, or any person associated with such se-curity-based swap dealer or major security-based swap partici-pant effecting or involved in effecting transactions in security-based swaps on behalf of such security-based swap dealer or major security-based swap participant, whether prior or subse-quent to becoming so associated—

(A) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), or (E) of paragraph (4) of section 15(b);

(B) has been convicted of any offense specified in sub-paragraph (B) of such paragraph (4) within 10 years of the commencement of the proceedings under this subsection;


(C) is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4);

(D) is subject to an order or a final order specified in subparagraph (F) or (H), respectively, of such paragraph (4); or

(E) has been found by a foreign financial regulatory authority to have committed or omitted any act, or vio-lated any foreign statute or regulation, enumerated in sub-paragraph (G) of such paragraph (4). (3) ASSOCIATED PERSONS.—With respect to any person who

is associated, who is seeking to become associated, or, at the time of the alleged misconduct, who was associated or was seeking to become associated with a security-based swap dealer or major security- based swap participant for the purpose of ef-fecting or being involved in effecting security-based swaps on behalf of such security-based swap dealer or major security-based swap participant, the Commission, by order, shall cen-sure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar such person from being associated with a security-based swap dealer or major security-based swap participant, if the Commission finds, on the record after notice and opportunity for a hearing, that such censure, placing of limitations, suspen-sion, or bar is in the public interest and that such person—

(A) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), or (E) of paragraph (4) of section 15(b);

(B) has been convicted of any offense specified in sub-paragraph (B) of such paragraph (4) within 10 years of the commencement of the proceedings under this subsection;

(C) is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4);

(D) is subject to an order or a final order specified in subparagraph (F) or (H), respectively, of such paragraph (4); or

(E) has been found by a foreign financial regulatory authority to have committed or omitted any act, or vio-lated any foreign statute or regulation, enumerated in sub-paragraph (G) of such paragraph (4). (4) UNLAWFUL CONDUCT.—It shall be unlawful—

(A) for any person as to whom an order under para-graph (3) is in effect, without the consent of the Commis-sion, willfully to become, or to be, associated with a secu-rity-based swap dealer or major security-based swap par-ticipant in contravention of such order; or

(B) for any security-based swap dealer or major security- based swap participant to permit such a person, without the consent of the Commission, to become or re-main a person associated with the security-based swap dealer or major security-based swap participant in con-travention of such order, if such security-based swap deal-er or major security-based swap participant knew, or in

253 Sec. 15GSECURITIES EXCHANGE ACT OF 1934

the exercise of reasonable care should have known, of such order.

(June 6, 1934, ch. 404, title I, Sec. 15F, as added Pub. L. 111-203, title VII, Sec. 764(a), July 21, 2010, 124 Stat. 1785.)

SEC. 15G. CREDIT RISK RETENTION.

(a) DEFINITIONS.—In this section—(1) the term ‘‘Federal banking agencies’’ means the Office

of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insur-ance Corporation;

(2) the term ‘‘insured depository institution’’ has the same meaning as in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c));

(3) the term ‘‘securitizer’’ means—(A) an issuer of an asset-backed security; or (B) a person who organizes and initiates an asset-

backed securities transaction by selling or transferring as-sets, either directly or indirectly, including through an af-filiate, to the issuer; and (4) the term ‘‘originator’’ means a person who—

(A) through the extension of credit or otherwise, cre-ates a financial asset that collateralizes an asset-backed security; and

(B) sells an asset directly or indirectly to a securitizer. (b) REGULATIONS REQUIRED.—

(1) IN GENERAL.—Not later than 270 days after the date of enactment of this section, the Federal banking agencies and the Commission shall jointly prescribe regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or con-veys to a third party.

(2) RESIDENTIAL MORTGAGES.—Not later than 270 days after the date of the enactment of this section, the Federal banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Federal Housing Finance Agency, shall jointly prescribe regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any residential mortgage asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party. (c) STANDARDS FOR REGULATIONS.—

(1) STANDARDS.—The regulations prescribed under sub-section (b) shall—

(A) prohibit a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain with respect to an asset;

(B) require a securitizer to retain—(i) not less than 5 percent of the credit risk for

any asset—

254Sec. 15G SECURITIES EXCHANGE ACT OF 1934

107So in original. The word ‘‘and’’ probably should not appear.

(I) that is not a qualified residential mortgage that is transferred, sold, or conveyed through the issuance of an asset-backed security by the securitizer; or

(II) that is a qualified residential mortgage that is transferred, sold, or conveyed through the issuance of an asset-backed security by the securitizer, if 1 or more of the assets that collateralize the asset-backed security are not qualified residential mortgages; or (ii) less than 5 percent of the credit risk for an

asset that is not a qualified residential mortgage that is transferred, sold, or conveyed through the issuance of an asset-backed security by the securitizer, if the originator of the asset meets the underwriting stand-ards prescribed under paragraph (2)(B); (C) specify—

(i) the permissible forms of risk retention for pur-poses of this section;

(ii) the minimum duration of the risk retention re-quired under this section; and

(iii) that a securitizer is not required to retain any part of the credit risk for an asset that is transferred, sold or conveyed through the issuance of an asset-backed security by the securitizer, if all of the assets that collateralize the asset-backed security are quali-fied residential mortgages; (D) apply, regardless of whether the securitizer is an

insured depository institution; (E) with respect to a commercial mortgage, specify the

permissible types, forms, and amounts of risk retention that would meet the requirements of subparagraph (B), which in the determination of the Federal banking agen-cies and the Commission may include—

(i) retention of a specified amount or percentage of the total credit risk of the asset;

(ii) retention of the first-loss position by a third- party purchaser that specifically negotiates for the purchase of such first loss position, holds adequate fi-nancial resources to back losses, provides due dili-gence on all individual assets in the pool before the issuance of the asset-backed securities, and meets the same standards for risk retention as the Federal bank-ing agencies and the Commission require of the securitizer;

(iii) a determination by the Federal banking agen-cies and the Commission that the underwriting stand-ards and controls for the asset are adequate; and

(iv) provision of adequate representations and warranties and related enforcement mechanisms; and [107]


(F) establish appropriate standards for retention of an economic interest with respect to collateralized debt obliga-tions, securities collateralized by collateralized debt obliga-tions, and similar instruments collateralized by other asset-backed securities; and

(G) provide for—(i) a total or partial exemption of any

securitization, as may be appropriate in the public in-terest and for the protection of investors;

(ii) a total or partial exemption for the securitization of an asset issued or guaranteed by the United States, or an agency of the United States, as the Federal banking agencies and the Commission jointly determine appropriate in the public interest and for the protection of investors, except that, for purposes of this clause, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are not agencies of the United States;

(iii) a total or partial exemption for any asset- backed security that is a security issued or guaranteed by any State of the United States, or by any political subdivision of a State or territory, or by any public in-strumentality of a State or territory that is exempt from the registration requirements of the Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 U.S.C. 77c(a)(2)), or a security defined as a qualified scholarship funding bond in section 150(d)(2) of the In-ternal Revenue Code of 1986, as may be appropriate in the public interest and for the protection of inves-tors; and

(iv) the allocation of risk retention obligations be-tween a securitizer and an originator in the case of a securitizer that purchases assets from an originator, as the Federal banking agencies and the Commission jointly determine appropriate.

(2) ASSET CLASSES.—(A) ASSET CLASSES.—The regulations prescribed under

subsection (b) shall establish asset classes with separate rules for securitizers of different classes of assets, includ-ing residential mortgages, commercial mortgages, commer-cial loans, auto loans, and any other class of assets that the Federal banking agencies and the Commission deem appropriate.

(B) CONTENTS.—For each asset class established under subparagraph (A), the regulations prescribed under sub-section (b) shall include underwriting standards estab-lished by the Federal banking agencies that specify the terms, conditions, and characteristics of a loan within the asset class that indicate a low credit risk with respect to the loan.

(d) ORIGINATORS.—In determining how to allocate risk reten-tion obligations between a securitizer and an originator under sub-section (c)(1)(E)(iv), the Federal banking agencies and the Commis-sion shall—

256Sec. 15G SECURITIES EXCHANGE ACT OF 1934

(1) reduce the percentage of risk retention obligations re-quired of the securitizer by the percentage of risk retention ob-ligations required of the originator; and

(2) consider—(A) whether the assets sold to the securitizer have

terms, conditions, and characteristics that reflect low cred-it risk;

(B) whether the form or volume of transactions in securitization markets creates incentives for imprudent origination of the type of loan or asset to be sold to the securitizer; and

(C) the potential impact of the risk retention obliga-tions on the access of consumers and businesses to credit on reasonable terms, which may not include the transfer of credit risk to a third party.

(e) EXEMPTIONS, EXCEPTIONS, AND ADJUSTMENTS.—(1) IN GENERAL.—The Federal banking agencies and the

Commission may jointly adopt or issue exemptions, exceptions, or adjustments to the rules issued under this section, including exemptions, exceptions, or adjustments for classes of institu-tions or assets relating to the risk retention requirement and the prohibition on hedging under subsection (c)(1).

(2) APPLICABLE STANDARDS.—Any exemption, exception, or adjustment adopted or issued by the Federal banking agencies and the Commission under this paragraph shall—

(A) help ensure high quality underwriting standards for the securitizers and originators of assets that are securitized or available for securitization; and

(B) encourage appropriate risk management practices by the securitizers and originators of assets, improve the access of consumers and businesses to credit on reasonable terms, or otherwise be in the public interest and for the protection of investors. (3) CERTAIN INSTITUTIONS AND PROGRAMS EXEMPT.—

(A) FARM CREDIT SYSTEM INSTITUTIONS.—Notwith-standing any other provision of this section, the require-ments of this section shall not apply to any loan or other financial asset made, insured, guaranteed, or purchased by any institution that is subject to the supervision of the Farm Credit Administration, including the Federal Agri-cultural Mortgage Corporation.

(B) OTHER FEDERAL PROGRAMS.—This section shall not apply to any residential, multifamily, or health care facil-ity mortgage loan asset, or securitization based directly or indirectly on such an asset, which is insured or guaranteed by the United States or an agency of the United States. For purposes of this subsection, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal home loan banks shall not be considered an agency of the United States. (4) EXEMPTION FOR QUALIFIED RESIDENTIAL MORTGAGES.—

(A) IN GENERAL.—The Federal banking agencies, the Commission, the Secretary of Housing and Urban Develop-ment, and the Director of the Federal Housing Finance


108So in original. Probably should be ‘‘129C(b)(2)’’.

Agency shall jointly issue regulations to exempt qualified residential mortgages from the risk retention requirements of this subsection.

(B) QUALIFIED RESIDENTIAL MORTGAGE.—The Federal banking agencies, the Commission, the Secretary of Hous-ing and Urban Development, and the Director of the Fed-eral Housing Finance Agency shall jointly define the term ‘‘qualified residential mortgage’’ for purposes of this sub-section, taking into consideration underwriting and prod-uct features that historical loan performance data indicate result in a lower risk of default, such as—

(i) documentation and verification of the financial resources relied upon to qualify the mortgagor;

(ii) standards with respect to—(I) the residual income of the mortgagor after

all monthly obligations; (II) the ratio of the housing payments of the

mortgagor to the monthly income of the mort-gagor;

(III) the ratio of total monthly installment payments of the mortgagor to the income of the mortgagor; (iii) mitigating the potential for payment shock on

adjustable rate mortgages through product features and underwriting standards;

(iv) mortgage guarantee insurance or other types of insurance or credit enhancement obtained at the time of origination, to the extent such insurance or credit enhancement reduces the risk of default; and

(v) prohibiting or restricting the use of balloon payments, negative amortization, prepayment pen-alties, interest-only payments, and other features that have been demonstrated to exhibit a higher risk of borrower default. (C) LIMITATION ON DEFINITION.—The Federal banking

agencies, the Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Hous-ing Finance Agency in defining the term ‘‘qualified resi-dential mortgage’’, as required by subparagraph (B), shall define that term to be no broader than the definition ‘‘qualified mortgage’’ as the term is defined under section 129C(c)(2) [108] of the Truth in Lending Act, as amended by the Consumer Financial Protection Act of 2010, and regu-lations adopted thereunder. (5) CONDITION FOR QUALIFIED RESIDENTIAL MORTGAGE EX-

EMPTION.— The regulations issued under paragraph (4) shall provide that an asset-backed security that is collateralized by tranches of other asset-backed securities shall not be exempt from the risk retention requirements of this subsection.

(6) CERTIFICATION.—The Commission shall require an issuer to certify, for each issuance of an asset-backed security collateralized exclusively by qualified residential mortgages,


that the issuer has evaluated the effectiveness of the internal supervisory controls of the issuer with respect to the process for ensuring that all assets that collateralize the asset-backed security are qualified residential mortgages. (f) ENFORCEMENT.—The regulations issued under this section

shall be enforced by—(1) the appropriate Federal banking agency, with respect

to any securitizer that is an insured depository institution; and (2) the Commission, with respect to any securitizer that is

not an insured depository institution. (g) AUTHORITY OF COMMISSION.—The authority of the Commis-

sion under this section shall be in addition to the authority of the Commission to otherwise enforce the securities laws.

(h) AUTHORITY TO COORDINATE ON RULEMAKING.—The Chair-person of the Financial Stability Oversight Council shall coordinate all joint rulemaking required under this section.

(i) EFFECTIVE DATE OF REGULATIONS.—The regulations issued under this section shall become effective—

(1) with respect to securitizers and originators of asset- backed securities backed by residential mortgages, 1 year after the date on which final rules under this section are published in the Federal Register; and

(2) with respect to securitizers and originators of all other classes of asset-backed securities, 2 years after the date on which final rules under this section are published in the Fed-eral Register.

(June 6, 1934, ch. 404, title I, Sec. 15G, as added Pub. L. 111-203, title IX, Sec. 941(b), July 21, 2010, 124 Stat. 1891.)

SEC. 16. DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS.

(a) DISCLOSURES REQUIRED.—(1) DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS

REQUIRED TO FILE.—Every person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security (other than an exempted security) which is registered pursuant to section 12, or who is a director or an of-ficer of the issuer of such security, shall file the statements re-quired by this subsection with the Commission.

(2) TIME OF FILING.—The statements required by this sub-section shall be filed—

(A) at the time of the registration of such security on a national securities exchange or by the effective date of a registration statement filed pursuant to section 12(g);

(B) within 10 days after he or she becomes such bene-ficial owner, director, or officer, or within such shorter time as the Commission may establish by rule;

(C) if there has been a change in such ownership, or if such person shall have purchased or sold a security-based swap agreement involving such equity security, be-fore the end of the second business day following the day on which the subject transaction has been executed, or at such other time as the Commission shall establish, by rule,


in any case in which the Commission determines that such 2-day period is not feasible. (3) CONTENTS OF STATEMENTS.—A statement filed—

(A) under subparagraph (A) or (B) of paragraph (2) shall contain a statement of the amount of all equity secu-rities of such issuer of which the filing person is the bene-ficial owner; and

(B) under subparagraph (C) of such paragraph shall indicate ownership by the filing person at the date of fil-ing, any such changes in such ownership, and such pur-chases and sales of the security-based swap agreements or security-based swaps as have occurred since the most re-cent such filing under such subparagraph. (4) ELECTRONIC FILING AND AVAILABILITY.—Beginning not

later than 1 year after the date of enactment of the Sarbanes-Oxley Act of 2002—

(A) a statement filed under subparagraph (C) of para-graph (2) shall be filed electronically;

(B) the Commission shall provide each such statement on a publicly accessible Internet site not later than the end of the business day following that filing; and

(C) the issuer (if the issuer maintains a corporate website) shall provide that statement on that corporate website, not later than the end of the business day fol-lowing that filing.

(b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit real-ized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted secu-rity) or a security-based swap agreement involving any such equity security within any period of less than six months, unless such se-curity or security-based swap agreement was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security or security-based swap agreement purchased or of not repurchasing the security or secu-rity-based swap agreement sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same there-after; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be con-strued to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security or security-based swap agreement or a se-curity-based swap involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.

(c) It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such


109So in law. Probably should be ‘‘municipal securities dealer, municipal advisor,’’.

issuer (other than an exempted security), if the person selling the security or his principal (1) does not own the security sold, or (2) if owning the security, does not deliver it against such sale within twenty days thereafter, or does not within five days after such sale deposit it in the mails or other usual channels of transportation; but no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise of good faith he was unable to make such delivery or deposit within such time, or that to do so would cause undue inconvenience or expense.

(d) The provisions of subsection (b) of this section shall not apply to any purchase and sale, or sale and purchase, and the pro-visions of subsection (c) of this section shall not apply to any sale, of an equity security not then or theretofore held by him in an in-vestment account, by a dealer in the ordinary course of his busi-ness and incident to the establishment or maintenance by him of a primary or secondary market (otherwise than on a national secu-rities exchange or an exchange exempted from registration under section 5 of this title) for such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the public interest, define and prescribe terms and conditions with respect to securities held in an investment account and trans-actions made in the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market.

(e) The provisions of this section shall not apply to foreign or domestic arbitrage transactions unless made in contravention of such rules and regulations as the Commission may adopt in order to carry out the purposes of this section.

(f) TREATMENT OF TRANSACTIONS IN SECURITY FUTURES PROD-UCTS.—The provisions of this section shall apply to ownership of and transactions in security futures products.

(g) The authority of the Commission under this section with re-spect to security-based swap agreements shall be subject to the re-strictions and limitations of section 3A(b) of this title.

(June 6, 1934, ch. 404, title I, Sec. 16, 48 Stat. 896; Aug. 20, 1964, Pub. L. 88-467, Sec. 8, 78 Stat. 579; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5)[title II, Sec. 208(b)(3), title III, Sec. 303(g), (h)], 114 Stat. 2763, 2763A-435, 2763A-455, 2763A-456; Pub. L. 107-204, title IV, Sec. 403(a), July 30, 2002, 116 Stat. 788; Pub. L. 111-203, title VII, Sec. 762(d)(5), title IX, Sec. 929R(b), July 21, 2010, 124 Stat. 1761, 1867.)

ACCOUNTS AND RECORDS, EXAMINATIONS OF EXCHANGES, MEMBERS, AND OTHERS

SEC. 17. (a)(1) Every national securities exchange, member thereof, broker or dealer who transacts a business in securities through the medium of any such member, registered securities as-sociation, registered broker or dealer, registered municipal securi-ties dealer municipal advisor,, [109] registered securities information processor, registered transfer agent, nationally recognized statis-tical rating organization, and registered clearing agency and the


110So in original. Probably should be ‘‘consult’’.

Municipal Securities Rulemaking Board shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the pur-poses of this title. Any report that a nationally recognized statis-tical rating organization is required by Commission rules under this paragraph to make and disseminate to the Commission shall be deemed furnished to the Commission.

(2) Every registered clearing agency shall also make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports, as the appropriate regu-latory agency for such clearing agency, by rule, prescribes as nec-essary or appropriate for the safeguarding of securities and funds in the custody or control of such clearing agency or for which it is responsible.

(3) Every registered transfer agent shall also make and keep for prescribed periods such records, furnish such copies thereof, and make such reports as the appropriate regulatory agency for such transfer agent, by rule, prescribes as necessary or appropriate in furtherance of the purposes of section 17A of this title.

(b) RECORDS SUBJECT TO EXAMINATION.—(1) PROCEDURES FOR COOPERATION WITH OTHER AGEN-

CIES.—All records of persons described in subsection (a) of this section are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by rep-resentatives of the Commission and the appropriate regulatory agency for such persons as the Commission or the appropriate regulatory agency for such persons deems necessary or appro-priate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title: Provided, however, That the Commission shall, prior to conducting any such examination of a—

(A) registered clearing agency, registered transfer agent, or registered municipal securities dealer for which it is not the appropriate regulatory agency, give notice to the appropriate regulatory agency for such clearing agen-cy, transfer agent, or municipal securities dealer of such proposed examination and consult with such appropriate regulatory agency concerning the feasibility and desir-ability of coordinating such examination with examina-tions conducted by such appropriate regulatory agency with a view to avoiding unnecessary regulatory duplication or undue regulatory burdens for such clearing agency, transfer agent, or municipal securities dealer; or

(B) broker or dealer registered pursuant to section 15(b)(11), exchange registered pursuant to section 6(g), or national securities association registered pursuant to sec-tion 15A(k), give notice to the Commodity Futures Trading Commission of such proposed examination and consults [110] with the Commodity Futures Trading Com-mission concerning the feasibility and desirability of co-


111So in law. Probably should be preceded by ‘‘an’’. 112So in law. Probably should be preceded by ‘‘a’’. 113This compilation reflects the apparent intention with respect to the location and indenta-

tion of section 17(b)(4)(C) of this Act. See section 204(3) and (5) of the Commodity Futures Mod-ernization Act of 2000 (114 Stat. 2763A-424, 425), as enacted into law by section 1(a)(5) of Public Law 106-554.

ordinating such examination with examinations conducted by the Commodity Futures Trading Commission in order to avoid unnecessary regulatory duplication or undue regu-latory burdens for such broker or dealer or exchange. (2) FURNISHING DATA AND REPORTS TO CFTC.—The Com-

mission shall notify the Commodity Futures Trading Commis-sion of any examination conducted of any broker or dealer reg-istered pursuant to section 15(b)(11), exchange registered pur-suant to section 6(g), or national securities association reg-istered pursuant to section 15A(k) and, upon request, furnish to the Commodity Futures Trading Commission any examina-tion report and data supplied to, or prepared by, the Commis-sion in connection with such examination.

(3) USE OF CFTC REPORTS.—Prior to conducting an exam-ination under paragraph (1), the Commission shall use the re-ports of examinations, if the information available therein is sufficient for the purposes of the examination, of—

(A) any broker or dealer registered pursuant to section 15(b)(11);

(B) exchange [111] registered pursuant to section 6(g); or

(C) national [112] securities association registered pur-suant to section 15A(k);

that is made by the Commodity Futures Trading Commission, a national securities association registered pursuant to section 15A(k), or an exchange registered pursuant to section 6(g).

(4) RULES OF CONSTRUCTION.—(A) Notwithstanding any other provision of this sub-

section, the records of a broker or dealer registered pursu-ant to section 15(b)(11), an exchange registered pursuant to section 6(g), or a national securities association reg-istered pursuant to section 15A(k) described in this sub-paragraph shall not be subject to routine periodic examina-tions by the Commission.

(B) Any recordkeeping rules adopted under this sub-section for a broker or dealer registered pursuant to sec-tion 15(b)(11), an exchange registered pursuant to section 6(g), or a national securities association registered pursu-ant to section 15A(k) shall be limited to records with re-spect to persons, accounts, agreements, contracts, and transactions involving security futures products.

(C) [113] Nothing in the proviso in paragraph (1) shall be construed to impair or limit (other than by the require-ment of prior consultation) the power of the Commission under this subsection to examine any clearing agency, transfer agent, or municipal securities dealer or to affect in any way the power of the Commission under any other provision of this title or otherwise to inspect, examine, or


investigate any such clearing agency, transfer agent, or municipal securities dealer.

(c)(1) Every clearing agency, transfer agent, and municipal se-curities dealer for which the Commission is not the appropriate regulatory agency shall (A) file with the appropriate regulatory agency for such clearing agency, transfer agent, or municipal secu-rities dealer a copy of any application, notice, proposal, report, or document filed with the Commission by reason of its being a clear-ing agency, transfer agent, or municipal securities dealer and (B) file with the Commission a copy of any application, notice, pro-posal, report, or document filed with such appropriate regulatory agency by reason of its being a clearing agency, transfer agent, or municipal securities dealer. The Municipal Securities Rulemaking Board shall file with each agency enumerated in section 3(a)(34)(A) of this title copies of every proposed rule change filed with the Commission pursuant to section 19(b) of this title.

(2) The appropriate regulatory agency for a clearing agency, transfer agent, or municipal securities dealer for which the Com-mission is not the appropriate regulatory agency shall file with the Commission notice of the commencement of any proceeding and a copy of any order entered by such appropriate regulatory agency against any clearing agency, transfer agent, municipal securities dealer, or person associated with a transfer agent or municipal se-curities dealer, and the Commission shall file with such appro-priate regulatory agency, if any, notice of the commencement of any proceeding and a copy of any order entered by the Commission against the clearing agency, transfer agent, or municipal securities dealer, or against any person associated with a transfer agent or municipal securities dealer for which the agency is the appropriate regulatory agency.

(3) The Commission and the appropriate regulatory agency for a clearing agency, transfer agent, or municipal securities dealer for which the Commission is not the appropriate regulatory agency shall each notify the other and make a report of any examination conducted by it of such clearing agency, transfer agent, or munic-ipal securities dealer, and, upon request, furnish to the other a copy of such report and any data supplied to it in connection with such examination.

(4) The Commission or the appropriate regulatory agency may specify that documents required to be filed pursuant to this sub-section with the Commission or such agency, respectively, may be retained by the originating clearing agency, transfer agent, or mu-nicipal securities dealer, or filed with another appropriate regu-latory agency. The Commission or the appropriate regulatory agen-cy (as the case may be) making such a specification shall continue to have access to the document on request.

(d)(1) The Commission, by rule or order, as it deems necessary or appropriate in the public interest and for the protection of inves-tors, to foster cooperation and coordination among self-regulatory organizations, or to remove impediments to and foster the develop-ment of a national market system and national system for the clearance and settlement of securities transactions, may—

(A) with respect to any person who is a member of or par-ticipant in more than one self-regulatory organization, relieve


114So in original. Probably should be ‘‘an’’. 115So in original.

any such self-regulatory organization of any responsibility under this title (i) to receive regulatory reports from such per-son, (ii) to examine such person for compliance, or to enforce compliance by such person, with specified provisions of this title, the rules and regulations thereunder, and its own rules, or (iii) to carry out other specified regulatory functions with re-spect to such person, and

(B) allocate among self-regulatory organizations the au-thority to adopt rules with respect to matters as to which, in the absence of such allocation, such self-regulatory organiza-tions share authority under this title.

In making any such rule or entering any such order, the Commis-sion shall take into consideration the regulatory capabilities and procedures of the self-regulatory organizations, availability of staff, convenience of location, unnecessary regulatory duplication, and such other factors as the Commission may consider germane to the protection of investors, cooperation and coordination among self-regulatory organizations, and the development of a national market system and a national system for the clearance and settlement of securities transactions. The Commission, by rule or order, as it deems necessary or appropriate in the public interest and for the protection of investors, may require any self-regulatory organiza-tion relieved of any responsibility pursuant to this paragraph, and any person with respect to whom such responsibility relates, to take such steps as are specified in any such rule or order to notify customers of, and persons doing business with, such person of the limited nature of such self- regulatory organization’s responsibility for such person’s acts, practices, and course of business.

(2) A self-regulatory organization shall furnish copies of any re-port of examination of any person who is a member of or a partici-pant in such self-regulatory organization to any other self-regu-latory organization of which such person is a member or in which such person is a participant upon the request of such person, such other self- regulatory organization, or the Commission.

(e)(1)(A) Every registered broker or dealer shall annually file with the Commission a balance sheet and income statement cer-tified by a [114] independent public accounting firm, or by a reg-istered public accounting firm if the firm is required to be reg-istered under the Sarbanes-Oxley Act of 2002,, [115] prepared on a calendar or fiscal year basis, and such other financial statements (which shall, as the Commission specifies, be certified) and infor-mation concerning its financial condition as the Commission, by rule may prescribe as necessary or appropriate in the public inter-est or for the protection of investors.

(B) Every registered broker and dealer shall annually send to its customers its certified balance sheet and such other financial statements and information concerning its financial condition as the Commission, by rule, may prescribe pursuant to subsection (a) of this section.

(C) The Commission, by rule or order, may conditionally or un-conditionally exempt any registered broker or dealer, or class of


such brokers or dealers, from any provision of this paragraph if the Commission determines that such exemption is consistent with the public interest and the protection of investors.

(2) The Commission, by rule, as it deems necessary or appro-priate in the public interest or for the protection of investors, may prescribe the form and content of financial statements filed pursu-ant to this title and the accounting principles and accounting standards used in their preparation.

(f)(1) Every national securities exchange, member thereof, reg-istered securities association, broker, dealer, municipal securities dealer, government securities broker, government securities dealer, registered transfer agent, registered clearing agency, participant therein, member of the Federal Reserve System, and bank whose deposits are insured by the Federal Deposit Insurance Corporation shall—

(A) report to the Commission or other person designated by the Commission and, in the case of securities issued pursu-ant to chapter 31 of title 31, United States Code, to the Sec-retary of the Treasury such information about securities that are missing, lost, counterfeit, stolen, or cancelled, in such form and within such time as the Commission, by rule, determines is necessary or appropriate in the public interest or for the pro-tection of investors; such information shall be available on re-quest for a reasonable fee, to any such exchange, member, as-sociation, broker, dealer, municipal securities dealer, transfer agent, clearing agency, participant, member of the Federal Re-serve System, or insured bank, and such other persons as the Commission, by rule, designates; and

(B) make such inquiry with respect to information reported pursuant to this subsection as the Commission, by rule, pre-scribes as necessary or appropriate in the public interest or for the protection of investors, to determine whether securities in their custody or control, for which they are responsible, or in which they are effecting, clearing, or settling a transaction have been reported as missing, lost, counterfeit, stolen, can-celled, or reported in such other manner as the Commission, by rule, may prescribe. (2) Every member of a national securities exchange, broker,

dealer, registered transfer agent, registered clearing agency, reg-istered securities information processor, national securities ex-change, and national securities association shall require that each of its partners, directors, officers, and employees be fingerprinted and shall submit such fingerprints, or cause the same to be sub-mitted, to the Attorney General of the United States for identifica-tion and appropriate processing. The Commission, by rule, may ex-empt from the provisions of this paragraph upon specified terms, conditions, and periods, any class of partners, directors, officers, or employees of any such member, broker, dealer, transfer agent, clearing agency, securities information processor, national securi-ties exchange, or national securities association, if the Commission finds that such action is not inconsistent with the public interest or the protection of investors. Notwithstanding any other provision of law, in providing identification and processing functions, the At-torney General shall provide the Commission and self-regulatory


organizations designated by the Commission with access to all criminal history record information.

(3)(A) In order to carry out the authority under paragraph (1) above, the Commission or its designee may enter into agreement with the Attorney General to use the facilities of the National Crime Information Center (’’NCIC’’) to receive, store, and dissemi-nate information in regard to missing, lost, counterfeit, or stolen securities and to permit direct inquiry access to NCIC’s file on such securities for the financial community.

(B) In order to carry out the authority under paragraph (1) of this subsection, the Commission or its designee and the Secretary of the Treasury shall enter into an agreement whereby the Com-mission or its designee will receive, store, and disseminate informa-tion in the possession, and which comes into the possession, of the Department of the Treasury in regard to missing, lost, counterfeit, or stolen securities.

(4) In regard to paragraphs (1), (2), and (3), above insofar as such paragraphs apply to any bank or member of the Federal Re-serve System, the Commission may delegate its authority to:

(A) the Comptroller of the Currency as to national banks; (B) the Federal Reserve Board in regard to any member of

the Federal Reserve System which is not a national bank; and (C) the Federal Deposit Insurance Corporation for any

State bank which is insured by the Federal Deposit Insurance Corporation but which is not a member of the Federal Reserve System. (5) The Commission shall encourage the insurance industry to

require their insured to report expeditiously instances of missing, lost, counterfeit, or stolen securities to the Commission or to such other person as the Commission may, by rule, designate to receive such information.

(g) Any broker, dealer, or other person extending credit who is subject to the rules and regulations prescribed by the Board of Gov-ernors of the Federal Reserve System pursuant to this title shall make such reports to the Board as it may require as necessary or appropriate to enable it to perform the functions conferred upon it by this title. If any such broker, dealer, or other person shall fail to make any such report or fail to furnish full information therein, or, if in the judgment of the Board it is otherwise necessary, such broker, dealer, or other person shall permit such inspections to be made by the Board with respect to the business operations of such broker, dealer, or other person as the Board may deem necessary to enable it to obtain the required information.

(h) RISK ASSESSMENT FOR HOLDING COMPANY SYSTEMS.—(1) OBLIGATIONS TO OBTAIN, MAINTAIN, AND REPORT INFOR-

MATION.— Every person who is (A) a registered broker or deal-er, or (B) a registered municipal securities dealer for which the Commission is the appropriate regulatory agency, shall obtain such information and make and keep such records as the Com-mission by rule prescribes concerning the registered person’s policies, procedures, or systems for monitoring and controlling financial and operational risks to it resulting from the activi-ties of any of its associated persons, other than a natural per-son. Such records shall describe, in the aggregate, each of the


financial and securities activities conducted by, and the cus-tomary sources of capital and funding of, those of its associated persons whose business activities are reasonably likely to have a material impact on the financial or operational condition of such registered person, including its net capital, its liquidity, or its ability to conduct or finance its operations. The Commis-sion, by rule, may require summary reports of such informa-tion to be filed with the Commission no more frequently than quarterly.

(2) AUTHORITY TO REQUIRE ADDITIONAL INFORMATION.—If, as a result of adverse market conditions or based on reports provided to the Commission pursuant to paragraph (1) of this subsection or other available information, the Commission rea-sonably concludes that it has concerns regarding the financial or operational condition of (A) any registered broker or dealer, or (B) any registered municipal securities dealer, government securities broker, or government securities dealer for which the Commission is the appropriate regulatory agency, the Commis-sion may require the registered person to make reports con-cerning the financial and securities activities of any of such person’s associated persons, other than a natural person, whose business activities are reasonably likely to have a mate-rial impact on the financial or operational condition of such registered person. The Commission, in requiring reports pursu-ant to this paragraph, shall specify the information required, the period for which it is required, the time and date on which the information must be furnished, and whether the informa-tion is to be furnished directly to the Commission or to a self-regulatory organization with primary responsibility for exam-ining the registered person’s financial and operational condi-tion.

(3) SPECIAL PROVISIONS WITH RESPECT TO ASSOCIATED PER-SONS SUBJECT TO FEDERAL BANKING AGENCY REGULATION.—

(A) COOPERATION IN IMPLEMENTATION.—In developing and implementing reporting requirements pursuant to paragraph (1) of this subsection with respect to associated persons subject to examination by or reporting require-ments of a Federal banking agency, the Commission shall consult with and consider the views of each such Federal banking agency. If a Federal banking agency comments in writing on a proposed rule of the Commission under this subsection that has been published for comment, the Com-mission shall respond in writing to such written comment before adopting the proposed rule. The Commission shall, at the request of the Federal banking agency, publish such comment and response in the Federal Register at the time of publishing the adopted rule.

(B) USE OF BANKING AGENCY REPORTS.—A registered broker, dealer, or municipal securities dealer shall be in compliance with any recordkeeping or reporting require-ment adopted pursuant to paragraph (1) of this subsection concerning an associated person that is subject to exam-ination by or reporting requirements of a Federal banking agency if such broker, dealer, or municipal securities deal-


er utilizes for such recordkeeping or reporting requirement copies of reports filed by the associated person with the Federal banking agency pursuant to section 5211 of the Revised Statutes, section 9 of the Federal Reserve Act, sec-tion 7(a) of the Federal Deposit Insurance Act, section 10(b) of the Home Owners’ Loan Act, or section 8 of the Bank Holding Company Act of 1956. The Commission may, however, by rule adopted pursuant to paragraph (1), re-quire any broker, dealer, or municipal securities dealer fil-ing such reports with the Commission to obtain, maintain, or report supplemental information if the Commission makes an explicit finding that such supplemental informa-tion is necessary to inform the Commission regarding po-tential risks to such broker, dealer, or municipal securities dealer. Prior to requiring any such supplemental informa-tion, the Commission shall first request the Federal bank-ing agency to expand its reporting requirements to include such information.

(C) PROCEDURE FOR REQUIRING ADDITIONAL INFORMA-TION.—Prior to making a request pursuant to paragraph (2) of this subsection for information with respect to an as-sociated person that is subject to examination by or report-ing requirements of a Federal banking agency, the Com-mission shall—

(i) notify such agency of the information required with respect to such associated person; and

(ii) consult with such agency to determine whether the information required is available from such agency and for other purposes, unless the Commission deter-mines that any delay resulting from such consultation would be inconsistent with ensuring the financial and operational condition of the broker, dealer, municipal securities dealer, government securities broker, or gov-ernment securities dealer or the stability or integrity of the securities markets. (D) EXCLUSION FOR EXAMINATION REPORTS.—Nothing

in this subsection shall be construed to permit the Com-mission to require any registered broker or dealer, or any registered municipal securities dealer, government securi-ties broker, or government securities dealer for which the Commission is the appropriate regulatory agency, to ob-tain, maintain, or furnish any examination report of any Federal banking agency or any supervisory recommenda-tions or analysis contained therein.

(E) CONFIDENTIALITY OF INFORMATION PROVIDED.—No information provided to or obtained by the Commission from any Federal banking agency pursuant to a request by the Commission under subparagraph (C) of this paragraph regarding any associated person which is subject to exam-ination by or reporting requirements of a Federal banking agency may be disclosed to any other person (other than a self-regulatory organization), without the prior written approval of the Federal banking agency. Nothing in this subsection shall authorize the Commission to withhold in-


formation from Congress, or prevent the Commission from complying with a request for information from any other Federal department or agency requesting the information for purposes within the scope of its jurisdiction, or com-plying with an order of a court of the United States in an action brought by the United States or the Commission.

(F) NOTICE TO BANKING AGENCIES CONCERNING FINAN-CIAL AND OPERATIONAL CONDITION CONCERNS.—The Com-mission shall notify the Federal banking agency of any concerns of the Commission regarding significant financial or operational risks resulting from the activities of any registered broker or dealer, or any registered municipal se-curities dealer, government securities broker, or govern-ment securities dealer for which the Commission is the ap-propriate regulatory agency, to any associated person thereof which is subject to examination by or reporting re-quirements of the Federal banking agency.

(G) DEFINITION.—For purposes of this paragraph, the term ‘‘Federal banking agency’’ shall have the same mean-ing as the term ‘‘appropriate Federal bank agency’’ in sec-tion 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)). (4) EXEMPTIONS.—The Commission by rule or order may

exempt any person or class of persons, under such terms and conditions and for such periods as the Commission shall pro-vide in such rule or order, from the provisions of this sub-section, and the rules thereunder. In granting such exemp-tions, the Commission shall consider, among other factors—

(A) whether information of the type required under this subsection is available from a supervisory agency (as defined in section 1101(6) of the Right to Financial Privacy Act of 1978 (12 U.S.C. 3401(6))), a State insurance com-mission or similar State agency, the Commodity Futures Trading Commission, or a similar foreign regulator;

(B) the primary business of any associated person; (C) the nature and extent of domestic or foreign regu-

lation of the associated person’s activities; (D) the nature and extent of the registered person’s se-

curities activities; and (E) with respect to the registered person and its asso-

ciated persons, on a consolidated basis, the amount and proportion of assets devoted to, and revenues derived from, activities in the United States securities markets. (5) AUTHORITY TO LIMIT DISCLOSURE OF INFORMATION.—

Notwithstanding any other provision of law, the Commission shall not be compelled to disclose any information required to be reported under this subsection, or any information supplied to the Commission by any domestic or foreign regulatory agen-cy that relates to the financial or operational condition of any associated person of a registered broker, dealer, government securities broker, government securities dealer, or municipal securities dealer. Nothing in this subsection shall authorize the Commission to withhold information from Congress, or prevent the Commission from complying with a request for information


116Subsetion (i) of this section was repealed, and subsec. (j) was redesignated (i), by Pub. L. 111-203, Sec. 617(a).

from any other Federal department or agency requesting the information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this sub-section shall be considered a statute described in subsection (b)(3)(B) of such section 552. In prescribing regulations to carry out the requirements of this subsection, the Commission shall designate information described in or obtained pursuant to subparagraph (B) or (C) of paragraph (3) of this subsection as confidential information for purposes of section 24(b)(2) of this title. (i) AUTHORITY TO LIMIT DISCLOSURE OF INFORMATION.—Not-

withstanding any other provision of law, the Commission shall not be compelled to disclose any information required to be reported under subsection (h) or (i) [116] or any information supplied to the Commission by any domestic or foreign regulatory agency that re-lates to the financial or operational condition of any associated per-son of a broker or dealer, investment bank holding company, or any affiliate of an investment bank holding company. Nothing in this subsection shall authorize the Commission to withhold information from Congress, or prevent the Commission from complying with a request for information from any other Federal department or agency or any self-regulatory organization requesting the informa-tion for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this subsection shall be consid-ered a statute described in subsection (b)(3)(B) of such section 552. In prescribing regulations to carry out the requirements of this subsection, the Commission shall designate information described in or obtained pursuant to subparagraphs (A), (B), and (C) of sub-section (i)(5) [116] as confidential information for purposes of section 24(b)(2) of this title.

(j) COORDINATION OF EXAMINING AUTHORITIES.—(1) ELIMINATION OF DUPLICATION.—The Commission and

the examining authorities, through cooperation and coordina-tion of examination and oversight activities, shall eliminate any unnecessary and burdensome duplication in the examina-tion process.

(2) COORDINATION OF EXAMINATIONS.—The Commission and the examining authorities shall share such information, including reports of examinations, customer complaint informa-tion, and other nonpublic regulatory information, as appro-priate to foster a coordinated approach to regulatory oversight of brokers and dealers that are subject to examination by more than one examining authority.

(3) EXAMINATIONS FOR CAUSE.—At any time, any exam-ining authority may conduct an examination for cause of any broker or dealer subject to its jurisdiction.

(4) CONFIDENTIALITY.—


(A) IN GENERAL.—Section 24 shall apply to the sharing of information in accordance with this subsection. The Commission shall take appropriate action under section 24(c) to ensure that such information is not inappropri-ately disclosed.

(B) APPROPRIATE DISCLOSURE NOT PROHIBITED.—Noth-ing in this paragraph authorizes the Commission or any examining authority to withhold information from the Congress, or prevent the Commission or any examining authority from complying with a request for information from any other Federal department or agency requesting the information for purposes within the scope of its juris-diction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. (5) DEFINITION.—For purposes of this subsection, the term

‘‘examining authority’’ means a self-regulatory organization registered with the Commission under this title (other than a registered clearing agency) with the authority to examine, in-spect, and otherwise oversee the activities of a registered broker or dealer.

(June 6, 1934, ch. 404, title I, Sec. 17, 48 Stat. 897; Aug. 23, 1935, ch. 614, Sec. 203(a), 49 Stat. 704; May 27, 1936, ch. 462, Sec. 4, 49 Stat. 1379; June 25, 1938, ch. 677, Sec. 5, 52 Stat. 1076; June 4, 1975, Pub. L. 94-29, Sec. 14, 89 Stat. 137; Oct. 28, 1986, Pub. L. 99-571, title I, Sec. 102(h), (i), 100 Stat. 3219; Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 321, title VIII, Sec. 801(b), 101 Stat. 1257, 1265; Oct. 16, 1990, Pub. L. 101-432, Sec. 4(a), 104 Stat. 966; Oct. 11, 1996, Pub. L. 104-290, title I, Sec. 108, 110 Stat. 3425; Nov. 3, 1998, Pub. L. 105-353, title III, Sec. 301(b)(5), 112 Stat. 3236; Nov. 12, 1999, Pub. L. 106-102, title II, Sec. 231(a), 113 Stat. 1402; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5)[title II, Sec. 204], 114 Stat. 2763, 2763A-424; Pub. L. 107-204, title II, Sec. 205(c)(2), July 30, 2002, 116 Stat. 774; Pub. L. 108-386, Sec. 8(f)(5), (6), Oct. 30, 2004, 118 Stat. 2232; Pub. L. 109-291, Sec. 5, Sept. 29, 2006, 120 Stat. 1338; Pub. L. 111-203, title VI, Sec. 617(a), title IX, Secs. 929D, 929S, 975(h), 982(e)(2), 985(b)(7), July 21, 2010, 124 Stat. 1616, 1853, 1867, 1923, 1929, 1934.)

NATIONAL SYSTEM FOR CLEARANCE AND SETTLEMENT OF SECURITIES TRANSACTIONS

SEC. 17A. (a)(1) The Congress finds that—(A) The prompt and accurate clearance and settlement of

securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and per-sons facilitating transactions by and acting on behalf of inves-tors.

(B) Inefficient procedures for clearance and settlement im-pose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.


(C) New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.

(D) The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and in-crease the protection of investors and persons facilitating transactions by and acting on behalf of investors. (2)(A) The Commission is directed, therefore, having due re-

gard for the public interest, the protection of investors, the safe-guarding of securities and funds, and maintenance of fair competi-tion among brokers and dealers, clearing agencies, and transfer agents, to use its authority under this title—

(i) to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of trans-actions in securities (other than exempt securities); and

(ii) to facilitate the establishment of linked or coordinated facilities for clearance and settlement of transactions in securi-ties, securities options, contracts of sale for future delivery and options thereon, and commodity options;

in accordance with the findings and to carry out the objectives set forth in paragraph (1) of this subsection.

(B) The Commission shall use its authority under this title to assure equal regulation under this title of registered clearing agen-cies and registered transfer agents. In carrying out its responsibil-ities set forth in subparagraph (A)(ii) of this paragraph, the Com-mission shall coordinate with the Commodity Futures Trading Commission and consult with the Board of Governors of the Fed-eral Reserve System.

(b)(1) Except as otherwise provided in this section, it shall be unlawful for any clearing agency, unless registered in accordance with this subsection, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a clearing agency with respect to any security (other than an exempted security). The Commission, by rule or order, upon its own motion or upon application, may conditionally or unconditionally exempt any clearing agency or security or any class of clearing agencies or securities from any provisions of this section or the rules or regulations thereunder, if the Commission finds that such exemption is consistent with the public interest, the protection of investors, and the purposes of this section, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds. A clear-ing agency or transfer agent shall not perform the functions of both a clearing agency and a transfer agent unless such clearing agency or transfer agent is registered in accordance with this subsection and subsection (c) of this section.

(2) A clearing agency may be registered under the terms and conditions hereinafter provided in this subsection and in accord-ance with the provisions of section 19(a) of this title, by filing with the Commission an application for registration in such form as the Commission, by rule, may prescribe containing the rules of the clearing agency and such other information and documents as the Commission, by rule, may prescribe as necessary or appropriate in


the public interest or for the prompt and accurate clearance and settlement of securities transactions.

(3) A clearing agency shall not be registered unless the Com-mission determines that—

(A) Such clearing agency is so organized and has the ca-pacity to be able to facilitate the prompt and accurate clear-ance and settlement of securities transactions and derivative agreements, contracts, and transactions for which it is respon-sible, to safeguard securities and funds in its custody or control or for which it is responsible, to comply with the provisions of this title and the rules and regulations thereunder, to enforce (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of this title) compliance by its partici-pants with the rules of the clearing agency, and to carry out the purposes of this section.

(B) Subject to the provisions of paragraph (4) of this subsection, the rules of the clearing agency provide that any (i) registered broker or dealer, (ii) other registered clearing agen-cy, (iii) registered investment company, (iv) bank, (v) insurance company, or (vi) other person or class of persons as the Com-mission, by rule, may from time to time designate as appro-priate to the development of a national system or the prompt and accurate clearance and settlement of securities trans-actions may become a participant in such clearing agency.

(C) The rules of the clearing agency assure a fair represen-tation of its shareholders (or members) and participants in the selection of its directors and administration of its affairs. (The Commission may determine that the representation of partici-pants is fair if they are afforded a reasonable opportunity to acquire voting stock of the clearing agency, directly or indi-rectly, in reasonable proportion to their use of such clearing agency.)

(D) The rules of the clearing agency provide for the equi-table allocation of reasonable dues, fees, and other charges among its participants.

(E) The rules of the clearing agency do not impose any schedule of prices, or fix rates or other fees, for services ren-dered by its participants.

(F) The rules of the clearing agency are designed to pro-mote the prompt and accurate clearance and settlement of se-curities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, to assure the safe-guarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible, to foster cooperation and coordination with persons engaged in the clearance and settlement of securities transactions, to re-move impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination in the admission of participants or among par-ticipants in the use of the clearing agency, or to regulate by virtue of any authority conferred by this title matters not re-


lated to the purposes of this section or the administration of the clearing agency.

(G) The rules of the clearing agency provide that (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of this title) its participants shall be appro-priately disciplined for violation of any provision of the rules of the clearing agency by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, or any other fitting sanction.

(H) The rules of the clearing agency are in accordance with the provisions of paragraph (5) of this subsection, and, in gen-eral, provide a fair procedure with respect to the disciplining of participants, the denial of participation to any persons seek-ing participation therein, and the prohibition or limitation by the clearing agency of any person with respect to access to services offered by the clearing agency.

(I) The rules of the clearing agency do not impose any bur-den on competition not necessary or appropriate in furtherance of the purposes of this title. (4)(A) A registered clearing agency may, and in cases in which

the Commission, by order, directs as appropriate in the public in-terest shall, deny participation to any person subject to a statutory disqualification. A registered clearing agency shall file notice with the Commission not less than thirty days prior to admitting any person to participation, if the clearing agency knew, or in the exer-cise of reasonable care should have known, that such person was subject to a statutory disqualification. The notice shall be in such form and contain such information as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(B) A registered clearing agency may deny participation to, or condition the participation of, any person if such person does not meet such standards of financial responsibility, operational capa-bility, experience, and competence as are prescribed by the rules of the clearing agency. A registered clearing agency may examine and verify the qualifications of an applicant to be a participant in ac-cordance with procedures established by the rules of the clearing agency.

(5)(A) In any proceeding by a registered clearing agency to de-termine whether a participant should be disciplined (other than a summary proceeding pursuant to subparagraph (C) of this para-graph), the clearing agency shall bring specific charges, notify such participant of, and give him an opportunity to defend against such charges, and keep a record. A determination by the clearing agency to impose a disciplinary sanction shall be supported by a statement setting forth—

(i) any act or practice in which such participant has been found to have engaged, or which such participant has been found to have omitted;

(ii) the specific provisions of the rules of the clearing agen-cy which any such act or practice, or omission to act, is deemed to violate; and

(iii) the sanction imposed and the reasons therefor.


(B) In any proceeding by a registered clearing agency to deter-mine whether a person shall be denied participation or prohibited or limited with respect to access to services offered by the clearing agency, the clearing agency shall notify such person of, and give him an opportunity to be heard upon, the specific grounds for de-nial or prohibition or limitation under consideration and keep a record. A determination by the clearing agency to deny participa-tion or prohibit or limit a person with respect to access to services offered by the clearing agency shall be supported by a statement setting forth the specific grounds on which the denial or prohibition or limitation is based.

(C) A registered clearing agency may summarily suspend and close the accounts of a participant who (i) has been and is expelled or suspended from any self-regulatory organization, (ii) is in default of any delivery of funds or securities to the clearing agency, or (iii) is in such financial or operating difficulty that the clearing agency determines and so notifies the appropriate regulatory agency for such participant that such suspension and closing of accounts are necessary for the protection of the clearing agency, its participants, creditors, or investors. A participant so summarily suspended shall be promptly afforded an opportunity for a hearing by the clearing agency in accordance with the provisions of subparagraph (A) of this paragraph. The appropriate regulatory agency for such partici-pant, by order, may stay any such summary suspension on its own motion or upon application by any person aggrieved thereby, if such appropriate regulatory agency determines summarily or after notice and opportunity for hearing (which hearing may consist sole-ly of the submission of affidavits or presentation of oral arguments) that such stay is consistent with the public interest and protection of investors.

(6) No registered clearing agency shall prohibit or limit access by any person to services offered by any participant therein.

(7)(A) A clearing agency that is regulated directly or indirectly by the Commodity Futures Trading Commission through its asso-ciation with a designated contract market for security futures prod-ucts that is a national securities exchange registered pursuant to section 6(g), and that would be required to register pursuant to paragraph (1) of this subsection only because it performs the func-tions of a clearing agency with respect to security futures products effected pursuant to the rules of the designated contract market with which such agency is associated, is exempted from the provi-sions of this section and the rules and regulations thereunder, ex-cept that if such a clearing agency performs the functions of a clearing agency with respect to a security futures product that is not cash settled, it must have arrangements in place with a reg-istered clearing agency to effect the payment and delivery of the se-curities underlying the security futures product.

(B) Any clearing agency that performs the functions of a clear-ing agency with respect to security futures products must coordi-nate with and develop fair and reasonable links with any and all other clearing agencies that perform the functions of a clearing agency with respect to security futures products, in order to permit,


117So in law. Probably should be section 6(h)(7)(C).

as of the compliance date (as defined in section 6(h)(6)(C)) [117], se-curity futures products to be purchased on one market and offset on another market that trades such products.

(8) A registered clearing agency shall be permitted to provide facilities for the clearance and settlement of any derivative agree-ments, contracts, or transactions that are excluded from the Com-modity Exchange Act, subject to the requirements of this section and to such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title.

(c)(1) Except as otherwise provided in this section, it shall be unlawful for any transfer agent, unless registered in accordance with this section, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the function of a transfer agent with respect to any security reg-istered under section 12 of this title or which would be required to be registered except for the exemption from registration provided by subsection (g)(2)(B) or (g)(2)(G) of that section. The appropriate regulatory agency, by rule or order, upon its own motion or upon application, may conditionally or unconditionally exempt any per-son or security or class of persons or securities from any provision of this section or any rule or regulation prescribed under this sec-tion, if the appropriate regulatory agency finds (A) that such ex-emption is in the public interest and consistent with the protection of investors and the purposes of this section, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds, and (B) the Commis-sion does not object to such exemption.

(2) A transfer agent may be registered by filing with the appro-priate regulatory agency for such transfer agent an application for registration in such form and containing such information and doc-uments concerning such transfer agent and any persons associated with the transfer agent as such appropriate regulatory agency may prescribe as necessary or appropriate in furtherance of the pur-poses of this section. Except as hereinafter provided, such registra-tion shall become effective 45 days after receipt of such application by such appropriate regulatory agency or within such shorter pe-riod of time as such appropriate regulatory agency may determine.

(3) The appropriate regulatory agency for a transfer agent, by order, shall deny registration to, censure, place limitations on the activities, functions, or operations of, suspend for a period not ex-ceeding 12 months, or revoke the registration of such transfer agent, if such appropriate regulatory agency finds, on the record after notice and opportunity for hearing, that such denial, censure, placing of limitations, suspension, or revocation is in the public in-terest and that such transfer agent, whether prior or subsequent to becoming such, or any person associated with such transfer agent, whether prior or subsequent to becoming so associated—

(A) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been


118So in law. Probably should be ‘‘of’’.

convicted of any offense specified in subparagraph (B) of such paragraph (4) within ten years of the commencement of the proceedings under this paragraph, or is enjoined from any ac-tion, conduct, or practice specified in subparagraph (C) of such paragraph (4); or

(B) is subject to an order entered pursuant to subpara-graph (C) of paragraph (4) of this subsection barring or sus-pending the right of such person to be associated with a trans-fer agent. (4)(A) Pending final determination whether any registration by

a transfer agent under this subsection shall be denied, the appro-priate regulatory agency for such transfer agent, by order, may postpone the effective date of such registration for a period not to exceed fifteen days, but if, after notice and opportunity for hearing (which may consist solely of affidavits and oral arguments), it shall appear to such appropriate regulatory agency to be necessary or appropriate in the public interest or for the protection of investors to postpone the effective date of such registration until final deter-mination, such appropriate regulatory agency shall so order. Pend-ing final determination whether any registration under this sub-section shall be revoked, such appropriate regulatory agency, by order, may suspend such registration, if such suspension appears to such appropriate regulatory agency, after notice and opportunity for hearing, to be necessary or appropriate in the public interest or for the protection of investors.

(B) A registered transfer agent may, upon such terms and con-ditions as the appropriate regulatory agency for such transfer agent deems necessary or appropriate in the public interest, for the protection of investors, or in furtherance of the purposes of this sec-tion, withdraw from registration by filing a written notice of with-drawal with such appropriate regulatory agency. If such appro-priate regulatory agency finds that any transfer agent for which it is the appropriate regulatory agency, is no longer in existence or has ceased to do business as a transfer agent, such appropriate reg-ulatory agency, by order, shall cancel or deny the registration.

(C) The appropriate regulatory agency for a transfer agent, by order, shall censure or place limitations on the activities or func-tions of any person associated, seeking to become associated, or, at the time of the alleged misconduct, associated or seeking to become associated with the transfer agent, or suspend for a period not ex-ceeding 12 months or bar any such person from being associated with any transfer agent, broker, dealer, investment adviser, munic-ipal securities dealer, municipal advisor, or nationally recognized statistical rating organization, if the appropriate regulatory agency finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or bar is in the public interest and that such person has committed or omitted any act, or is subject to an order or finding, enumerated in subpara-graph (A), (D), (E), (H), or (G) or [118] paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subpara-graph (B) of such paragraph (4) within ten years of the commence-ment of the proceedings under this paragraph, or is enjoined from


any action, conduct, or practice specified in subparagraph (C) of such paragraph (4). It shall be unlawful for any person as to whom such an order suspending or barring him from being associated with a transfer agent is in effect willfully to become, or to be, asso-ciated with a transfer agent without the consent of the appropriate regulatory agency that entered the order and the appropriate regu-latory agency for that transfer agent. It shall be unlawful for any transfer agent to permit such a person to become, or remain, a per-son associated with it without the consent of such appropriate reg-ulatory agencies, if the transfer agent knew, or in the exercise of reasonable care should have known, of such order. The Commission may establish, by rule, procedures by which a transfer agent rea-sonably can determine whether a person associated or seeking to become associated with it is subject to any such order, and may re-quire, by rule, that any transfer agent comply with such proce-dures.

(d)(1) No registered clearing agency or registered transfer agent shall, directly or indirectly, engage in any activity as clearing agency or transfer agent in contravention of such rules and regula-tions (A) as the Commission may prescribe as necessary or appro-priate in the public interest, for the protection of investors, or oth-erwise in furtherance of the purposes of this title, or (B) as the ap-propriate regulatory agency for such clearing agency or transfer agent may prescribe as necessary or appropriate for the safe-guarding of securities and funds.

(2) With respect to any clearing agency or transfer agent for which the Commission is not the appropriate regulatory agency, the appropriate regulatory agency for such clearing agency or transfer agent may, in accordance with section 8 of the Federal De-posit Insurance Act (12 U.S.C. 1818), enforce compliance by such clearing agency or transfer agent with the provisions of this sec-tion, sections 17 and 19 of this title, and the rules and regulations thereunder. For purposes of the preceding sentence, any violation of any such provision shall constitute adequate basis for the issuance of an order under section 8(b) or 8(c) of the Federal De-posit Insurance Act, and the participants in any such clearing agency and the persons doing business with any such transfer agent shall be deemed to be ‘‘depositors’’ as that term is used in section 8(c) of that Act.

(3)(A) With respect to any clearing agency or transfer agent for which the Commission is not the appropriate regulatory agency, the Commission and the appropriate regulatory agency for such clearing agency or transfer agent shall consult and cooperate with each other, and, as may be appropriate, with State banking au-thorities having supervision over such clearing agency or transfer agent toward the end that, to the maximum extent practicable, their respective regulatory responsibilities may be fulfilled and the rules and regulations applicable to such clearing agency or transfer agent may be in accord with both sound banking practices and a national system for the prompt and accurate clearance and settle-ment of securities transactions. In accordance with this objective—

(i) the Commission and such appropriate regulatory agency shall, at least fifteen days prior to the issuance for public com-ment of any proposed rule or regulation or adoption of any rule


or regulation concerning such clearing agency or transfer agent, consult and request the views of the other; and

(ii) such appropriate regulatory agency shall assume pri-mary responsibility to examine and enforce compliance by such clearing agency or transfer agent with the provisions of this section and sections 17 and 19 of this title. (B) Nothing in the preceding subparagraph or elsewhere in this

title shall be construed to impair or limit (other than by the re-quirement of notification) the Commission’s authority to make rules under any provision of this title or to enforce compliance pur-suant to any provision of this title by any clearing agency, transfer agent, or person associated with a transfer agent with the provi-sions of this title and the rules and regulations thereunder.

(4) Nothing in this section shall be construed to impair the au-thority of any State banking authority or other State or Federal regulatory authority having jurisdiction over a person registered as a clearing agency, transfer agent, or person associated with a transfer agent, to make and enforce rules governing such person which are not inconsistent with this title and the rules and regula-tions thereunder.

(5) A registered transfer agent may not, directly or indirectly, engage in any activity in connection with the guarantee of a signa-ture of an endorser of a security, including the acceptance or rejec-tion of such guarantee, in contravention of such rules and regula-tions as the Commission may prescribe as necessary or appropriate in the public interest, for the protection of investors, to facilitate the equitable treatment of financial institutions which issue such guarantees, or otherwise in furtherance of the purposes of this title.

(e) The Commission shall use its authority under this title to end the physical movement of securities certificates in connection with the settlement among brokers and dealers of transactions in securities consummated by means of the mails or any means or in-strumentalities of interstate commerce.

(f)(1) Notwithstanding any provision of State law, except as provided in paragraph (3), if the Commission makes each of the findings described in paragraph (2)(A), the Commission may adopt rules concerning—

(A) the transfer of certificated or uncertificated securities (other than government securities issued pursuant to chapter 31 of title 31, United States Code, or securities otherwise proc-essed within a book-entry system operated by the Federal Re-serve banks pursuant to a Federal book-entry regulation) or limited interests (including security interests) therein; and

(B) rights and obligations of purchasers, sellers, owners, lenders, borrowers, and financial intermediaries (including bro-kers, dealers, banks, and clearing agencies) involved in or af-fected by such transfers, and the rights of third parties whose interests in such securities devolve from such transfers. (2)(A) The findings described in this paragraph are findings by

the Commission that—(i) such rule is necessary or appropriate for the protection

of investors or in the public interest and is reasonably designed


to promote the prompt, accurate, and safe clearance and settle-ment of securities transactions;

(ii) in the absence of a uniform rule, the safe and efficient operation of the national system for clearance and settlement of securities transactions will be, or is, substantially impeded; and

(iii) to the extent such rule will impair or diminish, di-rectly or indirectly, rights of persons specified in paragraph (1)(B) under State law concerning transfers of securities (or limited interests therein), the benefits of such rule outweigh such impairment or diminution of rights. (B) In making the findings described in subparagraph (A), the

Commission shall give consideration to the recommendations of the Advisory Committee established under paragraph (4), and it shall consult with and consider the views of the Secretary of the Treas-ury and the Board of Governors of the Federal Reserve System. If the Secretary of the Treasury objects, in writing, to any proposed rule of the Commission on the basis of the Secretary’s view on the issues described in clauses (i), (ii), and (iii) of subparagraph (A), the Commission shall consider all feasible alternatives to the proposed rule, and it shall not adopt any such rule unless the Commission makes an explicit finding that the rule is the most practicable method for achieving safe and efficient operation of the national clearance and settlement system.

(3) Any State may, prior to the expiration of 2 years after the Commission adopts a rule under this subsection, enact a statute that specifically refers to this subsection and the specific rule thereunder and establishes, prospectively from the date of enact-ment of the State statute, a provision that differs from that appli-cable under the Commission’s rule.

(4)(A) Within 90 days after the date of enactment of this sub-section, the Commission shall (and at such times thereafter as the Commission may determine, the Commission may), after consulta-tion with the Secretary of the Treasury and the Board of Governors of the Federal Reserve System, establish an advisory committee under the Federal Advisory Committee Act (5 U.S.C. App.). The Advisory Committee shall be directed to consider and report to the Commission on such matters as the Commission, after consultation with the Secretary of the Treasury and the Board of Governors of the Federal Reserve System, determines, including the areas, if any, in which State commercial laws and related Federal laws con-cerning the transfer of certificated or uncertificated securities, lim-ited interests (including security interests) in such securities, or the creation or perfection of security interests in such securities do not provide the necessary certainty, uniformity, and clarity for pur-chasers, sellers, owners, lenders, borrowers, and financial inter-mediaries concerning their respective rights and obligations.

(B) The Advisory Committee shall consist of 15 members, of which—

(i) 11 shall be designated by the Commission in accordance with the Federal Advisory Committee Act; and

(ii) 2 each shall be designated by the Board of Governors of the Federal Reserve System and the Secretary of the Treas-ury.


119Two subsecs. (g) have been enacted.

(C) The Advisory Committee shall conduct its activities in ac-cordance with the Federal Advisory Committee Act. Within 6 months of its designation, or such longer time as the Commission may designate, the Advisory Committee shall issue a report to the Commission, and shall cause copies of that report to be delivered to the Secretary of the Treasury and the Chairman of the Board of Governors of the Federal Reserve System.

(g) [119] DUE DILIGENCE FOR THE DELIVERY OF DIVIDENDS, IN-TEREST, AND OTHER VALUABLE PROPERTY RIGHTS.—

(1) REVISION OF RULES REQUIRED.—The Commission shall revise its regulations in section 240.17Ad-17 of title 17, Code of Federal Regulations, as in effect on December 8, 1997, to ex-tend the application of such section to brokers and dealers and to provide for the following:

(A) A requirement that the paying agent provide a sin-gle written notification to each missing security holder that the missing security holder has been sent a check that has not yet been negotiated. The written notification may be sent along with a check or other mailing subse-quently sent to the missing security holder but must be provided no later than 7 months after the sending of the not yet negotiated check.

(B) An exclusion for paying agents from the notifica-tion requirements when the value of the not yet negotiated check is less than $25.

(C) A provision clarifying that the requirements de-scribed in subparagraph (A) shall have no effect on State escheatment laws.

(D) For purposes of such revised regulations—(i) a security holder shall be considered a ‘‘missing

security holder’’ if a check is sent to the security hold-er and the check is not negotiated before the earlier of the paying agent sending the next regularly scheduled check or the elapsing of 6 months after the sending of the not yet negotiated check; and

(ii) the term ‘‘paying agent’’ includes any issuer, transfer agent, broker, dealer, investment adviser, in-denture trustee, custodian, or any other person that accepts payments from the issuer of a security and distributes the payments to the holders of the security.

(2) RULEMAKING.—The Commission shall adopt such rules, regulations, and orders necessary to implement this subsection no later than 1 year after the date of enactment of this sub-section. In proposing such rules, the Commission shall seek to minimize disruptions to current systems used by or on behalf of paying agents to process payment to account holders and avoid requiring multiple paying agents to send written notifi-cation to a missing security holder regarding the same not yet negotiated check.


120Two subsecs. (g) have been enacted.

(g) [120] REGISTRATION REQUIREMENT.—It shall be unlawful for a clearing agency, unless registered with the Commission, directly or indirectly to make use of the mails or any means or instrumen-tality of interstate commerce to perform the functions of a clearing agency with respect to a security-based swap.

(h) VOLUNTARY REGISTRATION.—A person that clears agree-ments, contracts, or transactions that are not required to be cleared under this title may register with the Commission as a clearing agency.

(i) STANDARDS FOR CLEARING AGENCIES CLEARING SECURITY-BASED SWAP TRANSACTIONS.—To be registered and to maintain reg-istration as a clearing agency that clears security-based swap transactions, a clearing agency shall comply with such standards as the Commission may establish by rule. In establishing any such standards, and in the exercise of its oversight of such a clearing agency pursuant to this title, the Commission may conform such standards or oversight to reflect evolving United States and inter-national standards. Except where the Commission determines oth-erwise by rule or regulation, a clearing agency shall have reason-able discretion in establishing the manner in which it complies with any such standards.

(j) RULES.—The Commission shall adopt rules governing per-sons that are registered as clearing agencies for security-based swaps under this title.

(k) EXEMPTIONS.—The Commission may exempt, conditionally or unconditionally, a clearing agency from registration under this section for the clearing of security-based swaps if the Commission determines that the clearing agency is subject to comparable, com-prehensive supervision and regulation by the Commodity Futures Trading Commission or the appropriate government authorities in the home country of the agency. Such conditions may include, but are not limited to, requiring that the clearing agency be available for inspection by the Commission and make available all informa-tion requested by the Commission.

(l) EXISTING DEPOSITORY INSTITUTIONS AND DERIVATIVE CLEAR-ING ORGANIZATIONS.—

(1) IN GENERAL.—A depository institution or derivative clearing organization registered with the Commodity Futures Trading Commission under the Commodity Exchange Act that is required to be registered as a clearing agency under this sec-tion is deemed to be registered under this section solely for the purpose of clearing security-based swaps to the extent that, be-fore the date of enactment of this subsection—

(A) the depository institution cleared swaps as a mul-tilateral clearing organization; or

(B) the derivative clearing organization cleared swaps pursuant to an exemption from registration as a clearing agency. (2) CONVERSION OF DEPOSITORY INSTITUTIONS.—A deposi-

tory institution to which this subsection applies may, by the vote of the shareholders owning not less than 51 percent of the voting interests of the depository institution, be converted into


a State corporation, partnership, limited liability company, or similar legal form pursuant to a plan of conversion, if the con-version is not in contravention of applicable State law.

(3) SHARING OF INFORMATION.—The Commodity Futures Trading Commission shall make available to the Commission, upon request, all information determined to be relevant by the Commodity Futures Trading Commission regarding a deriva-tives clearing organization deemed to be registered with the Commission under paragraph (1). (m) MODIFICATION OF CORE PRINCIPLES.—The Commission

may conform the core principles established in this section to re-flect evolving United States and international standards.

(June 6, 1934, ch. 404, title I, Sec. 17A, as added June 4, 1975, Pub. L. 94-29, Sec. 15, 89 Stat. 141; amended Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 322, 101 Stat. 1257; Oct. 15, 1990, Pub. L. 101-429, title II, Sec. 206, 104 Stat. 941; Oct. 16, 1990, Pub. L. 101-432, Sec. 5, 104 Stat. 973; Nov. 15, 1990, Pub. L. 101-550, title II, Sec. 203(c)(1), 104 Stat. 2718; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5)[title II, Sec. 206(d), 207], 114 Stat. 2763, 2763A-431, 2763A-434; Pub. L. 107-204, title VI, Sec. 604(c)(1)(C), July 30, 2002, 116 Stat. 796; Pub. L. 111-203, title VII, Sec. 763(b), title IX, Secs. 925(a)(3), 929W, July 21, 2010, 124 Stat. 1768, 1851, 1869.)

AUTOMATED QUOTATION SYSTEMS FOR PENNY STOCKS

SEC. 17B. (a) FINDINGS.—The Congress finds that—(1) the market for penny stocks suffers from a lack of reli-

able and accurate quotation and last sale information available to investors and regulators;

(2) it is in the public interest and appropriate for the pro-tection of investors and the maintenance of fair and orderly markets to improve significantly the information available to brokers, dealers, investors, and regulators with respect to quotations for and transactions in penny stocks; and

(3) a fully implemented automated quotation system for penny stocks would meet the information needs of investors and market participants and would add visibility and regu-latory and surveillance data to that market. (b) MANDATE TO FACILITATE THE ESTABLISHMENT OF AUTO-

MATED QUOTATION SYSTEMS.—(1) IN GENERAL.—The Commission shall facilitate the

widespread dissemination of reliable and accurate last sale and quotation information with respect to penny stocks in accord-ance with the findings set forth in subsection (a), with a view toward establishing, at the earliest feasible time, one or more automated quotation systems that will collect and disseminate information regarding all penny stocks.

(2) CHARACTERISTICS OF SYSTEMS.—Each such automated quotation system shall—

(A) be operated by a registered securities association or a national securities exchange in accordance with such rules as the Commission and these entities shall prescribe;


(B) collect and disseminate quotation and transaction information;

(C) except as provided in subsection (c), provide bid and ask quotations of participating brokers or dealers, or comparably accurate and reliable pricing information, which shall constitute firm bids or offers for at least such minimum numbers of shares or minimum dollar amounts as the Commission and the registered securities associa-tion or national securities exchange shall require; and

(D) provide for the reporting of the volume of penny stock transactions, including last sale reporting, when the volume reaches appropriate levels that the Commission shall specify by rule or order.

(c) EXEMPTIVE AUTHORITY.—The Commission may, by rule or order, grant such exemptions, in whole or in part, conditionally or unconditionally, to any penny stock or class of penny stocks from the requirements of subsection (b) as the Commission determines to be consistent with the public interest, the protection of investors, and the maintenance of fair and orderly markets.

(d) COMMISSION REPORTING REQUIREMENTS.—The Commission shall, in each of the first 5 annual reports (under section 23(b)(1) of this title) submitted more than 12 months after the date of en-actment of this section, include a description of the status of the penny stock automated quotation system or systems required by subsection (b). Such description shall include—

(1) a review of the development, implementation, and progress of the project, including achievement of significant milestones and current project schedule; and

(2) a review of the activities of registered securities asso-ciations and national securities exchanges in the development of the system.

(June 6, 1934, ch. 404, title I, Sec. 17B, as added Pub. L. 101-429, title V, Sec. 506, Oct. 15, 1990, 104 Stat. 955.)

LIABILITY FOR MISLEADING STATEMENTS

SEC. 18. (a) Any person who shall make or cause to be made any statement in any application, report, or document filed pursu-ant to this title or any rule or regulation thereunder or any under-taking contained in a registration statement as provided in sub-section (d) of section 15 of this title, which statement was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person (not knowing that such statement was false or misleading) who, in reliance upon such statement shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading. A person seeking to enforce such liability may sue at law or in equity in any court of competent jurisdiction. In any such suit the court may, in its dis-cretion, require an undertaking for the payment of the costs of such


suit, and assess reasonable costs, including reasonable attorneys’ fees, against either party litigant.

(b) Every person who becomes liable to make payment under this section may recover contribution as in cases of contract from any person who, if joined in the original suit, would have been lia-ble to make the same payment.

(c) No action shall be maintained to enforce any liability cre-ated under this section unless brought within one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued.

(June 6, 1934, ch. 404, title I, Sec. 18, 48 Stat. 897; May 27, 1936, ch. 462, Sec. 5, 49 Stat. 1379.)

REGISTRATION, RESPONSIBILITIES, AND OVERSIGHT OF SELF-REGULATORY ORGANIZATIONS

SEC. 19. (a)(1) The Commission shall, upon the filing of an ap-plication for registration as a national securities exchange, reg-istered securities association, or registered clearing agency, pursu-ant to section 6, 15A, or 17A of this title, respectively, publish no-tice of such filing and afford interested persons an opportunity to submit written data, views, and arguments concerning such appli-cation. Within ninety days of the date of publication of such notice (or within such longer period as to which the applicant consents), the Commission shall—

(A) by order grant such registration, or (B) institute proceedings to determine whether registration

should be denied. Such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing and shall be concluded within one hundred eighty days of the date of a publication of notice of the filing of the applica-tion for registration. At the conclusion of such proceedings the Commission, by order, shall grant or deny such registration. The Commission may extend the time for conclusion of such proceedings for up to ninety days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the applicant consents.

The Commission shall grant such registration if it finds that the requirements of this title and the rules and regulations thereunder with respect to the applicant are satisfied. The Commission shall deny such registration if it does not make such finding.

(2) With respect to an application for registration filed by a clearing agency for which the Commission is not the appropriate regulatory agency—

(A) The Commission shall not grant registration prior to the sixtieth day after the date of publication of notice of the fil-ing of such application unless the appropriate regulatory agen-cy for such clearing agency has notified the Commission of such appropriate regulatory agency’s determination that such clearing agency is so organized and has the capacity to be able to safeguard securities and funds in its custody or control or for which it is responsible and that the rules of such clearing


agency are designed to assure the safeguarding of such securi-ties and funds.

(B) The Commission shall institute proceedings in accord-ance with paragraph (1)(B) of this subsection to determine whether registration should be denied if the appropriate regu-latory agency for such clearing agency notifies the Commission within sixty days of the date of publication of notice of the fil-ing of such application of such appropriate regulatory agency’s (i) determination that such clearing agency may not be so orga-nized or have the capacity to be able to safeguard securities or funds in its custody or control or for which it is responsible or that the rules of such clearing agency may not be designed to assure the safeguarding of such securities and funds and (ii) reasons for such determination.

(C) The Commission shall deny registration if the appro-priate regulatory agency for such clearing agency notifies the Commission prior to the conclusion of proceedings instituted in accordance with paragraph (1)(B) of this subsection of such ap-propriate regulatory agency’s (i) determination that such clear-ing agency is not so organized or does not have the capacity to be able to safeguard securities or funds in its custody or con-trol or for which it is responsible or that the rules of such clearing agency are not designed to assure the safeguarding of such securities or funds and (ii) reasons for such determina-tion. (3) A self-regulatory organization may, upon such terms and

conditions as the Commission, by rule, deems necessary or appro-priate in the public interest or for the protection of investors, with-draw from registration by filing a written notice of withdrawal with the Commission. If the Commission finds that any self-regulatory organization is no longer in existence or has ceased to do business in the capacity specified in its application for registration, the Com-mission, by order, shall cancel its registration. Upon the with-drawal of a national securities association from registration or the cancellation, suspension, or revocation of the registration of a na-tional securities association, the registration of any association af-filiated therewith shall automatically terminate.

(b)(1) Each self-regulatory organization shall file with the Com-mission, in accordance with such rules as the Commission may pre-scribe, copies of any proposed rule or any proposed change in, addi-tion to, or deletion from the rules of such self-regulatory organiza-tion (hereinafter in this subsection collectively referred to as a ‘‘pro-posed rule change’’) accompanied by a concise general statement of the basis and purpose of such proposed rule change. The Commis-sion shall, as soon as practicable after the date of the filing of any proposed rule change, publish notice thereof together with the terms of substance of the proposed rule change or a description of the subjects and issues involved. The Commission shall give inter-ested persons an opportunity to submit written data, views, and ar-guments concerning such proposed rule change. No proposed rule change shall take effect unless approved by the Commission or oth-erwise permitted in accordance with the provisions of this sub-section.



(2) [121] APPROVAL PROCESS.—(A) APPROVAL PROCESS ESTABLISHED.—

(i) IN GENERAL.—Except as provided in clause (ii), not later than 45 days after the date of publication of a proposed rule change under paragraph (1), the Com-mission shall—

(I) by order, approve or disapprove the pro-posed rule change; or

(II) institute proceedings under subparagraph (B) to determine whether the proposed rule change should be disapproved. (ii) EXTENSION OF TIME PERIOD.—The Commission

may extend the period established under clause (i) by not more than an additional 45 days, if—

(I) the Commission determines that a longer period is appropriate and publishes the reasons for such determination; or

(II) the self-regulatory organization that filed the proposed rule change consents to the longer period.

(B) PROCEEDINGS.—(i) NOTICE AND HEARING.—If the Commission does

not approve or disapprove a proposed rule change under subparagraph (A), the Commission shall provide to the self-regulatory organization that filed the pro-posed rule change—

(I) notice of the grounds for disapproval under consideration; and

(II) opportunity for hearing, to be concluded not later than 180 days after the date of publica-tion of notice of the filing of the proposed rule change. (ii) ORDER OF APPROVAL OR DISAPPROVAL.—

(I) IN GENERAL.—Except as provided in sub-clause (II), not later than 180 days after the date of publication under paragraph (1), the Commis-sion shall issue an order approving or dis-approving the proposed rule change.

(II) EXTENSION OF TIME PERIOD.—The Com-mission may extend the period for issuance under clause (I) by not more than 60 days, if—

(aa) the Commission determines that a longer period is appropriate and publishes the reasons for such determination; or

(bb) the self-regulatory organization that filed the proposed rule change consents to the longer period.

(C) STANDARDS FOR APPROVAL AND DISAPPROVAL.—(i) APPROVAL.—The Commission shall approve a

proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of this title and the rules and


regulations issued under this title that are applicable to such organization.

(ii) DISAPPROVAL.—The Commission shall dis-approve a proposed rule change of a self-regulatory or-ganization if it does not make a finding described in clause (i).

(iii) TIME FOR APPROVAL.—The Commission may not approve a proposed rule change earlier than 30 days after the date of publication under paragraph (1), unless the Commission finds good cause for so doing and publishes the reason for the finding. (D) RESULT OF FAILURE TO INSTITUTE OR CONCLUDE

PROCEEDINGS.—A proposed rule change shall be deemed to have been approved by the Commission, if—

(i) the Commission does not approve or disapprove the proposed rule change or begin proceedings under subparagraph (B) within the period described in sub-paragraph (A); or

(ii) the Commission does not issue an order ap-proving or disapproving the proposed rule change under subparagraph (B) within the period described in subparagraph (B)(ii). (E) PUBLICATION DATE BASED ON FEDERAL REGISTER

PUBLISHING.—For purposes of this paragraph, if, after fil-ing a proposed rule change with the Commission pursuant to paragraph (1), a self-regulatory organization publishes a notice of the filing of such proposed rule change, together with the substantive terms of such proposed rule change, on a publicly accessible website, the Commission shall thereafter send the notice to the Federal Register for pub-lication thereof under paragraph (1) within 15 days of the date on which such website publication is made. If the Commission fails to send the notice for publication thereof within such 15 day period, then the date of publication shall be deemed to be the date on which such website pub-lication was made.

(F) RULEMAKING.—(i) IN GENERAL.—Not later than 180 days after the

date of enactment of the Investor Protection and Secu-rities Reform Act of 2010, after consultation with other regulatory agencies, the Commission shall pro-mulgate rules setting forth the procedural require-ments of the proceedings required under this para-graph.

(ii) NOTICE AND COMMENT NOT REQUIRED.—The rules promulgated by the Commission under clause (i) are not required to include republication of proposed rule changes or solicitation of public comment.

(3)(A) Notwithstanding the provisions of paragraph (2) of this subsection, a proposed rule change shall take effect upon filing with the Commission if designated by the self-regulatory organiza-tion as (i) constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule of the self-regulatory organization, (ii) establishing or


changing a due, fee, or other charge imposed by the self-regulatory organization on any person, whether or not the person is a member of the self-regulatory organization, or (iii) concerned solely with the administration of the self-regulatory organization or other matters which the Commission, by rule, consistent with the public interest and the purposes of this subsection, may specify as without the provisions of such paragraph (2).

(B) Notwithstanding any other provision of this subsection, a proposed rule change may be put into effect summarily if it ap-pears to the Commission that such action is necessary for the pro-tection of investors, the maintenance of fair and orderly markets, or the safeguarding of securities or funds. Any proposed rule change so put into effect shall be filed promptly thereafter in ac-cordance with the provisions of paragraph (1) of this subsection.

(C) Any proposed rule change of a self-regulatory organization which has taken effect pursuant to subparagraph (A) or (B) of this paragraph may be enforced by such organization to the extent it is not inconsistent with the provisions of this title, the rules and reg-ulations thereunder, and applicable Federal and State law. At any time within the 60-day period beginning on the date of filing of such a proposed rule change in accordance with the provisions of paragraph (1), the Commission summarily may temporarily sus-pend the change in the rules of the self-regulatory organization made thereby, if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title. If the Commission takes such action, the Commission shall in-stitute proceedings under paragraph (2)(B) to determine whether the proposed rule should be approved or disapproved. Commission action pursuant to this subparagraph shall not affect the validity or force of the rule change during the period it was in effect and shall not be reviewable under section 25 of this title, nor deemed to be ‘‘final agency action’’ for purposes of section 704 of title 5, United States Code.

(4) With respect to a proposed rule changed filed by a reg-istered clearing agency for which the Commission is not the appro-priate regulatory agency—

(A) The Commission shall not approve any such proposed rule change prior to the thirtieth day after the date of publica-tion of notice of the filing thereof unless the appropriate regu-latory agency for such clearing agency has notified the Com-mission of such appropriate regulatory agency’s determination that the proposed rule change is consistent with the safe-guarding of securities and funds in the custody or control of such clearing agency or for which it is responsible.

(B) The Commission shall institute proceedings in accord-ance with paragraph (2)(B) of this subsection to determine whether any such proposed rule change should be disapproved, if the appropriate regulatory agency for such clearing agency notifies the Commission within thirty days of the date of publi-cation of notice of the filing of the proposed rule change of such appropriate regulatory agency’s (i) determination that the pro-posed rule change may be inconsistent with the safeguarding of securities or funds in the custody or control of such clearing



agency or for which it is responsible and (ii) reasons for such determination.

(C) The Commission shall disapprove any such proposed rule change if the appropriate regulatory agency for such clear-ing agency notifies the Commission prior to the conclusion of proceedings instituted in accordance with paragraph (2)(B) of this subsection of such appropriate regulatory agency’s (i) de-termination that the proposed rule change is inconsistent with the safeguarding of securities or funds in the custody or control of such clearing agency or for which it is responsible and (ii) reasons for such determination.

(D)(i) [122] The Commission shall order the temporary suspension of any change in the rules of a clearing agency made by a proposed rule change that has taken effect under paragraph (3), if the appropriate regulatory agency for the clearing agency notifies the Commission not later than 30 days after the date on which the proposed rule change was filed of—

(I) the determination by the appropriate regu-latory agency that the rules of such clearing agency, as so changed, may be inconsistent with the safe-guarding of securities or funds in the custody or con-trol of such clearing agency or for which it is respon-sible; and

(II) the reasons for the determination described in subclause (I). (ii) If the Commission takes action under clause (i),

the Commission shall institute proceedings under para-graph (2)(B) to determine if the proposed rule change should be approved or disapproved.

(5) The Commission shall consult with and consider the views of the Secretary of the Treasury prior to approving a proposed rule filed by a registered securities association that primarily concerns conduct related to transactions in government securities, except where the Commission determines that an emergency exists requir-ing expeditious or summary action and publishes its reasons there-for. If the Secretary of the Treasury comments in writing to the Commission on a proposed rule that has been published for com-ment, the Commission shall respond in writing to such written comment before approving the proposed rule. If the Secretary of the Treasury determines, and notifies the Commission, that such rule, if implemented, would, or as applied does (i) adversely affect the liquidity or efficiency of the market for government securities; or (ii) impose any burden on competition not necessary or appropriate in furtherance of the purposes of this section, the Commission shall, prior to adopting the proposed rule, find that such rule is necessary and appropriate in furtherance of the purposes of this section notwithstanding the Secretary’s determination.

(6) In approving rules described in paragraph (5), the Commis-sion shall consider the sufficiency and appropriateness of then ex-isting laws and rules applicable to government securities brokers,


government securities dealers, and persons associated with govern-ment securities brokers and government securities dealers.

(7) SECURITY FUTURES PRODUCT RULE CHANGES.—(A) FILING REQUIRED.—A self-regulatory organization that

is an exchange registered with the Commission pursuant to section 6(g) of this title or that is a national securities associa-tion registered pursuant to section 15A(k) of this title shall file with the Commission, in accordance with such rules as the Commission may prescribe, copies of any proposed rule change or any proposed change in, addition to, or deletion from the rules of such self- regulatory organization (hereinafter in this paragraph collectively referred to as a ‘‘proposed rule change’’) that relates to higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, or decimal pricing for security futures products, sales practices for security fu-tures products for persons who effect transactions in security futures products, or rules effectuating such self-regulatory or-ganization’s obligation to enforce the securities laws. Such pro-posed rule change shall be accompanied by a concise general statement of the basis and purpose of such proposed rule change. The Commission shall, upon the filing of any proposed rule change, promptly publish notice thereof together with the terms of substance of the proposed rule change or a description of the subjects and issues involved. The Commission shall give interested persons an opportunity to submit data, views, and arguments concerning such proposed rule change.

(B) FILING WITH CFTC.—A proposed rule change filed with the Commission pursuant to subparagraph (A) shall be filed concurrently with the Commodity Futures Trading Commis-sion. Such proposed rule change may take effect upon filing of a written certification with the Commodity Futures Trading Commission under section 5c(c) of the Commodity Exchange Act, upon a determination by the Commodity Futures Trading Commission that review of the proposed rule change is not nec-essary, or upon approval of the proposed rule change by the Commodity Futures Trading Commission.

(C) ABROGATION OF RULE CHANGES.—Any proposed rule change of a self-regulatory organization that has taken effect pursuant to subparagraph (B) may be enforced by such self-regulatory organization to the extent such rule is not incon-sistent with the provisions of this title, the rules and regula-tions thereunder, and applicable Federal law. At any time within 60 days of the date of the filing of a written certification with the Commodity Futures Trading Commission under sec-tion 5c(c) of the Commodity Exchange Act, the date the Com-modity Futures Trading Commission determines that review of such proposed rule change is not necessary, or the date the Commodity Futures Trading Commission approves such pro-posed rule change, the Commission, after consultation with the Commodity Futures Trading Commission, may summarily ab-rogate the proposed rule change and require that the proposed rule change be refiled in accordance with the provisions of paragraph (1), if it appears to the Commission that such pro-posed rule change unduly burdens competition or efficiency,


conflicts with the securities laws, or is inconsistent with the public interest and the protection of investors. Commission ac-tion pursuant to the preceding sentence shall not affect the va-lidity or force of the rule change during the period it was in effect and shall not be reviewable under section 25 of this title nor deemed to be a final agency action for purposes of section 704 of title 5, United States Code.

(D) REVIEW OF RESUBMITTED ABROGATED RULES.—(i) PROCEEDINGS.—Within 35 days of the date of publi-

cation of notice of the filing of a proposed rule change that is abrogated in accordance with subparagraph (C) and refiled in accordance with paragraph (1), or within such longer period as the Commission may designate up to 90 days after such date if the Commission finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self- regulatory organization consents, the Commission shall—

(I) by order approve such proposed rule change; or (II) after consultation with the Commodity Fu-

tures Trading Commission, institute proceedings to de-termine whether the proposed rule change should be disapproved. Proceedings under subclause (II) shall in-clude notice of the grounds for disapproval under con-sideration and opportunity for hearing and be con-cluded within 180 days after the date of publication of notice of the filing of the proposed rule change. At the conclusion of such proceedings, the Commission, by order, shall approve or disapprove such proposed rule change. The Commission may extend the time for con-clusion of such proceedings for up to 60 days if the Commission finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the self-regulatory organization consents. (ii) GROUNDS FOR APPROVAL.—The Commission shall

approve a proposed rule change of a self-regulatory organi-zation under this subparagraph if the Commission finds that such proposed rule change does not unduly burden competition or efficiency, does not conflict with the securi-ties laws, and is not inconsistent with the public interest or the protection of investors. The Commission shall dis-approve such a proposed rule change of a self-regulatory organization if it does not make such finding. The Commis-sion shall not approve any proposed rule change prior to the 30th day after the date of publication of notice of the filing thereof, unless the Commission finds good cause for so doing and publishes its reasons for so finding.

(8) DECIMAL PRICING.—Not later than 9 months after the date on which trading in any security futures product commences under this title, all self-regulatory organizations listing or trading secu-rity futures products shall file proposed rule changes necessary to implement decimal pricing of security futures products. The Com-mission may not require such rules to contain equal minimum in-crements in such decimal pricing.


123Two pars. (10) of subsec. (b) have been enacted. Margins so in law.

(9) CONSULTATION WITH CFTC.—(A) CONSULTATION REQUIRED.—The Commission shall con-

sult with and consider the views of the Commodity Futures Trading Commission prior to approving or disapproving a pro-posed rule change filed by a national securities association reg-istered pursuant to section 15A(a) or a national securities ex-change subject to the provisions of subsection (a) that pri-marily concerns conduct related to transactions in security fu-tures products, except where the Commission determines that an emergency exists requiring expeditious or summary action and publishes its reasons therefor.

(B) RESPONSES TO CFTC COMMENTS AND FINDINGS.—If the Commodity Futures Trading Commission comments in writing to the Commission on a proposed rule that has been published for comment, the Commission shall respond in writing to such written comment before approving or disapproving the pro-posed rule. If the Commodity Futures Trading Commission de-termines, and notifies the Commission, that such rule, if imple-mented or as applied, would—

(i) adversely affect the liquidity or efficiency of the market for security futures products; or

(ii) impose any burden on competition not necessary or appropriate in furtherance of the purposes of this section,

the Commission shall, prior to approving or disapproving the proposed rule, find that such rule is necessary and appropriate in furtherance of the purposes of this section notwithstanding the Commodity Futures Trading Commission’s determination.

(10) [123] RULE OF CONSTRUCTION RELATING TO FILING DATE OF PROPOSED RULE CHANGES.—

(A) IN GENERAL.—For purposes of this subsection, the date of filing of a proposed rule change shall be deemed to be the date on which the Commission receives the pro-posed rule change.

(B) EXCEPTION.—A proposed rule change has not been received by the Commission for purposes of subparagraph (A) if, not later than 7 business days after the date of re-ceipt by the Commission, the Commission notifies the self-regulatory organization that such proposed rule change does not comply with the rules of the Commission relating to the required form of a proposed rule change, except that if the Commission determines that the proposed rule change is unusually lengthy and is complex or raises novel regulatory issues, the Commission shall inform the self-regulatory organization of such determination not later than 7 business days after the date of receipt by the Com-mission and, for the purposes of subparagraph (A), a pro-posed rule change has not been received by the Commis-sion, if, not later than 21 days after the date of receipt by the Commission, the Commission notifies the self- regu-latory organization that such proposed rule change does not comply with the rules of the Commission relating to the required form of a proposed rule change.


124Two pars. (10) of subsec. (b) have been enacted. Margins so in law.

(10) [124] Notwithstanding paragraph (2), the time period within which the Commission is required by order to approve a proposed rule change or institute proceedings to determine whether the proposed rule change should be disapproved is stayed pending a determination by the Commission upon the request of the Commodity Futures Trading Commission or its Chairman that the Commission issue a determination as to whether a product that is the subject of such proposed rule change is a security pursuant to section 718 of the Wall Street Transparency and Accountability Act of 2010. (c) The Commission, by rule, may abrogate, add to, and delete

from (hereinafter in this subsection collectively referred to as ‘‘amend’’) the rules of a self-regulatory organization (other than a registered clearing agency) as the Commission deems necessary or appropriate to insure the fair administration of the self-regulatory organization, to conform its rules to requirements of this title and the rules and regulations thereunder applicable to such organiza-tion, or otherwise in furtherance of the purposes of this title, in the following manner:

(1) The Commission shall notify the self-regulatory organi-zation and publish notice of the proposed rulemaking in the Federal Register. The notice shall include the text of the pro-posed amendment to the rules of the self-regulatory organiza-tion and a statement of the Commission’s reasons, including any pertinent facts, for commencing such proposed rulemaking.

(2) The Commission shall give interested persons an oppor-tunity for the oral presentation of data, views, and arguments, in addition to an opportunity to make written submissions. A transcript shall be kept of any oral presentation.

(3) A rule adopted pursuant to this subsection shall incor-porate the text of the amendment to the rules of the self- regu-latory organization and a statement of the Commission’s basis for and purpose in so amending such rules. This statement shall include an identification of any facts on which the Com-mission considers its determination so to amend the rules of the self- regulatory agency to be based, including the reasons for the Commission’s conclusions as to any of such facts which were disputed in the rulemaking.

(4)(A) Except as provided in paragraphs (1) through (3) of this subsection, rulemaking under this subsection shall be in accordance with the procedures specified in section 553 of title 5, United States Code, for rulemaking not on the record.

(B) Nothing in this subsection shall be construed to impair or limit the Commission’s power to make, or to modify or alter the procedures the Commission may follow in making, rules and regulations pursuant to any other authority under this title.

(C) Any amendment to the rules of a self-regulatory orga-nization made by the Commission pursuant to this subsection shall be considered for all purposes of this title to be part of the rules of such self-regulatory organization and shall not be considered to be a rule of the Commission.


(5) With respect to rules described in subsection (b)(5), the Commission shall consult with and consider the views of the Secretary of the Treasury before abrogating, adding to, and de-leting from such rules, except where the Commission deter-mines that an emergency exists requiring expeditious or sum-mary action and publishes its reasons therefor. (d)(1) If any self-regulatory organization imposes any final dis-

ciplinary sanction on any member thereof or participant therein, denies membership or participation to any applicant, or prohibits or limits any person in respect to access to services offered by such organization or member thereof or if any self-regulatory organiza-tion (other than a registered clearing agency) imposes any final dis-ciplinary sanction on any person associated with a member or bars any person from becoming associated with a member, the self-regu-latory organization shall promptly file notice thereof with the ap-propriate regulatory agency for the self-regulatory organization and (if other than the appropriate regulatory agency for the self-regu-latory organization) the appropriate regulatory agency for such member, participant, applicant, or other person. The notice shall be in such form and contain such information as the appropriate regu-latory agency for the self-regulatory organization, by rule, may pre-scribe as necessary or appropriate in furtherance of the purposes of this title.

(2) Any action with respect to which a self-regulatory organiza-tion is required by paragraph (1) of this subsection to file notice shall be subject to review by the appropriate regulatory agency for such member, participant, applicant, or other person, on its own motion, or upon application by any person aggrieved thereby filed within thirty days after the date such notice was filed with such appropriate regulatory agency and received by such aggrieved per-son, or within such longer period as such appropriate regulatory agency may determine. Application to such appropriate regulatory agency for review, or the institution of review by such appropriate regulatory agency on its own motion, shall not operate as a stay of such action unless such appropriate regulatory agency otherwise orders, summarily or after notice and opportunity for hearing on the question of a stay (which hearing may consist solely of the sub-mission of affidavits or presentation of oral arguments). Each ap-propriate regulatory agency shall establish for appropriate cases an expedited procedure for consideration and determination of the question of a stay.

(3) The provisions of this subsection shall apply to an exchange registered pursuant to section 6(g) of this title or a national securi-ties association registered pursuant to section 15A(k) of this title only to the extent that such exchange or association imposes any final disciplinary sanction for—

(A) a violation of the Federal securities laws or the rules and regulations thereunder; or

(B) a violation of a rule of such exchange or association, as to which a proposed change would be required to be filed under section 19 of this title, except that, to the extent that the ex-change or association rule violation relates to any account, agreement, contract, or transaction, this subsection shall apply


only to the extent such violation involves a security futures product. (e)(1) In any proceeding to review a final disciplinary sanction

imposed by a self-regulatory organization on a member thereof or participant therein or a person associated with such a member, after notice and opportunity for hearing (which hearing may con-sist solely of consideration of the record before the self-regulatory organization and opportunity for the presentation of supporting reasons to affirm, modify, or set aside the sanction)—

(A) if the appropriate regulatory agency for such member, participant, or person associated with a member finds that such member, participant, or person associated with a member has engaged in such acts or practices, or has omitted such acts, as the self- regulatory organization has found him to have en-gaged in or omitted, that such acts or practices, or omissions to act, are in violation of such provisions of this title, the rules or regulations thereunder, the rules of the self-regulatory orga-nization, or, in the case of a registered securities association, the rules of the Municipal Securities Rulemaking Board as have been specified in the determination of the self-regulatory organization, and that such provisions are, and were applied in a manner, consistent with the purposes of this title, such ap-propriate regulatory agency, by order, shall so declare and, as appropriate, affirm the sanction imposed by the self-regulatory organization, modify the sanction in accordance with para-graph (2) of this subsection, or remand to the self-regulatory organization for further proceedings; or

(B) if such appropriate regulatory agency does not make any such finding it shall, by order, set aside the sanction im-posed by the self-regulatory organization and, if appropriate, remand to the self-regulatory organization for further pro-ceedings. (2) If the appropriate regulatory agency for a member, partici-

pant, or person associated with a member, having due regard for the public interest and the protection of investors, finds after a pro-ceeding in accordance with paragraph (1) of this subsection that a sanction imposed by a self-regulatory organization upon such mem-ber, participant, or person associated with a member imposes any burden on competition not necessary or appropriate in furtherance of the proposes of this title or is excessive or oppressive, the appro-priate regulatory agency may cancel, reduce, or require the remis-sion of such sanction.

(f) In any proceeding to review the denial of membership or participation in a self-regulatory organization to any applicant, the barring of any person from becoming associated with a member of a self- regulatory organization, or the prohibition or limitation by a self- regulatory organization of any person with respect to access to services offered by the self-regulatory organization or any mem-ber thereof, if the appropriate regulatory agency for such applicant or person, after notice and opportunity for hearing (which hearing may consist solely of consideration of the record before the self- regulatory organization and opportunity for the presentation of supporting reasons to dismiss the proceeding or set aside the action of the self-regulatory organization) finds that the specific grounds


on which such denial, bar, or prohibition or limitation is based exist in fact, that such denial, bar, or prohibition or limitation is in accordance with the rules of the self-regulatory organization, and that such rules are, and were applied in a manner, consistent with the purposes of this title, such appropriate regulatory agency, by order, shall dismiss the proceeding. If such appropriate regu-latory agency does not make any such finding or if it finds that such denial, bar, or prohibition or limitation imposes any burden on competition not necessary or appropriate in furtherance of the purposes of this title, such appropriate regulatory agency, by order, shall set aside the action of the self-regulatory organization and re-quire it to admit such applicant to membership or participation, permit such person to become associated with a member, or grant such person access to services offered by the self-regulatory organi-zation or member thereof.

(g)(1) Every self-regulatory organization shall comply with the provisions of this title, the rules and regulations thereunder, and its own rules, and (subject to the provisions of section 17(d) of this title, paragraph (2) of this subsection, and the rules thereunder) absent reasonable justification or excuse enforce compliance—

(A) in the case of a national securities exchange, with such provisions by its members and persons associated with its members;

(B) in the case of a registered securities association, with such provisions and the provisions of the rules of the Municipal Securities Rulemaking Board by its members and persons asso-ciated with its members; and

(C) in the case of a registered clearing agency, with its own rules by its participants. (2) The Commission, by rule, consistent with the public inter-

est, the protection of investors, and the other purposes of this title, may relieve any self-regulatory organization of any responsibility under this title to enforce compliance with any specified provision of this title or the rules or regulations thereunder by any member of such organization or person associated with such a member, or any class of such members or persons associated with a member.

(h)(1) The appropriate regulatory agency for a self-regulatory organization is authorized, by order, if in its opinion such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title to suspend for a period not exceeding twelve months or revoke the registration of such self-regulatory organization, or to censure or impose limitations upon the activities, functions, and operations of such self-regulatory organization, if such appropriate regulatory agency finds, on the record after notice and opportunity for hear-ing, that such self-regulatory organization has violated or is unable to comply with any provision of this title, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance—

(A) in the case of a national securities exchange, with any such provision by a member thereof or a person associated with a member thereof;

(B) in the case of a registered securities association, with any such provision or any provision of the rules of the Munic-


ipal Securities Rulemaking Board by a member thereof or a person associated with a member thereof; or

(C) in the case of a registered clearing agency, with any provision of its own rules by a participant therein. (2) The appropriate regulatory agency for a self-regulatory or-

ganization is authorized, by order, if in its opinion such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title, to suspend for a period not exceeding twelve months or expel from such self-regulatory organization any member thereof or par-ticipant therein, if such member or participant is subject to an order of the Commission pursuant to section 15(b)(4) of this title or if such appropriate regulatory agency finds, on the record after notice and opportunity for hearing, that such member or partici-pant has willfully violated or has effected any transaction for any other person who, such member or participant had reason to be-lieve, was violating with respect to such transaction—

(A) in the case of a national securities exchange, any provi-sion of the Securities Act of 1933, the Investment Advisers Act of 1940, the Investment Company Act of 1940, this title, or the rules or regulations under any of such statutes;

(B) in the case of a registered securities association, any provision of the Securities Act of 1933, the Investment Advis-ers Act of 1940, the Investment Company Act of 1940, this title, the rules or regulations under any of such statutes, or the rules of the Municipal Securities Rulemaking Board; or

(C) in the case of a registered clearing agency, any provi-sion of the rules of the clearing agency. (3) The appropriate regulatory agency for a national securities

exchange or registered securities association is authorized, by order, if in its opinion such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title, to suspend for a period not exceeding twelve months or to bar any person from being associ-ated with a member of such national securities exchange or reg-istered securities association, if such person is subject to an order of the Commission pursuant to section 15(b)(6) or if such appro-priate regulatory agency finds, on the record after notice and op-portunity for hearing, that such person has willfully violated or has effected any transaction for any other person who, such person as-sociated with a member had reason to believe, was violating with respect to such transaction—

(A) in the case of a national securities exchange, any provi-sion of the Securities Act of 1933, the Investment Advisers Act of 1940, the Investment Company Act of 1940, this title, or the rules or regulations under any of such statutes; or

(B) in the case of a registered securities association, any provision of the Securities Act of 1933, the Investment Advis-ers Act of 1940, the Investment Company Act of 1940, this title, the rules or regulations under any of the statutes, or the rules of the Municipal Securities Rulemaking Board. (4) The appropriate regulatory agency for a self-regulatory or-

ganization is authorized, by order, if in its opinion such action is necessary or appropriate in the public interest, for the protection


of investors, or otherwise in furtherance of the purposes of this title, to remove from office or censure any person who is, or at the time of the alleged misconduct was, an officer or director of such self-regulatory organization, if such appropriate regulatory agency finds, on the record after notice and opportunity for hearing, that such person has willfully violated any provision of this title, the rules or regulations thereunder, or the rules of such self-regulatory organization, willfully abused his authority, or without reasonable justification or excuse has failed to enforce compliance—

(A) in the case of a national securities exchange, with any such provision by any member or person associated with a member;

(B) in the case of a registered securities association, with any such provision or any provision of the rules of the Munic-ipal Securities Rulemaking Board by any member or person as-sociated with a member; or

(C) in the case of a registered clearing agency, with any provision of the rules of the clearing agency by any participant. (i) If a proceeding under subsection (h)(1) of this section results

in the suspension or revocation of the registration of a clearing agency, the appropriate regulatory agency for such clearing agency may, upon notice to such clearing agency, apply to any court of competent jurisdiction specified in section 21(d) or 27 of this title for the appointment of a trustee. In the event of such an applica-tion, the court may, to the extent it deems necessary or appro-priate, take exclusive jurisdiction of such clearing agency and the records and assets thereof, wherever located; and the court shall appoint the appropriate regulatory agency for such clearing agency or a person designated by such appropriate regulatory agency as trustee with power to take possession and continue to operate or terminate the operations of such clearing agency in an orderly manner for the protection of participants and investors, subject to such terms and conditions as the court may prescribe.

(June 6, 1934, ch. 404, title I, Sec. 19, 48 Stat. 898; Pub. L. 87-196, Sept. 5, 1961, 75 Stat. 465; Pub. L. 87-561, July 27, 1962, 76 Stat. 247; Pub. L. 90-438, July 29, 1968, 82 Stat. 453; Pub. L. 91-94, Oct. 20, 1969, 83 Stat. 141; Pub. L. 91-410, Sept. 25, 1970, 84 Stat. 862; Pub. L. 94-29, Sec. 16, June 4, 1975, 89 Stat. 146; Pub. L. 103-202, title I, Sec. 106(c), Dec. 17, 1993, 107 Stat. 2350; Pub. L. 105-353, title III, Sec. 301(b)(11), Nov. 3, 1998, 112 Stat. 3236; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 202(b), (c)], Dec. 21, 2000, 114 Stat. 2763, 2763A-418, 2763A-421; Pub. L. 111-203, title VII, Sec. 717(c), title IX, Secs. 916, 929F(e), July 21, 2010, 124 Stat. 1652, 1833, 1854.)

LIABILITY OF CONTROLLING PERSONS AND PERSONS WHO AID AND ABET VIOLATIONS

SEC. 20. (a) Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any per-son to whom such controlled person is liable (including to the Com-


125Sections 205(a)(3) and 303(i) of the Commodity Futures Modernization Act of 2000 (114 Stat. 2763A-426, 2763A-526), as enacted into law by section 1(a)(5) of Public Law 106-554, both amended section 20(d) of the Securities Exchange Act of 1934. Section 203(a)(3) amended section 20(d) by striking ‘‘, or privilege’’ and inserting ‘‘, privilege, or security future product’’. Section 303(i) amended section 20(d) to read in the form in which it appears in this compilation. Appar-ent intention of the combined amendments would be to insert references to both securities fu-tures products and security-based swap agreements after the reference to ‘‘privilege’’.

mission in any action brought under paragraph (1) or (3) of section 21(d)), unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the viola-tion or cause of action.

(b) It shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this title or any rule or regulation thereunder through or by means of any other person.

(c) It shall be unlawful for any director or officer of, or any owner of any securities issued by, any issuer required to file any document, report, or information under this title or any rule or reg-ulation thereunder without just cause to hinder, delay, or obstruct the making or filing of any such document, report, or information.

(d) Wherever communicating, or purchasing or selling a secu-rity while in possession of, material nonpublic information would violate, or result in liability to any purchaser or seller of the secu-rity under any provisions of this title, or any rule or regulation thereunder, such conduct in connection with a purchase or sale of a put, call, straddle, option, privilege [125] or security-based swap agreement with respect to such security or with respect to a group or index of securities including such security, shall also violate and result in comparable liability to any purchaser or seller of that se-curity under such provision, rule, or regulation.

(e) PROSECUTION OF PERSONS WHO AID AND ABET VIOLA-TIONS.—For purposes of any action brought by the Commission under paragraph (1) or (3) of section 21(d), any person that know-ingly or recklessly provides substantial assistance to another per-son in violation of a provision of this title, or of any rule or regula-tion issued under this title, shall be deemed to be in violation of such provision to the same extent as the person to whom such as-sistance is provided.

(f) The authority of the Commission under this section with re-spect to security-based swap agreements shall be subject to the re-strictions and limitations of section 3A(b) of this title.

(June 6, 1934, ch. 404, title I, Sec. 20, 48 Stat. 899; May 27, 1936, ch. 462, Sec. 6, 49 Stat. 1379; Pub. L. 88-467, Sec. 9, Aug. 20, 1964, 78 Stat. 579; Pub. L. 98-376, Sec. 5, Aug. 10, 1984, 98 Stat. 1265; Pub. L. 104-67, title I, Sec. 104, Dec. 22, 1995, 109 Stat. 757; Pub. L. 105-353, title III, Sec. 301(b)(12), Nov. 3, 1998, 112 Stat. 3236; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 205(a)(3), title III, Sec. 303(i), (j)], Dec. 21, 2000, 114 Stat. 2763, 2763A-426, 2763A-456; Pub. L. 111-203, title VII, Sec. 762(d)(6), title IX, Secs. 929O, 929P(c), July 21, 2010, 124 Stat. 1761, 1862, 1865.)


LIABILITY TO CONTEMPORANEOUS TRADERS FOR INSIDER TRADING

SEC. 20A. (a) PRIVATE RIGHTS OF ACTION BASED ON CONTEM-PORANEOUS TRADING.—Any person who violates any provision of this title or the rules or regulations thereunder by purchasing or selling a security while in possession of material, non-public infor-mation shall be liable in an action in any court of competent juris-diction to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has pur-chased (where such violation is based on a sale of securities) or sold (where such violation is based on a purchase of securities) securi-ties of the same class.

(b) LIMITATIONS ON LIABILITY.—(1) CONTEMPORANEOUS TRADING ACTIONS LIMITED TO PROF-

IT GAINED OR LOSS AVOIDED.—The total amount of damages im-posed under subsection (a) shall not exceed the profit gained or loss avoided in the transaction or transactions that are the subject of the violation.

(2) OFFSETTING DISGORGEMENTS AGAINST LIABILITY.—The total amount of damages imposed against any person under subsection (a) shall be diminished by the amounts, if any, that such person may be required to disgorge, pursuant to a court order obtained at the instance of the Commission, in a pro-ceeding brought under section 21(d) of this title relating to the same transaction or transactions.

(3) CONTROLLING PERSON LIABILITY.—No person shall be liable under this section solely by reason of employing another person who is liable under this section, but the liability of a controlling person under this section shall be subject to section 20(a) of this title.

(4) STATUTE OF LIMITATIONS.—No action may be brought under this section more than 5 years after the date of the last transaction that is the subject of the violation. (c) JOINT AND SEVERAL LIABILITY FOR COMMUNICATING.—Any

person who violates any provision of this title or the rules or regu-lations thereunder by communicating material, nonpublic informa-tion shall be jointly and severally liable under subsection (a) with, and to the same extent as, any person or persons liable under sub-section (a) to whom the communication was directed.

(d) AUTHORITY NOT TO RESTRICT OTHER EXPRESS OR IMPLIED RIGHTS OF ACTION.—Nothing in this section shall be construed to limit or condition the right of any person to bring an action to en-force a requirement of this title or the availability of any cause of action implied from a provision of this title.

(e) PROVISIONS NOT TO AFFECT PUBLIC PROSECUTIONS.—This section shall not be construed to bar or limit in any manner any action by the Commission or the Attorney General under any other provision of this title, nor shall it bar or limit in any manner any action to recover penalties, or to seek any other order regarding penalties.

(June 6, 1934, ch. 404, title I, Sec. 20A, as added Pub. L. 100-704, Sec. 5, Nov. 19, 1988, 102 Stat. 4680.)


INVESTIGATIONS; INJUNCTIONS AND PROSECUTION OF OFFENSES

SEC. 21. (a)(1) The Commission may, in its discretion, make such investigations as it deems necessary to determine whether any person has violated, is violating, or is about to violate any pro-vision of this title, the rules or regulations thereunder, the rules of a national securities exchange or registered securities association of which such person is a member or a person associated, or, as to any act or practice, or omission to act, while associated with a member, formerly associated with a member, the rules of a reg-istered clearing agency in which such person is a participant, or, as to any act or practice, or omission to act, while a participant, was a participant, the rules of the Public Company Accounting Oversight Board, of which such person is a registered public ac-counting firm, a person associated with such a firm, or, as to any act, practice, or omission to act, while associated with such firm, a person formerly associated with such a firm, or the rules of the Municipal Securities Rulemaking Board, and may require or per-mit any person to file with it a statement in writing, under oath or otherwise as the Commission shall determine, as to all the facts and circumstances concerning the matter to be investigated. The Commission is authorized in its discretion, to publish information concerning any such violations, and to investigate any facts, condi-tions, practices, or matters which it may deem necessary or proper to aid in the enforcement of such provisions, in the prescribing of rules and regulations under this title, or in securing information to serve as a basis for recommending further legislation concerning the matters to which this title relates.

(2) On request from a foreign securities authority, the Commis-sion may provide assistance in accordance with this paragraph if the requesting authority states that the requesting authority is conducting an investigation which it deems necessary to determine whether any person has violated, is violating, or is about to violate any laws or rules relating to securities matters that the requesting authority administers or enforces. The Commission may, in its dis-cretion, conduct such investigation as the Commission deems nec-essary to collect information and evidence pertinent to the request for assistance. Such assistance may be provided without regard to whether the facts stated in the request would also constitute a vio-lation of the laws of the United States. In deciding whether to pro-vide such assistance, the Commission shall consider whether (A) the requesting authority has agreed to provide reciprocal assistance in securities matters to the Commission; and (B) compliance with the request would prejudice the public interest of the United States.

(b) For the purpose of any such investigation, or any other pro-ceeding under this title, any member of the Commission or any offi-cer designated by it is empowered to administer oaths and affirma-tions, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, or other records which the Commission deems rel-evant or material to the inquiry. Such attendance of witnesses and the production of any such records may be required from any place


in the United States or any State at any designated place of hear-ing.

(c) In case of contumacy by, or refusal to obey a subpoena issued to, any person, the Commission may invoke the aid of any court of the United States within the jurisdiction of which such in-vestigation or proceeding is carried on, or where such person re-sides or carries on business, in requiring the attendance and testi-mony of witnesses and the production of books, papers, correspond-ence, memoranda, and other records. And such court may issue an order requiring such person to appear before the Commission or member or officer designated by the Commission, there to produce records, if so ordered, or to give testimony touching the matter under investigation or in question; and any failure to obey such order of the court may be punished by such court as a contempt thereof. All process in any such case may be served in the judicial district whereof such person is an inhabitant or wherever he may be found. Any person who shall, without just cause, fail or refuse to attend and testify or to answer any lawful inquiry or to produce books, papers, correspondence, memoranda, and other records, if in his power so to do, in obedience to the subpoena of the Commis-sion, shall be guilty of a misdemeanor and, upon conviction, shall be subject to a fine of not more than $1,000 or to imprisonment for a term of not more than one year, or both.

(d)(1) Whenever it shall appear to the Commission that any person is engaged or is about to engage in acts or practices consti-tuting a violation of any provision of this title, the rules or regula-tions thereunder, the rules of a national securities exchange or reg-istered securities association of which such person is a member or a person associated with a member, the rules of a registered clear-ing agency in which such person is a participant, the rules of the Public Company Accounting Oversight Board, of which such person is a registered public accounting firm or a person associated with such a firm, or the rules of the Municipal Securities Rulemaking Board, it may in its discretion bring an action in the proper district court of the United States, the United States District Court for the District of Columbia, or the United States courts of any territory or other place subject to the jurisdiction of the United States, to en-join such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted with-out bond. The Commission may transmit such evidence as may be available concerning such acts or practices as may constitute a vio-lation of any provision of this title or the rules or regulations there-under to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under this title.

(2) AUTHORITY OF A COURT TO PROHIBIT PERSONS FROM SERV-ING AS OFFICERS AND DIRECTORS.—In any proceeding under para-graph (1) of this subsection, the court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 10(b) of this title or the rules or regulations thereunder from acting as an officer or director of any issuer that has a class of securities registered pursuant to section 12 of this title or that is required to file reports pursuant to section 15(d) of this title if the person’s conduct dem-


onstrates unfitness to serve as an officer or director of any such issuer.

(3) MONEY PENALTIES IN CIVIL ACTIONS.—(A) AUTHORITY OF COMMISSION.—Whenever it shall appear

to the Commission that any person has violated any provision of this title, the rules or regulations thereunder, or a cease-and-desist order entered by the Commission pursuant to sec-tion 21C of this title, other than by committing a violation sub-ject to a penalty pursuant to section 21A, the Commission may bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, upon a proper showing, a civil penalty to be paid by the person who com-mitted such violation.

(B) AMOUNT OF PENALTY.—(i) FIRST TIER.—The amount of the penalty shall be de-

termined by the court in light of the facts and cir-cumstances. For each violation, the amount of the penalty shall not exceed the greater of (I) $5,000 for a natural per-son or $50,000 for any other person, or (II) the gross amount of pecuniary gain to such defendant as a result of the violation.

(ii) SECOND TIER.—Notwithstanding clause (i), the amount of penalty for each such violation shall not exceed the greater of (I) $50,000 for a natural person or $250,000 for any other person, or (II) the gross amount of pecuniary gain to such defendant as a result of the violation, if the violation described in subparagraph (A) involved fraud, de-ceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.

(iii) THIRD TIER.—Notwithstanding clauses (i) and (ii), the amount of penalty for each such violation shall not ex-ceed the greater of (I) $100,000 for a natural person or $500,000 for any other person, or (II) the gross amount of pecuniary gain to such defendant as a result of the viola-tion, if—

(aa) the violation described in subparagraph (A) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; and

(bb) such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.

(C) PROCEDURES FOR COLLECTION.—(i) PAYMENT OF PENALTY TO TREASURY.—A penalty im-

posed under this section shall be payable into the Treasury of the United States, except as otherwise provided in sec-tion 308 of the Sarbanes-Oxley Act of 2002 and section 21F of this title.

(ii) COLLECTION OF PENALTIES.—If a person upon whom such a penalty is imposed shall fail to pay such pen-alty within the time prescribed in the court’s order, the Commission may refer the matter to the Attorney General who shall recover such penalty by action in the appro-priate United States district court.


126Indentation so in original (Public Law 104-67; 109 Stat 756).

(iii) REMEDY NOT EXCLUSIVE.—The actions authorized by this paragraph may be brought in addition to any other action that the Commission or the Attorney General is en-titled to bring.

(iv) JURISDICTION AND VENUE.—For purposes of section 27 of this title, actions under this paragraph shall be ac-tions to enforce a liability or a duty created by this title. (D) SPECIAL PROVISIONS RELATING TO A VIOLATION OF A

CEASE-AND- DESIST ORDER.—In an action to enforce a cease-and-desist order entered by the Commission pursuant to sec-tion 21C, each separate violation of such order shall be a sepa-rate offense, except that in the case of a violation through a continuing failure to comply with the order, each day of the failure to comply shall be deemed a separate offense.

(4) [126] PROHIBITION OF ATTORNEYS’ FEES PAID FROM COM-MISSION DISGORGEMENT FUNDS.—Except as otherwise ordered by the court upon motion by the Commission, or, in the case of an administrative action, as otherwise ordered by the Com-mission, funds disgorged as the result of an action brought by the Commission in Federal court, or as a result of any Com-mission administrative action, shall not be distributed as pay-ment for attorneys’ fees or expenses incurred by private parties seeking distribution of the disgorged funds. (5) EQUITABLE RELIEF.—In any action or proceeding brought or

instituted by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.

(6) AUTHORITY OF A COURT TO PROHIBIT PERSONS FROM PAR-TICIPATING IN AN OFFERING OF PENNY STOCK.—

(A) IN GENERAL.—In any proceeding under paragraph (1) against any person participating in, or, at the time of the al-leged misconduct who was participating in, an offering of penny stock, the court may prohibit that person from partici-pating in an offering of penny stock, conditionally or uncondi-tionally, and permanently or for such period of time as the court shall determine.

(B) DEFINITION.—For purposes of this paragraph, the term ‘‘person participating in an offering of penny stock’’ includes any person engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or inducing or attempt-ing to induce the purchase or sale of, any penny stock. The Commission may, by rule or regulation, define such term to in-clude other activities, and may, by rule, regulation, or order, exempt any person or class of persons, in whole or in part, con-ditionally or unconditionally, from inclusion in such term. (e) Upon application of the Commission the district courts of

the United States and the United States courts of any territory or other place subject to the jurisdiction of the United States shall have jurisdiction to issue writs of mandamus, injunctions, and or-ders commanding (1) any person to comply with the provisions of this title, the rules, regulations, and orders thereunder, the rules


of a national securities exchange or registered securities association of which such person is a member or person associated with a member, the rules of a registered clearing agency in which such person is a participant, the rules of the Public Company Account-ing Oversight Board, of which such person is a registered public ac-counting firm or a person associated with such a firm, the rules of the Municipal Securities Rulemaking Board, or any undertaking contained in a registration statement as provided in subsection (d) of section 15 of this title, (2) any national securities exchange or registered securities association to enforce compliance by its mem-bers and persons associated with its members with the provisions of this title, the rules, regulations, and orders thereunder, and the rules of such exchange or association, or (3) any registered clearing agency to enforce compliance by its participants with the provisions of the rules of such clearing agency.

(f) Notwithstanding any other provision of this title, the Com-mission shall not bring any action pursuant to subsection (d) or (e) of this section against any person for violation of, or to command compliance with, the rules of a self-regulatory organization or the Public Company Accounting Oversight Board unless it appears to the Commission that (1) such self-regulatory organization or the Public Company Accounting Oversight Board is unable or unwilling to take appropriate action against such person in the public inter-est and for the protection of investors, or (2) such action is other-wise necessary or appropriate in the public interest or for the pro-tection of investors.

(g) Notwithstanding the provisions of section 1407(a) of title 28, United States Code, or any other provision of law, no action for equitable relief instituted by the Commission pursuant to the secu-rities laws shall be consolidated or coordinated with other actions not brought by the Commission, even though such other actions may involve common questions of fact, unless such consolidation is consented to by the Commission.

(h)(1) The Right to Financial Privacy Act of 1978 shall apply with respect to the Commission, except as otherwise provided in this subsection.

(2) Notwithstanding section 1105 or 1107 of the Right to Fi-nancial Privacy Act of 1978, the Commission may have access to and obtain copies of, or the information contained in financial records of a customer from a financial institution without prior no-tice to the customer upon an ex parte showing to an appropriate United States district court that the Commission seeks such finan-cial records pursuant to a subpoena issued in conformity with the requirements of section 19(b) of the Securities Act of 1933, section 21(b) of the Securities Exchange Act of 1934, section 42(b) of the Investment Company Act of 1940, or section 209(b) of the Invest-ment Advisers Act of 1940, and that the Commission has reason to believe that—

(A) delay in obtaining access to such financial records, or the required notice, will result in—

(i) flight from prosecution; (ii) destruction of or tampering with evidence; (iii) transfer of assets or records outside the territorial

limits of the United States;


(iv) improper conversion of investor assets; or (v) impeding the ability of the Commission to identify

or trace the source or disposition of funds involved in any securities transaction; (B) such financial records are necessary to identify or trace

the record or beneficial ownership interest in any security; (C) the acts, practices or course of conduct under investiga-

tion involve—(i) the dissemination of materially false or misleading

information concerning any security, issuer, or market, or the failure to make disclosures required under the securi-ties laws, which remain uncorrected; or

(ii) a financial loss to investors or other persons pro-tected under the securities laws which remains substan-tially uncompensated; or (D) the acts, practices or course of conduct under investiga-

tion—(i) involve significant financial speculation in securi-

ties; or (ii) endanger the stability of any financial or invest-

ment intermediary. (3) Any application under paragraph (2) for a delay in notice

shall be made with reasonable specificity. (4)(A) Upon a showing described in paragraph (2), the pre-

siding judge or magistrate shall enter an ex parte order granting the requested delay for a period not to exceed ninety days and an order prohibiting the financial institution involved from disclosing that records have been obtained or that a request for records has been made.

(B) Extensions of the period of delay of notice provided in subparagraph (A) of up to ninety days each may be granted by the court upon application, but only in accordance with this subsection or section 1109(a), (b)(1), or (b)(2) of the Right to Financial Privacy Act of 1978.

(C) Upon expiration of the period of delay of notification or-dered under subparagraph (A) or (B), the customer shall be served with or mailed a copy of the subpena insofar as it applies to the customer together with the following notice which shall describe with reasonable specificity the nature of the investigation for which the Commission sought the financial records:

‘‘Records or information concerning your transactions which are held by the financial institution named in the attached subpena were supplied to the Securities and Exchange Commission on (date). Notification was withheld pursuant to a determination by the (title of court so ordering) under section 21(h) of the Securities Exchange Act of 1934 that (state reason). The purpose of the inves-tigation or official proceeding was (state purpose).’’

(5) Upon application by the Commission, all proceedings pursu-ant to paragraphs (2) and (4) shall be held in camera and the records thereof sealed until expiration of the period of delay or such other date as the presiding judge or magistrate may permit.

(6) The Commission shall compile an annual tabulation of the occasions on which the Commission used each separate subpara-graph or clause of paragraph (2) of this subsection or the provisions


of the Right to Financial Privacy Act of 1978 to obtain access to fi-nancial records of a customer and include it in its annual report to the Congress. Section 1121(b) of the Right to Financial Privacy Act of 1978 shall not apply with respect to the Commission.

(7)(A) Following the expiration of the period of delay of notifi-cation ordered by the court pursuant to paragraph (4) of this sub-section, the customer may, upon motion, reopen the proceeding in the district court which issued the order. If the presiding judge or magistrate finds that the movant is the customer to whom the records obtained by the Commission pertain, and that the Commis-sion has obtained financial records or information contained there-in in violation of this subsection, other than paragraph (1), it may order that the customer be granted civil penalties against the Com-mission in an amount equal to the sum of—

(i) $100 without regard to the volume of records involved; (ii) any out-of-pocket damages sustained by the customer

as a direct result of the disclosure; and (iii) if the violation is found to have been willful, inten-

tional, and without good faith, such punitive damages as the court may allow, together with the costs of the action and rea-sonable attorney’s fees as determined by the court. (B) Upon a finding that the Commission has obtained financial

records or information contained therein in violation of this subsection, other than paragraph (1), the court, in its discretion, may also or in the alternative issue injunctive relief to require the Com-mission to comply with this subsection with respect to any subpena which the Commission issues in the future for financial records of such customer for purposes of the same investigation.

(C) Whenever the court determines that the Commission has failed to comply with this subsection, other than paragraph (1), and the court finds that the circumstances raise questions of whether an officer or employee of the Commission acted in a willful and in-tentional manner and without good faith with respect to the viola-tion, the Office of Personnel Management shall promptly initiate a proceeding to determine whether disciplinary action is warranted against the agent or employee who was primarily responsible for the violation. After investigating and considering the evidence sub-mitted, the Office of Personnel Management shall submit its find-ings and recommendations to the Commission and shall send cop-ies of the findings and recommendations to the officer or employee or his representative. The Commission shall take the corrective ac-tion that the Office of Personnel Management recommends.

(8) The relief described in paragraphs (7) and (10) shall be the only remedies or sanctions available to a customer for a violation of this subsection, other than paragraph (1), and nothing herein or in the Right to Financial Privacy Act of 1978 shall be deemed to prohibit the use in any investigation or proceeding of financial records, or the information contained therein, obtained by a sub-pena issued by the Commission. In the case of an unsuccessful ac-tion under paragraph (7), the court shall award the costs of the ac-tion and attorney’s fees to the Commission if the presiding judge or magistrate finds that the customer’s claims were made in bad faith.


(9)(A) The Commission may transfer financial records or the information contained therein to any government authority if the Commission proceeds as a transferring agency in accordance with section 1112 of the Right to Financial Privacy Act of 1978, except that the customer notice required under section 1112(b) or (c) of such Act may be delayed upon a showing by the Commission, in accordance with the procedure set forth in paragraphs (4) and (5), that one or more of subparagraphs (A) through (D) of paragraph (2) apply.

(B) The Commission may, without notice to the customer pur-suant to section 1112 of the Right to Financial Privacy Act of 1978, transfer financial records or the information contained therein to a State securities agency or to the Department of Justice. Financial records or information transferred by the Commission to the De-partment of Justice or to a State securities agency pursuant to the provisions of this subparagraph may be disclosed or used only in an administrative, civil, or criminal action or investigation by the Department of Justice or the State securities agency which arises out of or relates to the acts, practices, or courses of conduct inves-tigated by the Commission, except that if the Department of Jus-tice or the State securities agency determines that the information should be disclosed or used for any other purpose, it may do so if it notifies the customer, except as otherwise provided in the Right to Financial Privacy Act of 1978, within 30 days of its determina-tion, or complies with the requirements of section 1109 of such Act regarding delay of notice.

(10) Any government authority violating paragraph (9) shall be subject to the procedures and penalties applicable to the Commis-sion under paragraph (7)(A) with respect to a violation by the Com-mission in obtaining financial records.

(11) Notwithstanding the provisions of this subsection, the Commission may obtain financial records from a financial institu-tion or transfer such records in accordance with provisions of the Right to Financial Privacy Act of 1978.

(12) Nothing in this subsection shall enlarge or restrict any rights of a financial institution to challenge requests for records made by the Commission under existing law. Nothing in this sub-section shall entitle a customer to assert any rights of a financial institution.

(13) Unless the context otherwise requires, all terms defined in the Right to Financial Privacy Act of 1978 which are common to this subsection shall have the same meaning as in such Act.

(i) INFORMATION TO CFTC.—The Commission shall provide the Commodity Futures Trading Commission with notice of the com-mencement of any proceeding and a copy of any order entered by the Commission against any broker or dealer registered pursuant to section 15(b)(11), any exchange registered pursuant to section 6(g), or any national securities association registered pursuant to section 15A(k).

(June 6, 1934, ch. 404, title I, Sec. 21, 48 Stat. 899; May 27, 1936, ch. 462, Sec. 7, 49 Stat. 1379; Oct. 15, 1970, Pub. L. 91-452, title II, Sec. 212, 84 Stat. 929; June 4, 1975, Pub. L. 94-29, Sec. 17, 89 Stat. 154; Oct. 10, 1980, Pub. L. 96-433, Sec. 3, 4, 94 Stat. 1855,


1858; Aug. 10, 1984, Pub. L. 98-376, Sec. 2, 98 Stat. 1264; Dec. 4, 1987, Pub. L. 100-181, title III, Sec. 323, 101 Stat. 1259; Nov. 19, 1988, Pub. L. 100-704, Sec. 3(a)(1), 6(b), 102 Stat. 4677, 4681; Oct. 15, 1990, Pub. L. 101- 429, title II, Sec. 201, 104 Stat. 935; Dec. 1, 1990, Pub. L. 101-650, title III, Sec. 321, 104 Stat. 5117; Dec. 22, 1995, Pub. L. 104-67, title I, Sec. 103(b)(2), 109 Stat. 756; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5)[title II, Sec. 205(a)(5)], 114 Stat. 2763, 2763A-426; Pub. L. 107-204, Sec. 3(b)(2), title III, Sec. 305(a)(1), (b), 308(d)(1), title VI, Sec. 603(a), July 30, 2002, 116 Stat. 749, 778, 779, 785, 794; Pub. L. 111-203, title IX, Secs. 923(b)(1), 929F(c), (d), (g)(2), 986(a)(3), July 21, 2010, 124 Stat. 1849, 1854, 1855, 1935.)

CIVIL PENALTIES FOR INSIDER TRADING

SEC. 21A. (a) AUTHORITY TO IMPOSE CIVIL PENALTIES.—(1) JUDICIAL ACTIONS BY COMMISSION AUTHORIZED.—When-

ever it shall appear to the Commission that any person has violated any provision of this title or the rules or regulations thereunder by purchasing or selling a security or security-based swap agreement while in possession of material, non-public information in, or has violated any such provision by communicating such information in connection with, a trans-action on or through the facilities of a national securities ex-change or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardized options or security futures products, the Commis-sion—

(A) may bring an action in a United States district court to seek, and the court shall have jurisdiction to im-pose, a civil penalty to be paid by the person who com-mitted such violation; and

(B) may, subject to subsection (b)(1), bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by a person who, at the time of the violation, directly or indi-rectly controlled the person who committed such violation. (2) AMOUNT OF PENALTY FOR PERSON WHO COMMITTED VIO-

LATION.—The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.

(3) AMOUNT OF PENALTY FOR CONTROLLING PERSON.—The amount of the penalty which may be imposed on any person who, at the time of the violation, directly or indirectly con-trolled the person who committed such violation, shall be de-termined by the court in light of the facts and circumstances, but shall not exceed the greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of such controlled person’s violation. If such controlled person’s violation was a violation by communication, the profit gained or loss avoided as a result of the violation shall, for purposes of this paragraph only, be deemed to be limited to the profit


127Section 15(f) was redesignated 15(g) by Pub. L. 111-203, title IX, Sec. 929X(c)(1), July 21, 2010, 124 Stat. 1870.

gained or loss avoided by the person or persons to whom the controlled person directed such communication. (b) LIMITATIONS ON LIABILITY.—

(1) LIABILITY OF CONTROLLING PERSONS.—No controlling person shall be subject to a penalty under subsection (a)(1)(B) unless the Commission establishes that—

(A) such controlling person knew or recklessly dis-regarded the fact that such controlled person was likely to engage in the act or acts constituting the violation and failed to take appropriate steps to prevent such act or acts before they occurred; or

(B) such controlling person knowingly or recklessly failed to establish, maintain, or enforce any policy or pro-cedure required under section 15(f) [127] of this title or sec-tion 204A of the Investment Advisers Act of 1940 and such failure substantially contributed to or permitted the occur-rence of the act or acts constituting the violation. (2) ADDITIONAL RESTRICTIONS ON LIABILITY.—No person

shall be subject to a penalty under subsection (a) solely by rea-son of employing another person who is subject to a penalty under such subsection, unless such employing person is liable as a controlling person under paragraph (1) of this subsection. Section 20(a) of this title shall not apply to actions under sub-section (a) of this section. (c) AUTHORITY OF COMMISSION.—the Commission, by such

rules, regulations, and orders as it considers necessary or appro-priate in the public interest or for the protection of investors, may exempt, in whole or in part, either unconditionally or upon specific terms and conditions, any person or transaction or class of persons or transactions from this section.

(d) PROCEDURES FOR COLLECTION.—(1) PAYMENT OF PENALTY TO TREASURY.—A penalty im-

posed under this section shall be payable into the Treasury of the United States, except as otherwise provided in section 308 of the Sarbanes-Oxley Act of 2002 and section 21F of this title.

(2) COLLECTION OF PENALTIES.—If a person upon whom such a penalty is imposed shall fail to pay such penalty within the time prescribed in the court’s order, the Commission may refer the matter to the Attorney General who shall recover such penalty by action in the appropriate United States district court.

(3) REMEDY NOT EXCLUSIVE.—The actions authorized by this section may be brought in addition to any other actions that the Commission or the Attorney General are entitled to bring.

(4) JURISDICTION AND VENUE.—For purposes of section 27 of this title, actions under this section shall be actions to en-force a liability or a duty created by this title.

(5) STATUTE OF LIMITATIONS.—No action may be brought under this section more than 5 years after the date of the pur-chase or sale. This section shall not be construed to bar or


limit in any manner any action by the Commission or the At-torney General under any other provision of this title, nor shall it bar or limit in any manner any action to recover penalties, or to seek any other order regarding penalties, imposed in an action commenced within 5 years of such transaction. (e) DEFINITION.—For purposes of this section, ‘‘profit gained’’ or

‘‘loss avoided’’ is the difference between the purchase or sale price of the security and the value of that security as measured by the trading price of the security a reasonable period after public dis-semination of the nonpublic information.

(f) The authority of the Commission under this section with re-spect to security-based swap agreements shall be subject to the re-strictions and limitations of section 3A(b) of this title.

(g) DUTY OF MEMBERS AND EMPLOYEES OF CONGRESS.—(1) IN GENERAL.—Subject to the rule of construction under

section 10 of the STOCK Act and solely for purposes of the in-sider trading prohibitions arising under this Act, including sec-tion 10(b) and Rule 10b-5 thereunder, each Member of Con-gress or employee of Congress owes a duty arising from a rela-tionship of trust and confidence to the Congress, the United States Government, and the citizens of the United States with respect to material, nonpublic information derived from such person’s position as a Member of Congress or employee of Con-gress or gained from the performance of such person’s official responsibilities.

(2) DEFINITIONS.—In this subsection—(A) the term ‘‘Member of Congress’’ means a member

of the Senate or House of Representatives, a Delegate to the House of Representatives, and the Resident Commis-sioner from Puerto Rico; and

(B) the term ‘‘employee of Congress’’ means—(i) any individual (other than a Member of Con-

gress), whose compensation is disbursed by the Sec-retary of the Senate or the Chief Administrative Offi-cer of the House of Representatives; and

(ii) any other officer or employee of the legislative branch (as defined in section 109(11) of the Ethics in Government Act of 1978 (5 U.S.C. App. 109(11))).

(3) RULE OF CONSTRUCTION.—Nothing in this subsection shall be construed to impair or limit the construction of the ex-isting antifraud provisions of the securities laws or the author-ity of the Commission under those provisions. (h) DUTY OF OTHER FEDERAL OFFICIALS.—

(1) IN GENERAL.—Subject to the rule of construction under section 10 of the STOCK Act and solely for purposes of the in-sider trading prohibitions arising under this Act, including sec-tion 10(b), and Rule 10b-5 thereunder, each executive branch employee, each judicial officer, and each judicial employee owes a duty arising from a relationship of trust and confidence to the United States Government and the citizens of the United States with respect to material, nonpublic information derived from such person’s position as an executive branch employee, judicial officer, or judicial employee or gained from the per-formance of such person’s official responsibilities.


(2) DEFINITIONS.—In this subsection—(A) the term ‘‘executive branch employee’’—

(i) has the meaning given the term ‘‘employee’’ under section 2105 of title 5, United States Code;

(ii) includes—(I) the President; (II) the Vice President; and (III) an employee of the United States Postal

Service or the Postal Regulatory Commission; (B) the term ‘‘judicial employee’’ has the meaning

given that term in section 109(8) of the Ethics in Govern-ment Act of 1978 (5 U.S.C. App. 109(8)); and

(C) the term ‘‘judicial officer’’ has the meaning given that term under section 109(10) of the Ethics in Govern-ment Act of 1978 (5 U.S.C. App. 109(10)). (3) RULE OF CONSTRUCTION.—Nothing in this subsection

shall be construed to impair or limit the construction of the ex-isting antifraud provisions of the securities laws or the author-ity of the Commission under those provisions. (i) PARTICIPATION IN INITIAL PUBLIC OFFERINGS.—An indi-

vidual described in section 101(f) of the Ethics in Government Act of 1978 may not purchase securities that are the subject of an ini-tial public offering (within the meaning given such term in section 12(f)(1)(G)(i)) in any manner other than is available to members of the public generally.

(June 6, 1934, ch. 404, title I, Sec. 21A, as added Nov. 19, 1988, Pub. L. 100-704, Sec. 3(a)(2), 102 Stat. 4677; amended Oct. 15, 1990, Pub. L. 101-429, title II, Sec. 202(b), 104 Stat. 938; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5)[title II, Sec. 205(a)(4), title III, Sec. 303(k), (l),], 114 Stat. 2763, 2763A-426, 2763A-456, 2763A-457; Pub. L. 107-204, title III, Sec. 308(d)(2), July 30, 2002, 116 Stat. 785; Pub. L. 111-203, title VII, Sec. 762(d)(7), title IX, Sec. 923(b)(2), July 21, 2010, 124 Stat. 1761, 1850; Pub. L. 112-105, Secs. 4(b)(2), 9(b)(2)(B), 12, Apr. 4, 2012, 126 Stat. 292, 297, 300.)

CIVIL REMEDIES IN ADMINISTRATIVE PROCEEDINGS

SEC. 21B. (a) COMMISSION AUTHORITY TO ASSESS MONEY PEN-ALTIES.—

(1) IN GENERAL.—In any proceeding instituted pursuant to sections 15(b)(4), 15(b)(6), 15D, 15B, 15C, 15E, or 17A of this title against any person, the Commission or the appropriate regulatory agency may impose a civil penalty if it finds, on the record after notice and opportunity for hearing, that such pen-alty is in the public interest and that such person—

(A) has willfully violated any provision of the Securi-ties Act of 1933, the Investment Company Act of 1940, the Investment Advisers Act of 1940, or this title, or the rules or regulations thereunder, or the rules of the Municipal Securities Rulemaking Board;

(B) has willfully aided, abetted, counseled, com-manded, induced, or procured such a violation by any other person;


(C) has willfully made or caused to be made in any ap-plication for registration or report required to be filed with the Commission or with any other appropriate regulatory agency under this title, or in any proceeding before the Commission with respect to registration, any statement which was, at the time and in the light of the cir-cumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application or report any material fact which is required to be stated therein; or

(D) has failed reasonably to supervise, within the meaning of section 15(b)(4)(E) of this title, with a view to preventing violations of the provisions of such statutes, rules and regulations, another person who commits such a violation, if such other person is subject to his supervision; (2) CEASE-AND-DESIST PROCEEDINGS.—In any proceeding

instituted under section 21C against any person, the Commis-sion may impose a civil penalty, if the Commission finds, on the record after notice and opportunity for hearing, that such person—

(A) is violating or has violated any provision of this title, or any rule or regulation issued under this title; or

(B) is or was a cause of the violation of any provision of this title, or any rule or regulation issued under this title.

(b) MAXIMUM AMOUNT OF PENALTY.—(1) FIRST TIER.—The maximum amount of penalty for each

act or omission described in subsection (a) shall be $5,000 for a natural person or $50,000 for any other person.

(2) SECOND TIER.—Notwithstanding paragraph (1), the maximum amount of penalty for each such act or omission shall be $50,000 for a natural person or $250,000 for any other person if the act or omission described in subsection (a) in-volved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.

(3) THIRD TIER.—Notwithstanding paragraphs (1) and (2), the maximum amount of penalty for each such act or omission shall be $100,000 for a natural person or $500,000 for any other person if—

(A) the act or omission described in subsection (a) in-volved fraud, deceit, manipulation, or deliberate or reck-less disregard of a regulatory requirement; and

(B) such act or omission directly or indirectly resulted in substantial losses or created a significant risk of sub-stantial losses to other persons or resulted in substantial pecuniary gain to the person who committed the act or omission.

(c) DETERMINATION OF PUBLIC INTEREST.—In considering under this section whether a penalty is in the public interest, the Com-mission or the appropriate regulatory agency may consider—

(1) whether the act or omission for which such penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement;


(2) the harm to other persons resulting either directly or indirectly from such act or omission;

(3) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior;

(4) whether such person previously has been found by the Commission, another appropriate regulatory agency, or a self- regulatory organization to have violated the Federal securities laws, State securities laws, or the rules of a self-regulatory or-ganization, has been enjoined by a court of competent jurisdic-tion from violations of such laws or rules, or has been convicted by a court of competent jurisdiction of violations of such laws or of any felony or misdemeanor described in section 15(b)(4)(B) of this title;

(5) the need to deter such person and other persons from committing such acts or omissions; and

(6) such other matters as justice may require. (d) EVIDENCE CONCERNING ABILITY TO PAY.—In any proceeding

in which the Commission or the appropriate regulatory agency may impose a penalty under this section, a respondent may present evi-dence of the respondent’s ability to pay such penalty. The Commis-sion or the appropriate regulatory agency may, in its discretion, consider such evidence in determining whether such penalty is in the public interest. Such evidence may relate to the extent of such person’s ability to continue in business and the collectability of a penalty, taking into account any other claims of the United States or third parties upon such person’s assets and the amount of such person’s assets.

(e) AUTHORITY TO ENTER AN ORDER REQUIRING AN ACCOUNT-ING AND DISGORGEMENT.—In any proceeding in which the Commis-sion or the appropriate regulatory agency may impose a penalty under this section, the Commission or the appropriate regulatory agency may enter an order requiring accounting and disgorgement, including reasonable interest. The Commission is authorized to adopt rules, regulations, and orders concerning payments to inves-tors, rates of interest, periods of accrual, and such other matters as it deems appropriate to implement this subsection.

(f) SECURITY-BASED SWAPS.—(1) CLEARING AGENCY.—Any clearing agency that know-

ingly or recklessly evades or participates in or facilitates an evasion of the requirements of section 3C shall be liable for a civil money penalty in twice the amount otherwise available for a violation of section 3C.

(2) SECURITY-BASED SWAP DEALER OR MAJOR SECURITY-BASED SWAP PARTICIPANT.—Any security-based swap dealer or major security- based swap participant that knowingly or reck-lessly evades or participates in or facilitates an evasion of the requirements of section 3C shall be liable for a civil money penalty in twice the amount otherwise available for a violation of section 3C.

(June 6, 1934, ch. 404, title I, Sec. 21B, as added Oct. 15, 1990, Pub. L. 101-429, title II, Sec. 202(a), 104 Stat. 937; amended Pub. L. 107-204, title V, Sec. 501(b), July 30, 2002, 116 Stat. 793; Pub.


L. 109-291, Sec. 4(b)(1)(B), Sept. 29, 2006, 120 Stat. 1337; Pub. L. 111-203, title VII, Sec. 773, title IX, Sec. 929P(a)(2), July 21, 2010, 124 Stat. 1802, 1863.)

CEASE-AND-DESIST PROCEEDINGS

SEC. 21C. (a) AUTHORITY OF THE COMMISSION.—If the Commis-sion finds, after notice and opportunity for hearing, that any person is violating, has violated, or is about to violate any provision of this title, or any rule or regulation thereunder, the Commission may publish its findings and enter an order requiring such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from com-mitting or causing such violation and any future violation of the same provision, rule, or regulation. Such order may, in addition to requiring a person to cease and desist from committing or causing a violation, require such person to comply, or to take steps to effect compliance, with such provision, rule, or regulation, upon such terms and conditions and within such time as the Commission may specify in such order. Any such order may, as the Commission deems appropriate, require future compliance or steps to effect fu-ture compliance, either permanently or for such period of time as the Commission may specify, with such provision, rule, or regula-tion with respect to any security, any issuer, or any other person.

(b) HEARING.—The notice instituting proceedings pursuant to subsection (a) shall fix a hearing date not earlier than 30 days nor later than 60 days after service of the notice unless an earlier or a later date is set by the Commission with the consent of any re-spondent so served.

(c) TEMPORARY ORDER.—(1) IN GENERAL.—Whenever the Commission determines

that the alleged violation or threatened violation specified in the notice instituting proceedings pursuant to subsection (a), or the continuation thereof, is likely to result in significant dis-sipation or conversion of assets, significant harm to investors, or substantial harm to the public interest, including, but not limited to, losses to the Securities Investor Protection Corpora-tion, prior to the completion of the proceedings, the Commis-sion may enter a temporary order requiring the respondent to cease and desist from the violation or threatened violation and to take such action to prevent the violation or threatened viola-tion and to prevent dissipation or conversion of assets, signifi-cant harm to investors, or substantial harm to the public inter-est as the Commission deems appropriate pending completion of such proceedings. Such an order shall be entered only after notice and opportunity for a hearing, unless the Commission determines that notice and hearing prior to entry would be im-practicable or contrary to the public interest. A temporary order shall become effective upon service upon the respondent and, unless set aside, limited, or suspended by the Commission or a court of competent jurisdiction, shall remain effective and enforceable pending the completion of the proceedings.


(2) APPLICABILITY.—Paragraph (1) shall apply only to a re-spondent that acts, or, at the time of the alleged misconduct acted, as a broker, dealer, investment adviser, investment com-pany, municipal securities dealer, government securities broker, government securities dealer, registered public account-ing firm (as defined in section 2 of the Sarbanes-Oxley Act of 2002), or transfer agent, or is, or was at the time of the alleged misconduct, an associated person of, or a person seeking to be-come associated with, any of the foregoing.

(3) TEMPORARY FREEZE.—(A) IN GENERAL.—

(i) ISSUANCE OF TEMPORARY ORDER.—Whenever, during the course of a lawful investigation involving possible violations of the Federal securities laws by an issuer of publicly traded securities or any of its direc-tors, officers, partners, controlling persons, agents, or employees, it shall appear to the Commission that it is likely that the issuer will make extraordinary pay-ments (whether compensation or otherwise) to any of the foregoing persons, the Commission may petition a Federal district court for a temporary order requiring the issuer to escrow, subject to court supervision, those payments in an interest-bearing account for 45 days.

(ii) STANDARD.—A temporary order shall be en-tered under clause (i), only after notice and oppor-tunity for a hearing, unless the court determines that notice and hearing prior to entry of the order would be impracticable or contrary to the public interest.

(iii) EFFECTIVE PERIOD.—A temporary order issued under clause (i) shall—

(I) become effective immediately; (II) be served upon the parties subject to it;

and (III) unless set aside, limited or suspended by

a court of competent jurisdiction, shall remain ef-fective and enforceable for 45 days. (iv) EXTENSIONS AUTHORIZED.—The effective pe-

riod of an order under this subparagraph may be ex-tended by the court upon good cause shown for not longer than 45 additional days, provided that the com-bined period of the order shall not exceed 90 days. (B) PROCESS ON DETERMINATION OF VIOLATIONS.—

(i) VIOLATIONS CHARGED.—If the issuer or other person described in subparagraph (A) is charged with any violation of the Federal securities laws before the expiration of the effective period of a temporary order under subparagraph (A) (including any applicable ex-tension period), the order shall remain in effect, sub-ject to court approval, until the conclusion of any legal proceedings related thereto, and the affected issuer or other person, shall have the right to petition the court for review of the order.


(ii) VIOLATIONS NOT CHARGED.—If the issuer or other person described in subparagraph (A) is not charged with any violation of the Federal securities laws before the expiration of the effective period of a temporary order under subparagraph (A) (including any applicable extension period), the escrow shall ter-minate at the expiration of the 45-day effective period (or the expiration of any extension period, as applica-ble), and the disputed payments (with accrued inter-est) shall be returned to the issuer or other affected person.

(d) REVIEW OF TEMPORARY ORDERS.—(1) COMMISSION REVIEW.—At any time after the respond-

ent has been served with a temporary cease-and-desist order pursuant to subsection (c), the respondent may apply to the Commission to have the order set aside, limited, or suspended. If the respondent has been served with a temporary cease-and-desist order entered without a prior Commission hearing, the respondent may, within 10 days after the date on which the order was served, request a hearing on such application and the Commission shall hold a hearing and render a decision on such application at the earliest possible time.

(2) JUDICIAL REVIEW.—Within—(A) 10 days after the date the respondent was served

with a temporary cease-and-desist order entered with a prior Commission hearing, or

(B) 10 days after the Commission renders a decision on an application and hearing under paragraph (1), with respect to any temporary cease-and-desist order entered without a prior Commission hearing,

the respondent may apply to the United States district court for the district in which the respondent resides or has its prin-cipal place of business, or for the District of Columbia, for an order setting aside, limiting, or suspending the effectiveness or enforcement of the order, and the court shall have jurisdiction to enter such an order. A respondent served with a temporary cease- and-desist order entered without a prior Commission hearing may not apply to the court except after hearing and decision by the Commission on the respondent’s application under paragraph (1) of this subsection.

(3) NO AUTOMATIC STAY OF TEMPORARY ORDER.—The com-mencement of proceedings under paragraph (2) of this sub-section shall not, unless specifically ordered by the court, oper-ate as a stay of the Commission’s order.

(4) EXCLUSIVE REVIEW.—Section 25 of this title shall not apply to a temporary order entered pursuant to this section. (e) AUTHORITY TO ENTER AN ORDER REQUIRING AN ACCOUNT-

ING AND DISGORGEMENT.—In any cease-and-desist proceeding under subsection (a), the Commission may enter an order requiring accounting and disgorgement, including reasonable interest. The Commission is authorized to adopt rules, regulations, and orders concerning payments to investors, rates of interest, periods of ac-crual, and such other matters as it deems appropriate to imple-ment this subsection.


(f) AUTHORITY OF THE COMMISSION TO PROHIBIT PERSONS FROM SERVING AS OFFICERS OR DIRECTORS.—In any cease-and-desist pro-ceeding under subsection (a), the Commission may issue an order to prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who has violated section 10(b) or the rules or regulations thereunder, from acting as an officer or director of any issuer that has a class of se-curities registered pursuant to section 12, or that is required to file reports pursuant to section 15(d), if the conduct of that person demonstrates unfitness to serve as an officer or director of any such issuer.

(June 6, 1934, ch. 404, title I, Sec. 21C, as added Oct. 15, 1990, Pub. L. 101-429, title II, Sec. 203, 104 Stat. 939; amended Pub. L. 107-204, Sec. 3(b)(3), title XI, Secs. 1103, 1105(a), July 30, 2002, 116 Stat. 749, 807, 809; Pub. L. 111-203, title IX, Sec. 985(b)(8), July 21, 2010, 124 Stat. 1934.)

SEC. 21D. PRIVATE SECURITIES LITIGATION.

(a) PRIVATE CLASS ACTIONS.—(1) IN GENERAL.—The provisions of this subsection shall

apply in each private action arising under this title that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure.

(2) CERTIFICATION FILED WITH COMPLAINT.—(A) IN GENERAL.—Each plaintiff seeking to serve as a

representative party on behalf of a class shall provide a sworn certification, which shall be personally signed by such plaintiff and filed with the complaint, that—

(i) states that the plaintiff has reviewed the com-plaint and authorized its filing;

(ii) states that the plaintiff did not purchase the security that is the subject of the complaint at the di-rection of plaintiff’s counsel or in order to participate in any private action arising under this title;

(iii) states that the plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if nec-essary;

(iv) sets forth all of the transactions of the plain-tiff in the security that is the subject of the complaint during the class period specified in the complaint;

(v) identifies any other action under this title, filed during the 3-year period preceding the date on which the certification is signed by the plaintiff, in which the plaintiff has sought to serve as a represent-ative party on behalf of a class; and

(vi) states that the plaintiff will not accept any payment for serving as a representative party on be-half of a class beyond the plaintiff’s pro rata share of any recovery, except as ordered or approved by the court in accordance with paragraph (4).


(B) NONWAIVER OF ATTORNEY-CLIENT PRIVILEGE.—The certification filed pursuant to subparagraph (A) shall not be construed to be a waiver of the attorney-client privilege. (3) APPOINTMENT OF LEAD PLAINTIFF.—

(A) EARLY NOTICE TO CLASS MEMBERS.—(i) IN GENERAL.—Not later than 20 days after the

date on which the complaint is filed, the plaintiff or plaintiffs shall cause to be published, in a widely cir-culated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class—

(I) of the pendency of the action, the claims asserted therein, and the purported class period; and

(II) that, not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to serve as lead plaintiff of the purported class. (ii) MULTIPLE ACTIONS.—If more than one action

on behalf of a class asserting substantially the same claim or claims arising under this title is filed, only the plaintiff or plaintiffs in the first filed action shall be required to cause notice to be published in accord-ance with clause (i).

(iii) ADDITIONAL NOTICES MAY BE REQUIRED UNDER FEDERAL RULES.—Notice required under clause (i) shall be in addition to any notice required pursuant to the Federal Rules of Civil Procedure. (B) APPOINTMENT OF LEAD PLAINTIFF.—

(i) IN GENERAL.—Not later than 90 days after the date on which a notice is published under subpara-graph (A)(i), the court shall consider any motion made by a purported class member in response to the notice, including any motion by a class member who is not in-dividually named as a plaintiff in the complaint or complaints, and shall appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of ade-quately representing the interests of class members (hereafter in this paragraph referred to as the ‘‘most adequate plaintiff’’) in accordance with this subpara-graph.

(ii) CONSOLIDATED ACTIONS.—If more than one ac-tion on behalf of a class asserting substantially the same claim or claims arising under this title has been filed, and any party has sought to consolidate those actions for pretrial purposes or for trial, the court shall not make the determination required by clause (i) until after the decision on the motion to consolidate is rendered. As soon as practicable after such decision is rendered, the court shall appoint the most adequate plaintiff as lead plaintiff for the consolidated actions in accordance with this paragraph.

(iii) REBUTTABLE PRESUMPTION.—


(I) IN GENERAL.—Subject to subclause (II), for purposes of clause (i), the court shall adopt a pre-sumption that the most adequate plaintiff in any private action arising under this title is the per-son or group of persons that—

(aa) has either filed the complaint or made a motion in response to a notice under subparagraph (A)(i);

(bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and

(cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Proce-dure. (II) REBUTTAL EVIDENCE.—The presumption

described in subclause (I) may be rebutted only upon proof by a member of the purported plaintiff class that the presumptively most adequate plain-tiff—

(aa) will not fairly and adequately protect the interests of the class; or

(bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class.

(iv) DISCOVERY.—For purposes of this subpara-graph, discovery relating to whether a member or members of the purported plaintiff class is the most adequate plaintiff may be conducted by a plaintiff only if the plaintiff first demonstrates a reasonable basis for a finding that the presumptively most adequate plaintiff is incapable of adequately representing the class.

(v) SELECTION OF LEAD COUNSEL.—The most ade-quate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class.

(vi) RESTRICTIONS ON PROFESSIONAL PLAINTIFFS.— Except as the court may otherwise permit, consistent with the purposes of this section, a person may be a lead plaintiff, or an officer, director, or fiduciary of a lead plaintiff, in no more than 5 securities class ac-tions brought as plaintiff class actions pursuant to the Federal Rules of Civil Procedure during any 3-year pe-riod.

(4) RECOVERY BY PLAINTIFFS.—The share of any final judg-ment or of any settlement that is awarded to a representative party serving on behalf of a class shall be equal, on a per share basis, to the portion of the final judgment or settlement award-ed to all other members of the class. Nothing in this paragraph shall be construed to limit the award of reasonable costs and expenses (including lost wages) directly relating to the rep-resentation of the class to any representative party serving on behalf of a class.

(5) RESTRICTIONS ON SETTLEMENTS UNDER SEAL.—The terms and provisions of any settlement agreement of a class


action shall not be filed under seal, except that on motion of any party to the settlement, the court may order filing under seal for those portions of a settlement agreement as to which good cause is shown for such filing under seal. For purposes of this paragraph, good cause shall exist only if publication of a term or provision of a settlement agreement would cause direct and substantial harm to any party.

(6) RESTRICTIONS ON PAYMENT OF ATTORNEYS’ FEES AND EXPENSES.— Total attorneys’ fees and expenses awarded by the court to counsel for the plaintiff class shall not exceed a rea-sonable percentage of the amount of any damages and prejudg-ment interest actually paid to the class.

(7) DISCLOSURE OF SETTLEMENT TERMS TO CLASS MEM-BERS.—Any proposed or final settlement agreement that is published or otherwise disseminated to the class shall include each of the following statements, along with a cover page sum-marizing the information contained in such statements:

(A) STATEMENT OF PLAINTIFF RECOVERY.—The amount of the settlement proposed to be distributed to the parties to the action, determined in the aggregate and on an aver-age per share basis.

(B) STATEMENT OF POTENTIAL OUTCOME OF CASE.—(i) AGREEMENT ON AMOUNT OF DAMAGES.—If the

settling parties agree on the average amount of dam-ages per share that would be recoverable if the plain-tiff prevailed on each claim alleged under this title, a statement concerning the average amount of such po-tential damages per share.

(ii) DISAGREEMENT ON AMOUNT OF DAMAGES.—If the parties do not agree on the average amount of damages per share that would be recoverable if the plaintiff prevailed on each claim alleged under this title, a statement from each settling party concerning the issue or issues on which the parties disagree.

(iii) INADMISSIBILITY FOR CERTAIN PURPOSES.—A statement made in accordance with clause (i) or (ii) concerning the amount of damages shall not be admis-sible in any Federal or State judicial action or admin-istrative proceeding, other than an action or pro-ceeding arising out of such statement. (C) STATEMENT OF ATTORNEYS’ FEES OR COSTS

SOUGHT.—If any of the settling parties or their counsel in-tend to apply to the court for an award of attorneys’ fees or costs from any fund established as part of the settle-ment, a statement indicating which parties or counsel in-tend to make such an application, the amount of fees and costs that will be sought (including the amount of such fees and costs determined on an average per share basis), and a brief explanation supporting the fees and costs sought. Such information shall be clearly summarized on the cover page of any notice to a party of any proposed or final settlement agreement.

(D) IDENTIFICATION OF LAWYERS’ REPRESENTATIVES.— The name, telephone number, and address of one or more


representatives of counsel for the plaintiff class who will be reasonably available to answer questions from class members concerning any matter contained in any notice of settlement published or otherwise disseminated to the class.

(E) REASONS FOR SETTLEMENT.—A brief statement ex-plaining the reasons why the parties are proposing the set-tlement.

(F) OTHER INFORMATION.—Such other information as may be required by the court. (8) SECURITY FOR PAYMENT OF COSTS IN CLASS ACTIONS.—

In any private action arising under this title that is certified as a class action pursuant to the Federal Rules of Civil Proce-dure, the court may require an undertaking from the attorneys for the plaintiff class, the plaintiff class, or both, or from the attorneys for the defendant, the defendant, or both, in such proportions and at such times as the court determines are just and equitable, for the payment of fees and expenses that may be awarded under this subsection.

(9) ATTORNEY CONFLICT OF INTEREST.—If a plaintiff class is represented by an attorney who directly owns or otherwise has a beneficial interest in the securities that are the subject of the litigation, the court shall make a determination of whether such ownership or other interest constitutes a conflict of interest sufficient to disqualify the attorney from rep-resenting the plaintiff class. (b) REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.—

(1) MISLEADING STATEMENTS AND OMISSIONS.—In any pri-vate action arising under this title in which the plaintiff al-leges that the defendant—

(A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order

to make the statements made, in the light of the cir-cumstances in which they were made, not misleading;

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

(2) REQUIRED STATE OF MIND.—(A) IN GENERAL.—Except as provided in subparagraph

(B), in any private action arising under this title in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this title, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

(B) EXCEPTION.—In the case of an action for money damages brought against a credit rating agency or a con-trolling person under this title, it shall be sufficient, for purposes of pleading any required state of mind in relation to such action, that the complaint state with particularity


facts giving rise to a strong inference that the credit rating agency knowingly or recklessly failed—

(i) to conduct a reasonable investigation of the rated security with respect to the factual elements re-lied upon by its own methodology for evaluating credit risk; or

(ii) to obtain reasonable verification of such fac-tual elements (which verification may be based on a sampling technique that does not amount to an audit) from other sources that the credit rating agency con-sidered to be competent and that were independent of the issuer and underwriter.

(3) MOTION TO DISMISS; STAY OF DISCOVERY.—(A) DISMISSAL FOR FAILURE TO MEET PLEADING RE-

QUIREMENTS.—In any private action arising under this title, the court shall, on the motion of any defendant, dis-miss the complaint if the requirements of paragraphs (1) and (2) are not met.

(B) STAY OF DISCOVERY.—In any private action arising under this title, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.

(C) PRESERVATION OF EVIDENCE.—(i) IN GENERAL.—During the pendency of any stay

of discovery pursuant to this paragraph, unless other-wise ordered by the court, any party to the action with actual notice of the allegations contained in the com-plaint shall treat all documents, data compilations (in-cluding electronically recorded or stored data), and tangible objects that are in the custody or control of such person and that are relevant to the allegations, as if they were the subject of a continuing request for production of documents from an opposing party under the Federal Rules of Civil Procedure.

(ii) SANCTION FOR WILLFUL VIOLATION.—A party aggrieved by the willful failure of an opposing party to comply with clause (i) may apply to the court for an order awarding appropriate sanctions. (D) CIRCUMVENTION OF STAY OF DISCOVERY.—Upon a

proper showing, a court may stay discovery proceedings in any private action in a State court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant to this paragraph. (4) LOSS CAUSATION.—In any private action arising under

this title, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this title caused the loss for which the plaintiff seeks to recover dam-ages. (c) SANCTIONS FOR ABUSIVE LITIGATION.—

(1) MANDATORY REVIEW BY COURT.—In any private action arising under this title, upon final adjudication of the action,


the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.

(2) MANDATORY SANCTIONS.—If the court makes a finding under paragraph (1) that a party or attorney violated any re-quirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion, the court shall impose sanctions on such party or attorney in accordance with Rule 11 of the Federal Rules of Civil Proce-dure. Prior to making a finding that any party or attorney has violated Rule 11 of the Federal Rules of Civil Procedure, the court shall give such party or attorney notice and an oppor-tunity to respond.

(3) PRESUMPTION IN FAVOR OF ATTORNEYS’ FEES AND COSTS.—

(A) IN GENERAL.—Subject to subparagraphs (B) and (C), for purposes of paragraph (2), the court shall adopt a presumption that the appropriate sanction—

(i) for failure of any responsive pleading or dis-positive motion to comply with any requirement of Rule 11(b) of the Federal Rules of Civil Procedure is an award to the opposing party of the reasonable at-torneys’ fees and other expenses incurred as a direct result of the violation; and

(ii) for substantial failure of any complaint to com-ply with any requirement of Rule 11(b) of the Federal Rules of Civil Procedure is an award to the opposing party of the reasonable attorneys’ fees and other ex-penses incurred in the action. (B) REBUTTAL EVIDENCE.—The presumption described

in subparagraph (A) may be rebutted only upon proof by the party or attorney against whom sanctions are to be im-posed that—

(i) the award of attorneys’ fees and other expenses will impose an unreasonable burden on that party or attorney and would be unjust, and the failure to make such an award would not impose a greater burden on the party in whose favor sanctions are to be imposed; or

(ii) the violation of Rule 11(b) of the Federal Rules of Civil Procedure was de minimis. (C) SANCTIONS.—If the party or attorney against

whom sanctions are to be imposed meets its burden under subparagraph (B), the court shall award the sanctions that the court deems appropriate pursuant to Rule 11 of the Federal Rules of Civil Procedure.

(d) DEFENDANT’S RIGHT TO WRITTEN INTERROGATORIES.—In any private action arising under this title in which the plaintiff may recover money damages, the court shall, when requested by a defendant, submit to the jury a written interrogatory on the issue of each such defendant’s state of mind at the time the alleged viola-tion occurred.


(e) LIMITATION ON DAMAGES.—(1) IN GENERAL.—Except as provided in paragraph (2), in

any private action arising under this title in which the plaintiff seeks to establish damages by reference to the market price of a security, the award of damages to the plaintiff shall not ex-ceed the difference between the purchase or sale price paid or received, as appropriate, by the plaintiff for the subject secu-rity and the mean trading price of that security during the 90-day period beginning on the date on which the information cor-recting the misstatement or omission that is the basis for the action is disseminated to the market.

(2) EXCEPTION.—In any private action arising under this title in which the plaintiff seeks to establish damages by ref-erence to the market price of a security, if the plaintiff sells or repurchases the subject security prior to the expiration of the 90- day period described in paragraph (1), the plaintiff’s dam-ages shall not exceed the difference between the purchase or sale price paid or received, as appropriate, by the plaintiff for the security and the mean trading price of the security during the period beginning immediately after dissemination of infor-mation correcting the misstatement or omission and ending on the date on which the plaintiff sells or repurchases the secu-rity.

(3) DEFINITION.—For purposes of this subsection, the ‘‘mean trading price’’ of a security shall be an average of the daily trading price of that security, determined as of the close of the market each day during the 90-day period referred to in paragraph (1). (f) PROPORTIONATE LIABILITY.—

(1) APPLICABILITY.—Nothing in this subsection shall be construed to create, affect, or in any manner modify, the stand-ard for liability associated with any action arising under the securities laws.

(2) LIABILITY FOR DAMAGES.—(A) JOINT AND SEVERAL LIABILITY.—Any covered per-

son against whom a final judgment is entered in a private action shall be liable for damages jointly and severally only if the trier of fact specifically determines that such covered person knowingly committed a violation of the se-curities laws.

(B) PROPORTIONATE LIABILITY.—(i) IN GENERAL.—Except as provided in subpara-

graph (A), a covered person against whom a final judg-ment is entered in a private action shall be liable sole-ly for the portion of the judgment that corresponds to the percentage of responsibility of that covered person, as determined under paragraph (3).

(ii) RECOVERY BY AND COSTS OF COVERED PER-SON.—In any case in which a contractual relationship permits, a covered person that prevails in any private action may recover the attorney’s fees and costs of that covered person in connection with the action.

(3) DETERMINATION OF RESPONSIBILITY.—


128So in law. Probably should be preceded by ‘‘if,’’.

(A) IN GENERAL.—In any private action, the court shall instruct the jury to answer special interrogatories, or if there is no jury, shall make findings, with respect to each covered person and each of the other persons claimed by any of the parties to have caused or contributed to the loss incurred by the plaintiff, including persons who have en-tered into settlements with the plaintiff or plaintiffs, con-cerning—

(i) whether such person violated the securities laws;

(ii) the percentage of responsibility of such person, measured as a percentage of the total fault of all per-sons who caused or contributed to the loss incurred by the plaintiff; and

(iii) whether such person knowingly committed a violation of the securities laws. (B) CONTENTS OF SPECIAL INTERROGATORIES OR FIND-

INGS.—The responses to interrogatories, or findings, as ap-propriate, under subparagraph (A) shall specify the total amount of damages that the plaintiff is entitled to recover and the percentage of responsibility of each covered person found to have caused or contributed to the loss incurred by the plaintiff or plaintiffs.

(C) FACTORS FOR CONSIDERATION.—In determining the percentage of responsibility under this paragraph, the trier of fact shall consider—

(i) the nature of the conduct of each covered per-son found to have caused or contributed to the loss in-curred by the plaintiff or plaintiffs; and

(ii) the nature and extent of the causal relation-ship between the conduct of each such person and the damages incurred by the plaintiff or plaintiffs.

(4) UNCOLLECTIBLE SHARE.—(A) IN GENERAL.—Notwithstanding paragraph (2)(B),

upon [128] motion made not later than 6 months after a final judgment is entered in any private action, the court determines that all or part of the share of the judgment of the covered person is not collectible against that covered person, and is also not collectible against a covered person described in paragraph (2)(A), each covered person de-scribed in paragraph (2)(B) shall be liable for the uncollectible share as follows:

(i) PERCENTAGE OF NET WORTH.—Each covered person shall be jointly and severally liable for the uncollectible share if the plaintiff establishes that—

(I) the plaintiff is an individual whose recov-erable damages under the final judgment are equal to more than 10 percent of the net worth of the plaintiff; and

(II) the net worth of the plaintiff is equal to less than $200,000.


(ii) OTHER PLAINTIFFS.—With respect to any plain-tiff not described in subclauses (I) and (II) of clause (i), each covered person shall be liable for the uncollectible share in proportion to the percentage of responsibility of that covered person, except that the total liability of a covered person under this clause may not exceed 50 percent of the proportionate share of that covered person, as determined under para-graph (3)(B).

(iii) NET WORTH.—For purposes of this subpara-graph, net worth shall be determined as of the date immediately preceding the date of the purchase or sale (as applicable) by the plaintiff of the security that is the subject of the action, and shall be equal to the fair market value of assets, minus liabilities, including the net value of the investments of the plaintiff in real and personal property (including personal residences). (B) OVERALL LIMIT.—In no case shall the total pay-

ments required pursuant to subparagraph (A) exceed the amount of the uncollectible share.

(C) COVERED PERSONS SUBJECT TO CONTRIBUTION.—A covered person against whom judgment is not collectible shall be subject to contribution and to any continuing li-ability to the plaintiff on the judgment. (5) RIGHT OF CONTRIBUTION.—To the extent that a covered

person is required to make an additional payment pursuant to paragraph (4), that covered person may recover contribution—

(A) from the covered person originally liable to make the payment;

(B) from any covered person liable jointly and sever-ally pursuant to paragraph (2)(A);

(C) from any covered person held proportionately lia-ble pursuant to this paragraph who is liable to make the same payment and has paid less than his or her propor-tionate share of that payment; or

(D) from any other person responsible for the conduct giving rise to the payment that would have been liable to make the same payment. (6) NONDISCLOSURE TO JURY.—The standard for allocation

of damages under paragraphs (2) and (3) and the procedure for reallocation of uncollectible shares under paragraph (4) shall not be disclosed to members of the jury.

(7) SETTLEMENT DISCHARGE.—(A) IN GENERAL.—A covered person who settles any

private action at any time before final verdict or judgment shall be discharged from all claims for contribution brought by other persons. Upon entry of the settlement by the court, the court shall enter a bar order constituting the final discharge of all obligations to the plaintiff of the set-tling covered person arising out of the action. The order shall bar all future claims for contribution arising out of the action—

(i) by any person against the settling covered per-son; and


(ii) by the settling covered person against any per-son, other than a person whose liability has been ex-tinguished by the settlement of the settling covered person. (B) REDUCTION.—If a covered person enters into a set-

tlement with the plaintiff prior to final verdict or judg-ment, the verdict or judgment shall be reduced by the greater of—

(i) an amount that corresponds to the percentage of responsibility of that covered person; or

(ii) the amount paid to the plaintiff by that cov-ered person.

(8) CONTRIBUTION.—A covered person who becomes jointly and severally liable for damages in any private action may re-cover contribution from any other person who, if joined in the original action, would have been liable for the same damages. A claim for contribution shall be determined based on the per-centage of responsibility of the claimant and of each person against whom a claim for contribution is made.

(9) STATUTE OF LIMITATIONS FOR CONTRIBUTION.—In any private action determining liability, an action for contribution shall be brought not later than 6 months after the entry of a final, nonappealable judgment in the action, except that an ac-tion for contribution brought by a covered person who was re-quired to make an additional payment pursuant to paragraph (4) may be brought not later than 6 months after the date on which such payment was made.

(10) DEFINITIONS.—For purposes of this subsection—(A) a covered person ‘‘knowingly commits a violation of

the securities laws’’—(i) with respect to an action that is based on an

untrue statement of material fact or omission of a ma-terial fact necessary to make the statement not mis-leading, if—

(I) that covered person makes an untrue statement of a material fact, with actual knowl-edge that the representation is false, or omits to state a fact necessary in order to make the state-ment made not misleading, with actual knowledge that, as a result of the omission, one of the mate-rial representations of the covered person is false; and

(II) persons are likely to reasonably rely on that misrepresentation or omission; and (ii) with respect to an action that is based on any

conduct that is not described in clause (i), if that cov-ered person engages in that conduct with actual knowledge of the facts and circumstances that make the conduct of that covered person a violation of the securities laws; (B) reckless conduct by a covered person shall not be

construed to constitute a knowing commission of a viola-tion of the securities laws by that covered person;

(C) the term ‘‘covered person’’ means—


(i) a defendant in any private action arising under this title; or

(ii) a defendant in any private action arising under section 11 of the Securities Act of 1933, who is an outside director of the issuer of the securities that are the subject of the action; and (D) the term ‘‘outside director’’ shall have the meaning

given such term by rule or regulation of the Commission.

(June 6, 1934, ch. 404, title I, Sec. 21D, as added and amended Pub. L. 104-67, title I, Sec. 101(b), title II, Sec. 201(a), Dec. 22, 1995, 109 Stat. 743, 758; Pub. L. 105-353, title I, Sec. 101(b)(2), title III, Sec. 301(b)(13), Nov. 3, 1998, 112 Stat. 3233, 3236; Pub. L. 111-203, title IX, Sec. 933(b), July 21, 2010, 124 Stat. 1883.)

SEC. 21E. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.

(a) APPLICABILITY.—This section shall apply only to a forward- looking statement made by—

(1) an issuer that, at the time that the statement is made, is subject to the reporting requirements of section 13(a) or sec-tion 15(d);

(2) a person acting on behalf of such issuer; (3) an outside reviewer retained by such issuer making a

statement on behalf of such issuer; or (4) an underwriter, with respect to information provided by

such issuer or information derived from information provided by such issuer. (b) EXCLUSIONS.—Except to the extent otherwise specifically

provided by rule, regulation, or order of the Commission, this sec-tion shall not apply to a forward-looking statement—

(1) that is made with respect to the business or operations of the issuer, if the issuer—

(A) during the 3-year period preceding the date on which the statement was first made—

(i) was convicted of any felony or misdemeanor de-scribed in clauses (i) through (iv) of section 15(b)(4)(B); or

(ii) has been made the subject of a judicial or ad-ministrative decree or order arising out of a governmental action that—

(I) prohibits future violations of the antifraud provisions of the securities laws;

(II) requires that the issuer cease and desist from violating the antifraud provisions of the se-curities laws; or

(III) determines that the issuer violated the antifraud provisions of the securities laws;

(B) makes the forward-looking statement in connection with an offering of securities by a blank check company;

(C) issues penny stock; (D) makes the forward-looking statement in connection

with a rollup transaction; or


129So in law. The semicolon probably should be a comma.

(E) makes the forward-looking statement in connection with a going private transaction; or (2) that is—

(A) included in a financial statement prepared in ac-cordance with generally accepted accounting principles;

(B) contained in a registration statement of, or other-wise issued by, an investment company;

(C) made in connection with a tender offer; (D) made in connection with an initial public offering; (E) made in connection with an offering by, or relating

to the operations of, a partnership, limited liability com-pany, or a direct participation investment program; or

(F) made in a disclosure of beneficial ownership in a report required to be filed with the Commission pursuant to section 13(d).

(c) SAFE HARBOR.—(1) IN GENERAL.—Except as provided in subsection (b), in

any private action arising under this title that is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person referred to in subsection (a) shall not be liable with respect to any forward-looking statement, whether written or oral, if and to the extent that—

(A) the forward-looking statement is—(i) identified as a forward-looking statement, and

is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or

(ii) immaterial; or (B) the plaintiff fails to prove that the forward-looking

statement—(i) if made by a natural person, was made with ac-

tual knowledge by that person that the statement was false or misleading; or

(ii) if made by a business entity; [129]was—(I) made by or with the approval of an execu-

tive officer of that entity; and (II) made or approved by such officer with ac-

tual knowledge by that officer that the statement was false or misleading.

(2) ORAL FORWARD-LOOKING STATEMENTS.—In the case of an oral forward-looking statement made by an issuer that is subject to the reporting requirements of section 13(a) or section 15(d), or by a person acting on behalf of such issuer, the re-quirement set forth in paragraph (1)(A) shall be deemed to be satisfied—

(A) if the oral forward-looking statement is accom-panied by a cautionary statement—

(i) that the particular oral statement is a forward- looking statement; and


(ii) that the actual results might differ materially from those projected in the forward-looking statement; and (B) if—

(i) the oral forward-looking statement is accom-panied by an oral statement that additional informa-tion concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in a readily available written document, or portion thereof;

(ii) the accompanying oral statement referred to in clause (i) identifies the document, or portion thereof, that contains the additional information about those factors relating to the forward-looking statement; and

(iii) the information contained in that written doc-ument is a cautionary statement that satisfies the standard established in paragraph (1)(A).

(3) AVAILABILITY.—Any document filed with the Commis-sion or generally disseminated shall be deemed to be readily available for purposes of paragraph (2).

(4) EFFECT ON OTHER SAFE HARBORS.—The exemption pro-vided for in paragraph (1) shall be in addition to any exemp-tion that the Commission may establish by rule or regulation under subsection (g). (d) DUTY TO UPDATE.—Nothing in this section shall impose

upon any person a duty to update a forward-looking statement. (e) DISPOSITIVE MOTION.—On any motion to dismiss based

upon subsection (c)(1), the court shall consider any statement cited in the complaint and any cautionary statement accompanying the forward-looking statement, which are not subject to material dis-pute, cited by the defendant.

(f) STAY PENDING DECISION ON MOTION.—In any private action arising under this title, the court shall stay discovery (other than discovery that is specifically directed to the applicability of the ex-emption provided for in this section) during the pendency of any motion by a defendant for summary judgment that is based on the grounds that—

(1) the statement or omission upon which the complaint is based is a forward-looking statement within the meaning of this section; and

(2) the exemption provided for in this section precludes a claim for relief. (g) EXEMPTION AUTHORITY.—In addition to the exemptions pro-

vided for in this section, the Commission may, by rule or regula-tion, provide exemptions from or under any provision of this title, including with respect to liability that is based on a statement or that is based on projections or other forward-looking information, if and to the extent that any such exemption is consistent with the public interest and the protection of investors, as determined by the Commission.

(h) EFFECT ON OTHER AUTHORITY OF COMMISSION.—Nothing in this section limits, either expressly or by implication, the authority of the Commission to exercise similar authority or to adopt similar rules and regulations with respect to forward-looking statements


under any other statute under which the Commission exercises rulemaking authority.

(i) DEFINITIONS.—For purposes of this section, the following definitions shall apply:

(1) FORWARD-LOOKING STATEMENT.—The term ‘‘forward-looking statement’’ means—

(A) a statement containing a projection of revenues, income (including income loss), earnings (including earn-ings loss) per share, capital expenditures, dividends, cap-ital structure, or other financial items;

(B) a statement of the plans and objectives of manage-ment for future operations, including plans or objectives relating to the products or services of the issuer;

(C) a statement of future economic performance, in-cluding any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission;

(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C);

(E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward- looking statement made by the issuer; or

(F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the Commission. (2) INVESTMENT COMPANY.—The term ‘‘investment com-

pany’’ has the same meaning as in section 3(a) of the Invest-ment Company Act of 1940.

(3) GOING PRIVATE TRANSACTION.—The term ‘‘going private transaction’’ has the meaning given that term under the rules or regulations of the Commission issued pursuant to section 13(e).

(4) PERSON ACTING ON BEHALF OF AN ISSUER.—The term ‘‘person acting on behalf of an issuer’’ means any officer, direc-tor, or employee of such issuer.

(5) OTHER TERMS.—The terms ‘‘blank check company’’, ‘‘rollup transaction’’, ‘‘partnership’’, ‘‘limited liability company’’, ‘‘executive officer of an entity’’ and ‘‘direct participation invest-ment program’’, have the meanings given those terms by rule or regulation of the Commission.

(June 6, 1934, ch. 404, title I, Sec. 21E, as added Pub. L. 104-67, title I, Sec. 102(b), Dec. 22, 1995, 109 Stat. 753.)

SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTEC-TION.

(a) DEFINITIONS.—In this section the following definitions shall apply:

(1) COVERED JUDICIAL OR ADMINISTRATIVE ACTION.—The term ‘‘covered judicial or administrative action’’ means any ju-dicial or administrative action brought by the Commission


under the securities laws that results in monetary sanctions exceeding $1,000,000.

(2) FUND.—The term ‘‘Fund’’ means the Securities and Ex-change Commission Investor Protection Fund.

(3) ORIGINAL INFORMATION.—The term ‘‘original informa-tion’’ means information that—

(A) is derived from the independent knowledge or analysis of a whistleblower;

(B) is not known to the Commission from any other source, unless the whistleblower is the original source of the information; and

(C) is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the informa-tion. (4) MONETARY SANCTIONS.—The term ‘‘monetary sanc-

tions’’, when used with respect to any judicial or administra-tive action, means—

(A) any monies, including penalties, disgorgement, and interest, ordered to be paid; and

(B) any monies deposited into a disgorgement fund or other fund pursuant to section 308(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246(b)), as a result of such action or any settlement of such action. (5) RELATED ACTION.—The term ‘‘related action’’, when

used with respect to any judicial or administrative action brought by the Commission under the securities laws, means any judicial or administrative action brought by an entity de-scribed in subclauses (I) through (IV) of subsection (h)(2)(D)(i) that is based upon the original information provided by a whis-tleblower pursuant to subsection (a) that led to the successful enforcement of the Commission action.

(6) WHISTLEBLOWER.—The term ‘‘whistleblower’’ means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission. (b) AWARDS.—

(1) IN GENERAL.—In any covered judicial or administrative action, or related action, the Commission, under regulations prescribed by the Commission and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action, in an aggregate amount equal to—

(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and

(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the ac-tion or related actions.


(2) PAYMENT OF AWARDS.—Any amount paid under para-graph (1) shall be paid from the Fund. (c) DETERMINATION OF AMOUNT OF AWARD; DENIAL OF

AWARD.—(1) DETERMINATION OF AMOUNT OF AWARD.—

(A) DISCRETION.—The determination of the amount of an award made under subsection (b) shall be in the discre-tion of the Commission.

(B) CRITERIA.—In determining the amount of an award made under subsection (b), the Commission—

(i) shall take into consideration—(I) the significance of the information pro-

vided by the whistleblower to the success of the covered judicial or administrative action;

(II) the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in a covered judicial or administra-tive action;

(III) the programmatic interest of the Com-mission in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful en-forcement of such laws; and

(IV) such additional relevant factors as the Commission may establish by rule or regulation; and (ii) shall not take into consideration the balance of

the Fund. (2) DENIAL OF AWARD.—No award under subsection (b)

shall be made—(A) to any whistleblower who is, or was at the time the

whistleblower acquired the original information submitted to the Commission, a member, officer, or employee of—

(i) an appropriate regulatory agency; (ii) the Department of Justice; (iii) a self-regulatory organization; (iv) the Public Company Accounting Oversight

Board; or (v) a law enforcement organization;

(B) to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section;

(C) to any whistleblower who gains the information through the performance of an audit of financial state-ments required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1); or

(D) to any whistleblower who fails to submit informa-tion to the Commission in such form as the Commission may, by rule, require.

(d) REPRESENTATION.—


(1) PERMITTED REPRESENTATION.—Any whistleblower who makes a claim for an award under subsection (b) may be rep-resented by counsel.

(2) REQUIRED REPRESENTATION.—(A) IN GENERAL.—Any whistleblower who anony-

mously makes a claim for an award under subsection (b) shall be represented by counsel if the whistleblower anony-mously submits the information upon which the claim is based.

(B) DISCLOSURE OF IDENTITY.—Prior to the payment of an award, a whistleblower shall disclose the identity of the whistleblower and provide such other information as the Commission may require, directly or through counsel for the whistleblower.

(e) NO CONTRACT NECESSARY.—No contract with the Commis-sion is necessary for any whistleblower to receive an award under subsection (b), unless otherwise required by the Commission by rule or regulation.

(f) APPEALS.—Any determination made under this section, in-cluding whether, to whom, or in what amount to make awards, shall be in the discretion of the Commission. Any such determina-tion, except the determination of the amount of an award if the award was made in accordance with subsection (b), may be ap-pealed to the appropriate court of appeals of the United States not more than 30 days after the determination is issued by the Com-mission. The court shall review the determination made by the Commission in accordance with section 706 of title 5, United States Code.

(g) INVESTOR PROTECTION FUND.—(1) FUND ESTABLISHED.—There is established in the Treas-

ury of the United States a fund to be known as the ‘‘Securities and Exchange Commission Investor Protection Fund’’.

(2) USE OF FUND.—The Fund shall be available to the Commission, without further appropriation or fiscal year limi-tation, for—

(A) paying awards to whistleblowers as provided in subsection (b); and

(B) funding the activities of the Inspector General of the Commission under section 4(i). (3) DEPOSITS AND CREDITS.—

(A) IN GENERAL.—There shall be deposited into or credited to the Fund an amount equal to—

(i) any monetary sanction collected by the Com-mission in any judicial or administrative action brought by the Commission under the securities laws that is not added to a disgorgement fund or other fund under section 308 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246) or otherwise distributed to victims of a violation of the securities laws, or the rules and reg-ulations thereunder, underlying such action, unless the balance of the Fund at the time the monetary sanction is collected exceeds $300,000,000;


(ii) any monetary sanction added to a disgorgement fund or other fund under section 308 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246) that is not distributed to the victims for whom the Fund was established, unless the balance of the disgorgement fund at the time the determination is made not to distribute the monetary sanction to such victims exceeds $200,000,000; and

(iii) all income from investments made under paragraph (4). (B) ADDITIONAL AMOUNTS.—If the amounts deposited

into or credited to the Fund under subparagraph (A) are not sufficient to satisfy an award made under subsection (b), there shall be deposited into or credited to the Fund an amount equal to the unsatisfied portion of the award from any monetary sanction collected by the Commission in the covered judicial or administrative action on which the award is based. (4) INVESTMENTS.—

(A) AMOUNTS IN FUND MAY BE INVESTED.—The Com-mission may request the Secretary of the Treasury to in-vest the portion of the Fund that is not, in the discretion of the Commission, required to meet the current needs of the Fund.

(B) ELIGIBLE INVESTMENTS.—Investments shall be made by the Secretary of the Treasury in obligations of the United States or obligations that are guaranteed as to principal and interest by the United States, with matu-rities suitable to the needs of the Fund as determined by the Commission on the record.

(C) INTEREST AND PROCEEDS CREDITED.—The interest on, and the proceeds from the sale or redemption of, any obligations held in the Fund shall be credited to the Fund. (5) REPORTS TO CONGRESS.—Not later than October 30 of

each fiscal year beginning after the date of enactment of this subsection, the Commission shall submit to the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representa-tives a report on—

(A) the whistleblower award program, established under this section, including—

(i) a description of the number of awards granted; and

(ii) the types of cases in which awards were grant-ed during the preceding fiscal year; (B) the balance of the Fund at the beginning of the

preceding fiscal year; (C) the amounts deposited into or credited to the Fund

during the preceding fiscal year; (D) the amount of earnings on investments made

under paragraph (4) during the preceding fiscal year; (E) the amount paid from the Fund during the pre-

ceding fiscal year to whistleblowers pursuant to subsection (b);


130So in original. Probably should be ‘‘78j-1(m)’’.

(F) the balance of the Fund at the end of the preceding fiscal year; and

(G) a complete set of audited financial statements, in-cluding—

(i) a balance sheet; (ii) income statement; and (iii) cash flow analysis.

(h) PROTECTION OF WHISTLEBLOWERS.—(1) PROHIBITION AGAINST RETALIATION.—

(A) IN GENERAL.—No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower—

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such informa-tion; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m) [130]), section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commis-sion. (B) ENFORCEMENT.—

(i) CAUSE OF ACTION.—An individual who alleges discharge or other discrimination in violation of sub-paragraph (A) may bring an action under this sub-section in the appropriate district court of the United States for the relief provided in subparagraph (C).

(ii) SUBPOENAS.—A subpoena requiring the at-tendance of a witness at a trial or hearing conducted under this section may be served at any place in the United States.

(iii) STATUTE OF LIMITATIONS.—(I) IN GENERAL.—An action under this sub-

section may not be brought—(aa) more than 6 years after the date on

which the violation of subparagraph (A) oc-curred; or

(bb) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the employee alleging a violation of sub-paragraph (A). (II) REQUIRED ACTION WITHIN 10 YEARS.— Not-

withstanding subclause (I), an action under this subsection may not in any circumstance be


brought more than 10 years after the date on which the violation occurs.

(C) RELIEF.—Relief for an individual prevailing in an action brought under subparagraph (B) shall include—

(i) reinstatement with the same seniority status that the individual would have had, but for the dis-crimination;

(ii) 2 times the amount of back pay otherwise owed to the individual, with interest; and

(iii) compensation for litigation costs, expert wit-ness fees, and reasonable attorneys’ fees.

(2) CONFIDENTIALITY.—(A) IN GENERAL.—Except as provided in subpara-

graphs (B) and (C), the Commission and any officer or em-ployee of the Commission shall not disclose any informa-tion, including information provided by a whistleblower to the Commission, which could reasonably be expected to re-veal the identity of a whistleblower, except in accordance with the provisions of section 552a of title 5, United States Code, unless and until required to be disclosed to a defend-ant or respondent in connection with a public proceeding instituted by the Commission or any entity described in subparagraph (C). For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section.

(B) EXEMPTED STATUTE.—For purposes of section 552 of title 5, United States Code, this paragraph shall be con-sidered a statute described in subsection (b)(3)(B) of such section 552.

(C) RULE OF CONSTRUCTION.—Nothing in this section is intended to limit, or shall be construed to limit, the abil-ity of the Attorney General to present such evidence to a grand jury or to share such evidence with potential wit-nesses or defendants in the course of an ongoing criminal investigation.

(D) AVAILABILITY TO GOVERNMENT AGENCIES.—(i) IN GENERAL.—Without the loss of its status as

confidential in the hands of the Commission, all infor-mation referred to in subparagraph (A) may, in the discretion of the Commission, when determined by the Commission to be necessary to accomplish the pur-poses of this Act and to protect investors, be made available to—

(I) the Attorney General of the United States; (II) an appropriate regulatory authority; (III) a self-regulatory organization; (IV) a State attorney general in connection

with any criminal investigation; (V) any appropriate State regulatory author-

ity; (VI) the Public Company Accounting Over-

sight Board; (VII) a foreign securities authority; and (VIII) a foreign law enforcement authority.


(ii) CONFIDENTIALITY.—(I) IN GENERAL.—Each of the entities de-

scribed in subclauses (I) through (VI) of clause (i) shall maintain such information as confidential in accordance with the requirements established under subparagraph (A).

(II) FOREIGN AUTHORITIES.—Each of the enti-ties described in subclauses (VII) and (VIII) of clause (i) shall maintain such information in ac-cordance with such assurances of confidentiality as the Commission determines appropriate.

(3) RIGHTS RETAINED.—Nothing in this section shall be deemed to diminish the rights, privileges, or remedies of any whistleblower under any Federal or State law, or under any collective bargaining agreement. (i) PROVISION OF FALSE INFORMATION.—A whistleblower shall

not be entitled to an award under this section if the whistle-blower—

(1) knowingly and willfully makes any false, fictitious, or fraudulent statement or representation; or

(2) uses any false writing or document knowing the writing or document contains any false, fictitious, or fraudulent state-ment or entry. (j) RULEMAKING AUTHORITY.—The Commission shall have the

authority to issue such rules and regulations as may be necessary or appropriate to implement the provisions of this section con-sistent with the purposes of this section.

(June 6, 1934, ch. 404, title I, Sec. 21F, as added Pub. L. 111-203, title IX, Sec. 922(a), July 21, 2010, 124 Stat. 1841.)

HEARINGS BY COMMISSION

SEC. 22. Hearings may be public and may be held before the Commission, any member or members thereof, or any officer or offi-cers of the Commission designated by it, and appropriate records thereof shall be kept.


RULES, REGULATIONS, AND ORDERS; ANNUAL REPORTS

SEC. 23. (a)(1) The Commission, the Board of Governors of the Federal Reserve System, and the other agencies enumerated in sec-tion 3(a)(34) of this title shall each have power to make such rules and regulations as may be necessary or appropriate to implement the provisions of this title for which they are responsible or for the execution of the functions vested in them by this title, and may for such purposes classify persons, securities, transactions, statements, applications, reports, and other matters within their respective ju-risdictions, and prescribe greater, lesser, or different requirements for different classes thereof. No provision of this title imposing any liability shall apply to any act done or omitted in good faith in con-


formity with a rule, regulation, or order of the Commission, the Board of Governors of the Federal Reserve System, other agency enumerated in section 3(a)(34) of this title, or any self-regulatory organization, notwithstanding that such rule, regulation, or order may thereafter be amended or rescinded or determined by judicial or other authority to be invalid for any reason.

(2) The Commission and the Secretary of the Treasury, in mak-ing rules and regulations pursuant to any provisions of this title, shall consider among other matters the impact any such rule or regulation would have on competition. The Commission and the Secretary of the Treasury shall not adopt any such rule or regula-tion which would impose a burden on competition not necessary or appropriate in furtherance of the purposes of this title. The Com-mission and the Secretary of the Treasury shall include in the statement of basis and purpose incorporated in any rule or regula-tion adopted under this title, the reasons for the Commission’s or the Secretary’s determination that any burden on competition im-posed by such rule or regulation is necessary or appropriate in fur-therance of the purposes of this title.

(3) The Commission and the Secretary, in making rules and regulations pursuant to any provision of this title, considering any application for registration in accordance with section 19(a) of this title, or reviewing any proposed rule change of a self-regulatory or-ganization in accordance with section 19(b) of this title, shall keep in a public file and make available for copying all written state-ments filed with the Commission and the Secretary and all written communications between the Commission or the Secretary and any person relating to the proposed rule, regulation, application, or pro-posed rule change: Provided, however, That the Commission and the Secretary shall not be required to keep in a public file or make available for copying any such statement or communication which it may withhold from the public in accordance with the provisions of section 552 of title 5, United States Code.

(b)(1) The Commission, the Board of Governors of the Federal Reserve System, and the other agencies enumerated in section 3(a)(34) of this title shall each make an annual report to the Con-gress on its work for the preceding year, and shall include in each such report whatever information, data, and recommendations for further legislation it considers advisable with regard to matters within its respective jurisdiction under this title.

(2) The appropriate regulatory agency for a self-regulatory or-ganization shall include in its annual report to the Congress for each fiscal year, a summary of its oversight activities under this title with respect to such self-regulatory organization, including a description of any examination conducted as part of such activities of any organization, any material recommendation presented as part of such activities to such organization for changes in its orga-nization or rules, and any such action by such organization in re-sponse to any such recommendation.

(3) The appropriate regulatory agency for any class of munic-ipal securities dealers shall include in its annual report to the Con-gress for each fiscal year a summary of its regulatory activities pursuant to this title with respect to such municipal securities dealers, including the nature of and reason for any sanction im-


posed pursuant to this title against any such municipal securities dealer.

(4) The Commission shall also include in its annual report to the Congress for each fiscal year—

(A) a summary of the Commission’s oversight activities with respect to self-regulatory organizations for which it is not the appropriate regulatory agency, including a description of any examination of any such organization, any material rec-ommendation presented to any such organization for changes in its organization or rules, and any action by any such organi-zation in response to any such recommendations;

(B) a statement and analysis of the expenses and oper-ations of each self-regulatory organization in connection with the performance of its responsibilities under this title, for which purpose data pertaining to such expenses and operations shall be made available by such organization to the Commis-sion at its request;

(C) the steps the Commission has taken and the progress it has made toward ending the physical movement of the secu-rities certificate in connection with the settlement of securities transactions, and its recommendations, if any, for legislation to eliminate the securities certificate;

(D) the number of requests for exemptions from provisions of this title received, the number granted, and the basis upon which any such exemption was granted;

(E) a summary of the Commission’s regulatory activities with respect to municipal securities dealers for which it is not the appropriate regulatory agency, including the nature of, and reason for, any sanction imposed in proceedings against such municipal securities dealers;

(F) a statement of the time elapsed between the filing of reports pursuant to section 13(f) of this title and the public availability of the information contained therein, the costs in-volved in the Commission’s processing of such reports and tab-ulating such information, the manner in which the Commis-sion uses such information, and the steps the Commission has taken and the progress it has made toward requiring such re-ports to be filed and such information to be made available to the public in machine language;

(G) information concerning (i) the effects its rules and reg-ulations are having on the viability of small brokers and deal-ers; (ii) its attempts to reduce any unnecessary reporting bur-den on such brokers and dealers; and (iii) its efforts to help to assure the continued participation of small brokers and dealers in the United States securities markets;

(H) a statement detailing its administration of the Free-dom of Information Act, section 552 of title 5, United States Code, including a copy of the report filed pursuant to sub-section (d) of such section; and

(I) the steps that have been taken and the progress that has been made in promoting the timely public dissemination and availability for analytical purposes (on a fair, reasonable, and nondiscriminatory basis) of information concerning govern-ment securities transactions and quotations, and its rec-


ommendations, if any, for legislation to assure timely dissemi-nation of (i) information on transactions in regularly traded government securities sufficient to permit the determination of the prevailing market price for such securities, and (ii) reports of the highest published bids and lowest published offers for government securities (including the size at which persons are willing to trade with respect to such bids and offers). (c) The Commission, by rule, shall prescribe the procedure ap-

plicable to every case pursuant to this title of adjudication (as de-fined in section 551 of title 5, United States Code) not required to be determined on the record after notice and opportunity for hear-ing. Such rules shall, as a minimum, provide that prompt notice shall be given of any adverse action or final disposition and that such notice and the entry of any order shall be accompanied by a statement of written reasons.

(d) CEASE-AND-DESIST PROCEDURES.—Within 1 year after the date of enactment of this subsection, the Commission shall estab-lish regulations providing for the expeditious conduct of hearings and rendering of decisions under section 21C of this title, section 8A of the Securities Act of 1933, section 9(f) of the Investment Company Act of 1940, and section 203(k) of the Investment Advis-ers Act of 1940.

(June 6, 1934, ch. 404, title I, Sec. 23, 48 Stat. 901; Aug. 23, 1935, ch. 614, Sec. 203(a), 49 Stat. 704; May 27, 1936, ch. 462, Sec. 8, 49 Stat. 1379; Pub. L. 88-467, Sec. 10, Aug. 20, 1964, 78 Stat. 580; Pub. L. 94-29, Sec. 18, June 4, 1975, 89 Stat. 155; Pub. L. 99-571, title I, Sec. 102(j), Oct. 28, 1986, 100 Stat. 3220; Pub. L. 100-181, title III, Sec. 324, 325, Dec. 4, 1987, 101 Stat. 1259; Pub. L. 101-429, title II, Sec. 204, Oct. 15, 1990, 104 Stat. 940; Pub. L. 103-202, title I, Sec. 107, Dec. 17, 1993, 107 Stat. 2351; Pub. L. 109-351, title IV, Sec. 401(a)(3), Oct. 13, 2006, 120 Stat. 1973; Pub. L. 111-203, title III, Sec. 376(4), July, 22, 2010, 124 Stat. 1569.)

PUBLIC AVAILABILITY OF INFORMATION

SEC. 24. (a) For purposes of section 552 of title 5, United States Code, the term ‘‘records’’ includes all applications, statements, re-ports, contracts, correspondence, notices, and other documents filed with or otherwise obtained by the Commission pursuant to this title or otherwise.

(b) It shall be unlawful for any member, officer, or employee of the Commission to disclose to any person other than a member, officer, or employee of the Commission, or to use for personal ben-efit, any information contained in any application, statement, re-port, contract, correspondence, notice, or other document filed with or otherwise obtained by the Commission (1) in contravention of the rules and regulations of the Commission under section 552 of Title 5, United States Code, or (2) in circumstances where the Com-mission has determined pursuant to such rules to accord confiden-tial treatment to such information.

(c) CONFIDENTIAL DISCLOSURES.—The Commission may, in its discretion and upon a showing that such information is needed, provide all ‘‘records’’ (as defined in subsection (a)) and other infor-


mation in its possession to such persons, both domestic and foreign, as the Commission by rule deems appropriate if the person receiv-ing such records or information provides such assurances of con-fidentiality as the Commission deems appropriate.

(d) RECORDS OBTAINED FROM FOREIGN SECURITIES AUTHORI-TIES.—Except as provided in subsection (g), the Commission shall not be compelled to disclose records obtained from a foreign securi-ties authority if (1) the foreign securities authority has in good faith determined and represented to the Commission that public disclosure of such records would violate the laws applicable to that foreign securities authority, and (2) the Commission obtains such records pursuant to (A) such procedure as the Commission may au-thorize for use in connection with the administration or enforce-ment of the securities laws, or (B) a memorandum of under-standing. For purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in sub-section (b)(3)(B) of such section 552.

(e) FREEDOM OF INFORMATION ACT.—For purposes of section 552(b)(8) of title 5, United States Code, (commonly referred to as the Freedom of Information Act)—

(1) the Commission is an agency responsible for the regula-tion or supervision of financial institutions; and

(2) any entity for which the Commission is responsible for regulating, supervising, or examining under this title is a fi-nancial institution. (f) SHARING PRIVILEGED INFORMATION WITH OTHER AUTHORI-

TIES.—(1) PRIVILEGED INFORMATION PROVIDED BY THE COMMIS-

SION.—The Commission shall not be deemed to have waived any privilege applicable to any information by transferring that information to or permitting that information to be used by—

(A) any agency (as defined in section 6 of title 18, United States Code);

(B) the Public Company Accounting Oversight Board; (C) any self-regulatory organization; (D) any foreign securities authority; (E) any foreign law enforcement authority; or (F) any State securities or law enforcement authority.

(2) NONDISCLOSURE OF PRIVILEGED INFORMATION PROVIDED TO THE COMMISSION.—The Commission shall not be compelled to disclose privileged information obtained from any foreign se-curities authority, or foreign law enforcement authority, if the authority has in good faith determined and represented to the Commission that the information is privileged.

(3) NONWAIVER OF PRIVILEGED INFORMATION PROVIDED TO THE COMMISSION.—

(A) IN GENERAL.—Federal agencies, State securities and law enforcement authorities, self-regulatory organiza-tions, and the Public Company Accounting Oversight Board shall not be deemed to have waived any privilege applicable to any information by transferring that informa-tion to or permitting that information to be used by the Commission.


(B) EXCEPTION.—The provisions of subparagraph (A) shall not apply to a self-regulatory organization or the Public Company Accounting Oversight Board with respect to information used by the Commission in an action against such organization. (4) DEFINITIONS.—For purposes of this subsection—

(A) the term ‘‘privilege’’ includes any work-product privilege, attorney-client privilege, governmental privilege, or other privilege recognized under Federal, State, or for-eign law;

(B) the term ‘‘foreign law enforcement authority’’ means any foreign authority that is empowered under for-eign law to detect, investigate or prosecute potential viola-tions of law; and

(C) the term ‘‘State securities or law enforcement au-thority’’ means the authority of any State or territory that is empowered under State or territory law to detect, inves-tigate, or prosecute potential violations of law.

(g) SAVINGS PROVISIONS.—Nothing in this section shall—(1) alter the Commission’s responsibilities under the Right

to Financial Privacy Act (12 U.S.C. 3401 et seq.), as limited by section 21(h) of this Act, with respect to transfers of records covered by such statutes, or

(2) authorize the Commission to withhold information from the Congress or prevent the Commission from complying with an order of a court of the United States in an action com-menced by the United States or the Commission.

(June 6, 1934, ch. 404, title I, Sec. 24, 48 Stat. 901; Aug. 23, 1935, ch. 614, Sec. 203(a), 49 Stat. 704; Pub. L. 94-29, Sec. 19, June 4, 1975, 89 Stat. 158; Pub. L. 101-550, title II, Sec. 202(a), Nov. 15, 1990, 104 Stat. 2715; Pub. L. 111-203, title IX, Secs. 929I(a), 929K, July 21, 2010, 124 Stat. 1857, 1860; Pub. L. 111-257, Sec. 1(a), Oct. 5, 2010, 124 Stat. 2646.)

COURT REVIEW OF ORDERS AND RULES

SEC. 25. (a)(1) A person aggrieved by a final order of the Com-mission entered pursuant to this title may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business, or for the District of Columbia Circuit, by filing in such court, within sixty days after the entry of the order, a written petition requesting that the order be modified or set aside in whole or in part.

(2) A copy of the petition shall be transmitted forthwith by the clerk of the court to a member of the Commission or an officer des-ignated by the Commission for that purpose. Thereupon the Com-mission shall file in the court the record on which the order com-plained of is entered, as provided in section 2112 of title 28, United States Code, and the Federal Rules of Appellate Procedure.

(3) On the filing of the petition, the court has jurisdiction, which becomes exclusive on the filing of the record, to affirm or modify and enforce or to set aside the order in whole or in part.


(4) The findings of the Commission as to the facts, if supported by substantial evidence, are conclusive.

(5) If either party applies to the court for leave to adduce addi-tional evidence and shows to the satisfaction of the court that the additional evidence is material and that there was reasonable ground for failure to adduce it before the Commission, the court may remand the case to the Commission for further proceedings, in whatever manner and on whatever conditions the court con-siders appropriate. If the case is remanded to the Commission, it shall file in the court a supplemental record containing any new evidence, any further or modified findings, and any new order.

(b)(1) A person adversely affected by a rule of the Commission promulgated pursuant to section 6, 9(h)(2), 11, 11A, 15(c) (5) or (6), 15A, 17, 17A, or 19 of this title may obtain review of this rule in the United States Court of Appeals for the circuit in which he re-sides or has his principal place of business or for the District of Co-lumbia Circuit, by filing in such court, within sixty days after the promulgation of the rule, a written petition requesting that the rule be set aside.

(2) A copy of the petition shall be transmitted forthwith by the clerk of the court to a member of the Commission or an officer des-ignated for that purpose. Thereupon, the Commission shall file in the court the rule under review and any documents referred to therein, the Commission’s notice of proposed rulemaking and any documents referred to therein, all written submissions and the transcript of any oral presentations in the rulemaking, factual in-formation not included in the foregoing that was considered by the Commission in the promulgation of the rule or proffered by the Commission as pertinent to the rule, the report of any advisory committee received or considered by the Commission in the rule-making, and any other materials prescribed by the court.

(3) On the filing of the petition, the court has jurisdiction, which becomes exclusive on the filing of the materials set forth in paragraph (2) of this subsection, to affirm and enforce or to set aside the rule.

(4) The findings of the Commission as to the facts identified by the Commission as the basis, in whole or in part, of the rule, if sup-ported by substantial evidence, are conclusive. The court shall af-firm and enforce the rule unless the Commission’s action in pro-mulgating the rule is found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; contrary to con-stitutional right, power, privilege, or immunity; in excess of statu-tory jurisdiction, authority, or limitations, or short of statutory right; or without observance of procedure required by law.

(5) If proceedings have been instituted under this subsection in two or more courts of appeals with respect to the same rule, the Commission shall file the materials set forth in paragraph (2) of this subsection in that court in which a proceeding was first insti-tuted. The other courts shall thereupon transfer all such pro-ceedings to the court in which the materials have been filed. For the convenience of the parties in the interest of justice that court may thereafter transfer all the proceedings to any other court of appeals.


(c)(1) No objection to an order or rule of the Commission, for which review is sought under this section, may be considered by the court unless it was urged before the Commission or there was reasonable ground for failure to do so.

(2) The filing of a petition under this section does not operate as a stay of the Commission’s order or rule. Until the court’s juris-diction becomes exclusive, the Commission may stay its order or rule pending judicial review if it finds that justice so requires. After the filing of a petition under this section, the court, on whatever conditions may be required and to the extent necessary to prevent irreparable injury, may issue all necessary and appropriate process to stay the order or rule or to preserve status or rights pending its review; but (notwithstanding section 705 of title 5, United States Code) no such process may be issued by the court before the filing of the record or the materials set forth in subsection (b)(2) of this section unless: (A) the Commission has denied a stay or failed to grant requested relief, (B) a reasonable period has expired since the filing of an application for a stay without a decision by the Commission, or (C) there was reasonable ground for failure to apply to the Commission.

(3) When the same order or rule is the subject of one or more petitions for review filed under this section and an action for en-forcement filed in a district court of the United States under sec-tion 21 (d) or (e) of this title, that court in which the petition or the action is first filed has jurisdiction with respect to the order or rule to the exclusion of any other court, and thereupon all such proceedings shall be transferred to that court; but, for the conven-ience of the parties in the interest of justice, that court may there-after transfer all the proceedings to any other court of appeals or district court of the United States, whether or not a petition for re-view or an action for enforcement was originally filed in the trans-feree court. The scope of review by a district court under section 21 (d) or (e) of this title is in all cases the same as by a court of appeals under this section.

(d)(1) For purposes of the preceding subsections of this section, the term ‘‘Commission’’ includes the agencies enumerated in sec-tion 3(a)(34) of this title insofar as such agencies are acting pursu-ant to this title and the Secretary of the Treasury insofar as he is acting pursuant to section 15C of this title.

(2) For purposes of subsection (a)(4) of this section and section 706 of title 5, United States Code, an order of the Commission pur-suant to section 19(a) of this title denying registration to a clearing agency for which the Commission is not the appropriate regulatory agency or pursuant to section 19(b) of this title disapproving a pro-posed rule change by such a clearing agency shall be deemed to be an order of the appropriate regulatory agency for such clearing agency insofar as such order was entered by reason of a determina-tion by such appropriate regulatory agency pursuant to section 19(a)(2)(C) or 19(b)(4)(C) of this title that such registration or pro-posed rule change would be inconsistent with the safeguarding of securities or funds.

(June 6, 1934, ch. 404, title I, Sec. 25, 48 Stat. 901; June 7, 1934, ch. 426, 48 Stat. 926; June 25, 1948, ch. 646, Sec. 32(a), 62 Stat.


991; May 24, 1949, ch. 139, Sec. 127, 63 Stat. 107; Pub. L. 85-791, Sec. 10, Aug. 28, 1958, 72 Stat. 945; Pub. L. 94-29, Sec. 20, June 4, 1975, 89 Stat. 158; Pub. L. 99-571, title I, Sec. 102(k), Oct. 28, 1986, 100 Stat. 3220; Pub. L. 101-432, Sec. 6(b), Oct. 16, 1990, 104 Stat. 975.)

UNLAWFUL REPRESENTATIONS

SEC. 26. No action or failure to act by the Commission or the Board of Governors of the Federal Reserve System, in the adminis-tration of this title shall be construed to mean that the particular authority has in any way passed upon the merits of, or given ap-proval to, any security or any transaction or transactions therein, nor shall such action or failure to act with regard to any statement or report filed with or examined by such authority pursuant to this title or rules and regulations thereunder, be deemed a finding by such authority that such statement or report is true and accurate on its face or that it is not false or misleading. It shall be unlawful to make, or cause to be made, to any prospective purchaser or sell-er of a security any representation that any such action or failure to act by any such authority is to be so construed or has such ef-fect.

(June 6, 1934, ch. 404, title I, Sec. 26, 48 Stat. 902; Pub. L. 105-353, title III, Sec. 301(b)(5), Nov. 3, 1998, 112 Stat. 3236.)

JURISDICTION OF OFFENSES AND SUITS

SEC. 27. (a) IN GENERAL.—The district courts of the United States and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this title or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this title or the rules and regulations thereunder. Any criminal proceeding may be brought in the district wherein any act or transaction constituting the viola-tion occurred. Any suit or action to enforce any liability or duty cre-ated by this title or rules and regulations thereunder, or to enjoin any violation of such title or rules and regulations, may be brought in any such district or in the district wherein the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found. In any action or proceeding instituted by the Commission under this title in a United States district court for any judicial district, a sub-poena issued to compel the attendance of a witness or the produc-tion of documents or tangible things (or both) at a hearing or trial may be served at any place within the United States. Rule 45(c)(3)(A)(ii) of the Federal Rules of Civil Procedure shall not apply to a subpoena issued under the preceding sentence. Judg-ments and decrees so rendered shall be subject to review as pro-vided in sections 1254, 1291, 1292, and 1294 of title 28, United States Code. No costs shall be assessed for or against the Commis-


sion in any proceeding under this title brought by or against it in the Supreme Court or such other courts.

(b) EXTRATERRITORIAL JURISDICTION.—The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of the antifraud provisions of this title involving—

(1) conduct within the United States that constitutes sig-nificant steps in furtherance of the violation, even if the securi-ties transaction occurs outside the United States and involves only foreign investors; or

(2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.

(June 6, 1934, ch. 404, title I, Sec. 27, 48 Stat. 902; June 25, 1936, ch. 804, 49 Stat. 1921; June 25, 1948, ch. 646, Sec. 32(b), 62 Stat. 991; May 24, 1949, ch. 139, Sec. 127, 63 Stat. 107; Pub. L. 100-181, title III, Sec. 326, Dec. 4, 1987, 101 Stat. 1259; Pub. L. 111-203, title IX, Secs. 929E(b), 929P(b)(2), July 21, 2010, 124 Stat. 1853, 1865.)

SPECIAL PROVISION RELATING TO STATUTE OF LIMITATIONS ON PRIVATE CAUSES OF ACTION

SEC. 27A. (a) EFFECT ON PENDING CAUSES OF ACTION.—The limitation period for any private civil action implied under section 10(b) of this Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws ex-isted on June 19, 1991.

(b) EFFECT ON DISMISSED CAUSES OF ACTION.—Any private civil action implied under section 10(b) of this Act that was com-menced on or before June 19, 1991—

(1) which was dismissed as time barred subsequent to June 19, 1991, and

(2) which would have been timely filed under the limita-tion period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991,

shall be reinstated on motion by the plaintiff not later than 60 days after the date of enactment of this section.

(June 6, 1934, ch. 404, title I, Sec. 27A, as added Pub. L. 102-242, title IV, Sec. 476, Dec. 19, 1991, 105 Stat. 2387.)

EFFECT ON EXISTING LAW

SEC. 28. (a) LIMITATION ON JUDGMENTS.—(1) IN GENERAL.—No person permitted to maintain a suit

for damages under the provisions of this title shall recover, through satisfaction of judgment in 1 or more actions, a total amount in excess of the actual damages to that person on ac-count of the act complained of. Except as otherwise specifically


provided in this title, nothing in this title shall affect the juris-diction of the securities commission (or any agency or officer performing like functions) of any State over any security or any person insofar as it does not conflict with the provisions of this title or the rules and regulations under this title.

(2) RULE OF CONSTRUCTION.—Except as provided in sub-section (f), the rights and remedies provided by this title shall be in addition to any and all other rights and remedies that may exist at law or in equity.

(3) STATE BUCKET SHOP LAWS.—No State law which pro-hibits or regulates the making or promoting of wagering or gaming contracts, or the operation of ‘‘bucket shops’’ or other similar or related activities, shall invalidate—

(A) any put, call, straddle, option, privilege, or other security subject to this title (except any security that has a pari-mutuel payout or otherwise is determined by the Commission, acting by rule, regulation, or order, to be ap-propriately subject to such laws), or apply to any activity which is incidental or related to the offer, purchase, sale, exercise, settlement, or closeout of any such security;

(B) any security-based swap between eligible contract participants; or

(C) any security-based swap effected on a national se-curities exchange registered pursuant to section 6(b). (4) OTHER STATE PROVISIONS.—No provision of State law

regarding the offer, sale, or distribution of securities shall apply to any transaction in a security-based swap or a security futures product, except that this paragraph may not be con-strued as limiting any State antifraud law of general applica-bility. A security-based swap may not be regulated as an insur-ance contract under any provision of State law. (b) Nothing in this title shall be construed to modify existing

law with regard to the binding effect (1) on any member of or par-ticipant in any self-regulatory organization of any action taken by the authorities of such organization to settle disputes between its members or participants, (2) on any municipal securities dealer or municipal securities broker of any action taken pursuant to a pro-cedure established by the Municipal Securities Rulemaking Board to settle disputes between municipal securities dealers and munic-ipal securities brokers, or (3) of any action described in paragraph (1) or (2) on any person who has agreed to be bound thereby.

(c) The stay, setting aside, or modification pursuant to section 19(e) of this title of any disciplinary sanction imposed by a self- regulatory organization on a member thereof, person associated with a member, or participant therein, shall not affect the validity or force of any action taken as a result of such sanction by the self-regulatory organization prior to such stay, setting aside, or modi-fication: Provided, That such action is not inconsistent with the provisions of this title or the rules or regulations thereunder. The rights of any person acting in good faith which arise out of any such action shall not be affected in any way by such stay, setting aside, or modification.

(d) No State or political subdivision thereof shall impose any tax on any change in beneficial or record ownership of securities ef-


fected through the facilities of a registered clearing agency or reg-istered transfer agent or any nominee thereof or custodian therefor or upon the delivery or transfer of securities to or through or re-ceipt from such agency or agent or any nominee thereof or custo-dian therefor, unless such change in beneficial or record ownership or such transfer or delivery or receipt would otherwise be taxable by such State or political subdivision if the facilities of such reg-istered clearing agency, registered transfer agent, or any nominee thereof or custodian therefor were not physically located in the tax-ing State or political subdivision. No State or political subdivision thereof shall impose any tax on securities which are deposited in or retained by a registered clearing agency, registered transfer agent, or any nominee thereof or custodian therefor, unless such securities would otherwise be taxable by such State or political sub-division if the facilities of such registered clearing agency, reg-istered transfer agent, or any nominee thereof or custodian therefor were not physically located in the taxing State or political subdivi-sion.

(e)(1) No person using the mails, or any means or instrumen-tality of interstate commerce, in the exercise of investment discre-tion with respect to an account shall be deemed to have acted un-lawfully or to have breached a fiduciary duty under State or Fed-eral law unless expressly provided to the contrary by a law enacted by the Congress or any State subsequent to the date of enactment of the Securities Acts Amendments of 1975 solely by reason of his having caused the account to pay a member of an exchange, broker, or dealer an amount of commission for effecting a securities trans-action in excess of the amount of commission another member of an exchange, broker, or dealer would have charged for effecting that transaction, if such person determined in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such member, broker, or dealer, viewed in terms of either that particular trans-action or his overall responsibilities with respect to the accounts as to which he exercises investment discretion. This subsection is ex-clusive and plenary insofar as conduct is covered by the foregoing, unless otherwise expressly provided by contract: Provided, how-ever, That nothing in this subsection shall be construed to impair or limit the power of the Commission under any other provision of this title or otherwise.

(2) A person exercising investment discretion with respect to an account shall make such disclosure of his policies and practices with respect to commissions that will be paid for effecting securi-ties transactions, at such times and in such manner, as the appro-priate regulatory agency, by rule, may prescribe as necessary or ap-propriate in the public interest or for the protection of investors.

(3) For purposes of this subsection a person provides brokerage and research services insofar as he—

(A) furnishes advice, either directly or through publica-tions or writings, as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the avail-ability of securities or purchasers or sellers of securities;


(B) furnishes analyses and reports concerning issuers, in-dustries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; or

(C) effects securities transactions and performs functions incidental thereto (such as clearance, settlement, and custody) or required in connection therewith by rules of the Commission or a self-regulatory organization of which such person is a member or person associated with a member or in which such person is a participant. (4) The provisions of this subsection shall not apply with re-

gard to securities that are security futures products. (f) LIMITATIONS ON REMEDIES.—

(1) CLASS ACTION LIMITATIONS.—No covered class action based upon the statutory or common law of any State or sub-division thereof may be maintained in any State or Federal court by any private party alleging—

(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered secu-rity; or

(B) that the defendant used or employed any manipu-lative or deceptive device or contrivance in connection with the purchase or sale of a covered security. (2) REMOVAL OF COVERED CLASS ACTIONS.—Any covered

class action brought in any State court involving a covered se-curity, as set forth in paragraph (1), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to paragraph (1).

(3) PRESERVATION OF CERTAIN ACTIONS.—(A) ACTIONS UNDER STATE LAW OF STATE OF INCORPO-

RATION.—(i) ACTIONS PRESERVED.—Notwithstanding para-

graph (1) or (2), a covered class action described in clause (ii) of this subparagraph that is based upon the statutory or common law of the State in which the issuer is incorporated (in the case of a corporation) or organized (in the case of any other entity) may be maintained in a State or Federal court by a private party.

(ii) PERMISSIBLE ACTIONS.—A covered class action is described in this clause if it involves—

(I) the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer; or

(II) any recommendation, position, or other communication with respect to the sale of securi-ties of an issuer that—

(aa) is made by or on behalf of the issuer or an affiliate of the issuer to holders of eq-uity securities of the issuer; and

(bb) concerns decisions of such equity holders with respect to voting their securities, acting in response to a tender or exchange offer, or exercising dissenters’ or appraisal rights.


(B) STATE ACTIONS.—(i) IN GENERAL.—Notwithstanding any other provi-

sion of this subsection, nothing in this subsection may be construed to preclude a State or political subdivi-sion thereof or a State pension plan from bringing an action involving a covered security on its own behalf, or as a member of a class comprised solely of other States, political subdivisions, or State pension plans that are named plaintiffs, and that have authorized participation, in such action.

(ii) STATE PENSION PLAN DEFINED.—For purposes of this subparagraph, the term ‘‘State pension plan’’ means a pension plan established and maintained for its employees by the government of a State or political subdivision thereof, or by any agency or instrumen-tality thereof. (C) ACTIONS UNDER CONTRACTUAL AGREEMENTS BE-

TWEEN ISSUERS AND INDENTURE TRUSTEES.—Notwith-standing paragraph (1) or (2), a covered class action that seeks to enforce a contractual agreement between an issuer and an indenture trustee may be maintained in a State or Federal court by a party to the agreement or a successor to such party.

(D) REMAND OF REMOVED ACTIONS.—In an action that has been removed from a State court pursuant to para-graph (2), if the Federal court determines that the action may be maintained in State court pursuant to this sub-section, the Federal court shall remand such action to such State court. (4) PRESERVATION OF STATE JURISDICTION.—The securities

commission (or any agency or office performing like functions) of any State shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions.

(5) DEFINITIONS.—For purposes of this subsection, the fol-lowing definitions shall apply:

(A) AFFILIATE OF THE ISSUER.—The term ‘‘affiliate of the issuer’’ means a person that directly or indirectly, through one or more intermediaries, controls or is con-trolled by or is under common control with, the issuer.

(B) COVERED CLASS ACTION.—The term ‘‘covered class action’’ means—

(i) any single lawsuit in which—(I) damages are sought on behalf of more than

50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without ref-erence to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual per-sons or members; or

(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to


those persons or members of the prospective class predominate over any questions affecting only in-dividual persons or members; or (ii) any group of lawsuits filed in or pending in the

same court and involving common questions of law or fact, in which—

(I) damages are sought on behalf of more than 50 persons; and

(II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any pur-pose.

(C) EXCEPTION FOR DERIVATIVE ACTIONS.—Notwith-standing subparagraph (B), the term ‘‘covered class action’’ does not include an exclusively derivative action brought by one or more shareholders on behalf of a corporation.

(D) COUNTING OF CERTAIN CLASS MEMBERS.—For pur-poses of this paragraph, a corporation, investment com-pany, pension plan, partnership, or other entity, shall be treated as one person or prospective class member, but only if the entity is not established for the purpose of par-ticipating in the action.

(E) COVERED SECURITY.—The term ‘‘covered security’’ means a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933, at the time during which it is alleged that the misrepresentation, omission, or manipula-tive or deceptive conduct occurred, except that such term shall not include any debt security that is exempt from registration under the Securities Act of 1933 pursuant to rules issued by the Commission under section 4(2) of that Act.

(F) RULE OF CONSTRUCTION.—Nothing in this para-graph shall be construed to affect the discretion of a State court in determining whether actions filed in such court should be joined, consolidated, or otherwise allowed to pro-ceed as a single action.

(June 6, 1934, ch. 404, title I, Sec. 28, 48 Stat. 903; Pub. L. 94-29, Sec. 21, June 4, 1975, 89 Stat. 160; Pub. L. 97-303, Sec. 4, Oct. 13, 1982, 96 Stat. 1409; Pub. L. 100-181, title III, Sec. 327-329, Dec. 4, 1987, 101 Stat. 1259; Pub. L. 104-290, title I, Sec. 103(b), Oct. 11, 1996, 110 Stat. 3422; Pub. L. 105-353, title I, Sec. 101(b)(1), Nov. 3, 1998, 112 Stat. 3230; Pub. L. 106-554, Sec. 1(a)(5) [title II, Sec. 203(a)(2), 210], Dec. 21, 2000, 114 Stat. 2763, 2763A-422, 2763A-436; Pub. L. 111-203, title VII, Sec. 767, July 21, 2010, 124 Stat. 1799.)

VALIDITY OF CONTRACTS

SEC. 29. (a) Any condition, stipulation, or provision binding any person to waive compliance with any provision of this title or of any rule or regulation thereunder, or of any rule of a self-regu-latory organization, shall be void.


(b) Every contract made in violation of any provision of this title or of any rule or regulation thereunder, and every contract (in-cluding any contract for listing a security on an exchange) here-tofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this title or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or perform-ance of such contract was in violation of any such provision, rule, or regulation: Provided, (A) That no contract shall be void by rea-son of this subsection because of any violation of any rule or regu-lation prescribed pursuant to paragraph (3) of subsection (c) of sec-tion 15 of this title, and (B) that no contract shall be deemed to be void by reason of this subsection in any action maintained in re-liance upon this subsection, by any person to or for whom any broker or dealer sells, or from or for whom any broker or dealer purchases, a security in violation of any rule or regulation pre-scribed pursuant to paragraph (1) or (2) of subsection (c) of section 15 of this title, unless such action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after such violation. The Commission may, in a rule or regulation prescribed pursuant to such paragraph (2) of such section 15(c), designate such rule or regulation, or portion thereof, as a rule or regulation, or portion thereof, a contract in vio-lation of which shall not be void by reason of this subsection.

(c) Nothing in this title shall be construed (1) to affect the va-lidity of any loan or extension of credit (or any extension or re-newal thereof) made or of any lien created prior or subsequent to the enactment of this title, unless at the time of the making of such loan or extension of credit (or extension or renewal thereof) or the creating of such lien, the person making such loan or extension of credit (or extension or renewal thereof) or acquiring such lien shall have actual knowledge of facts by reason of which the making of such loan or extension of credit (or extension or renewal thereof) or the acquisition of such lien is a violation of the provisions of this title or any rule or regulation thereunder, or (2) to afford a defense to the collection of any debt or obligation or the enforcement of any lien by any person who shall have acquired such debt, obligation, or lien in good faith for value and without actual knowledge of the violation of any provision of this title or any rule or regulation thereunder affecting the legality of such debt, obligation, or lien.

(June 6, 1934, ch. 404, title I, Sec. 29, 48 Stat. 903; June 25, 1938, ch. 677, Sec. 3, 52 Stat. 1076; Pub. L. 101-429, title V, Sec. 507, Oct. 15, 1990, 104 Stat. 956; Pub. L. 111-203, title IX, Secs. 927, 929T, July 21, 2010, 124 Stat. 1852, 1867.)


FOREIGN SECURITIES EXCHANGES

SEC. 30. (a) It shall be unlawful for any broker or dealer, di-rectly or indirectly, to make use of the mails or of any means or instrumentality of interstate commerce for the purpose of effecting on an exchange not within or subject to the jurisdiction of the United States, any transaction in any security the issuer of which is a resident of, or is organized under the laws of, or has its prin-cipal place of business in, a place within or subject to the jurisdic-tion of the United States, in contravention of such rules and regu-lations as the Commission may prescribe as necessary or appro-priate in the public interest or for the protection of investors or to prevent the evasion of this title.

(b) The provisions of this title or of any rule or regulation thereunder shall not apply to any person insofar as he transacts a business in securities without the jurisdiction of the United States, unless he transacts such business in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate to prevent the evasion of this title.

(c) RULE OF CONSTRUCTION.—No provision of this title that was added by the Wall Street Transparency and Accountability Act of 2010, or any rule or regulation thereunder, shall apply to any person insofar as such person transacts a business in security-based swaps without the jurisdiction of the United States, unless such person transacts such business in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate to prevent the evasion of any provision of this title that was added by the Wall Street Transparency and Accountability Act of 2010. This subsection shall not be construed to limit the jurisdic-tion of the Commission under any provision of this title, as in effect prior to the date of enactment of the Wall Street Transparency and Accountability Act of 2010.

(June 6, 1934, ch. 404, title I, Sec. 30, 48 Stat. 904; Pub. L. 111-203, title VII, Sec. 772(b), July 21, 2010, 124 Stat. 1802.)

PROHIBITED FOREIGN TRADE PRACTICES BY ISSUERS

SEC. 30A. (a) PROHIBITION.—It shall be unlawful for any issuer which has a class of securities registered pursuant to section 12 of this title or which is required to file reports under section 15(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of inter-state commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of any-thing of value to—

(1) any foreign official for purposes of—(A)(i) influencing any act or decision of such foreign of-

ficial in his official capacity, (ii) inducing such foreign offi-cial to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advan-tage; or


(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to af-fect or influence any act or decision of such government or instrumentality,

in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

(2) any foreign political party or official thereof or any can-didate for foreign political office for purposes of—

(A)(i) influencing any act or decision of such party, of-ficial, or candidate in its or his official capacity, (ii) induc-ing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or

(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumen-tality thereof to affect or influence any act or decision of such government or instrumentality,

in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; or

(3) any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, di-rectly or indirectly, to any foreign official, to any foreign polit-ical party or official thereof, or to any candidate for foreign po-litical office, for purposes of—

(A)(i) influencing any act or decision of such foreign of-ficial, political party, party official, or candidate in his or its official capacity, (ii) inducing such foreign official, polit-ical party, party official, or candidate to do or omit to do any act in violation of the lawful duty of such foreign offi-cial, political party, party official, or candidate, or (iii) se-curing any improper advantage; or

(B) inducing such foreign official, political party, party official, or candidate to use his or its influence with a for-eign government or instrumentality thereof to affect or in-fluence any act or decision of such government or instru-mentality,

in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person. (b) EXCEPTION FOR ROUTINE GOVERNMENTAL ACTION.—Sub-

sections (a) and (g) shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.

(c) AFFIRMATIVE DEFENSES.—It shall be an affirmative defense to actions under subsections (a) or (g) that—

(1) the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regula-tions of the foreign official’s, political party’s, party official’s, or candidate’s country; or

(2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf


of a foreign official, party, party official, or candidate and was directly related to—

(A) the promotion, demonstration, or explanation of products or services; or

(B) the execution or performance of a contract with a foreign government or agency thereof.

(d) GUIDELINES BY THE ATTORNEY GENERAL.—Not later than one year after the date of the enactment of the Foreign Corrupt Practices Act Amendments of 1988, the Attorney General, after consultation with the Commission, the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with this section would be enhanced and the business community would be assisted by fur-ther clarification of the preceding provisions of this section and may, based on such determination and to the extent necessary and appropriate, issue—

(1) guidelines describing specific types of conduct, associ-ated with common types of export sales arrangements and business contracts, which for purposes of the Department of Justice’s present enforcement policy, the Attorney General de-termines would be in conformance with the preceding provi-sions of this section; and

(2) general precautionary procedures which issuers may use on a voluntary basis to conform their conduct to the De-partment of Justice’s present enforcement policy regarding the preceding provisions of this section.

The Attorney General shall issue the guidelines and procedures re-ferred to in the preceding sentence in accordance with the provi-sions of subchapter II of chapter 5 of title 5, United States Code, and those guidelines and procedures shall be subject to the provi-sions of chapter 7 of that title.

(e) OPINIONS OF THE ATTORNEY GENERAL.—(1) The Attorney General, after consultation with appropriate departments and agencies of the United States and after obtaining the views of all interested persons through public notice and comment procedures, shall establish a procedure to provide responses to specific inquiries by issuers concerning conformance of their conduct with the De-partment of Justice’s present enforcement policy regarding the pre-ceding provisions of this section. The Attorney General shall, with-in 30 days after receiving such a request, issue an opinion in re-sponse to that request. The opinion shall state whether or not cer-tain specified prospective conduct would, for purposes of the De-partment of Justice’s present enforcement policy, violate the pre-ceding provisions of this section. Additional requests for opinions may be filed with the Attorney General regarding other specified prospective conduct that is beyond the scope of conduct specified in previous requests. In any action brought under the applicable pro-visions of this section, there shall be a rebuttable presumption that conduct, which is specified in a request by an issuer and for which the Attorney General has issued an opinion that such conduct is in conformity with the Department of Justice’s present enforcement policy, is in compliance with the preceding provisions of this sec-


tion. Such a presumption may be rebutted by a preponderance of the evidence. In considering the presumption for purposes of this paragraph, a court shall weigh all relevant factors, including but not limited to whether the information submitted to the Attorney General was accurate and complete and whether it was within the scope of the conduct specified in any request received by the Attor-ney General. The Attorney General shall establish the procedure required by this paragraph in accordance with the provisions of subchapter II of chapter 5 of title 5, United States Code, and that procedure shall be subject to the provisions of chapter 7 of that title.

(2) Any document or other material which is provided to, re-ceived by, or prepared in the Department of Justice or any other department or agency of the United States in connection with a re-quest by an issuer under the procedure established under para-graph (1), shall be exempt from disclosure under section 552 of title 5, United States Code, and shall not, except with the consent of the issuer, be made publicly available, regardless of whether the Attor-ney General responds to such a request or the issuer withdraws such request before receiving a response.

(3) Any issuer who has made a request to the Attorney General under paragraph (1) may withdraw such request prior to the time the Attorney General issues an opinion in response to such request. Any request so withdrawn shall have no force or effect.

(4) The Attorney General shall, to the maximum extent prac-ticable, provide timely guidance concerning the Department of Jus-tice’s present enforcement policy with respect to the preceding pro-visions of this section to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to such provisions. Such guidance shall be limited to responses to requests under paragraph (1) concerning conformity of specified prospective conduct with the Department of Justice’s present en-forcement policy regarding the preceding provisions of this section and general explanations of compliance responsibilities and of po-tential liabilities under the preceding provisions of this section.

(f) DEFINITIONS.—For purposes of this section: (1)(A) The term ‘‘foreign official’’ means any officer or em-

ployee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organiza-tion, or any person acting in an official capacity for or on be-half of any such government or department, agency, or instru-mentality, or for or on behalf of any such public international organization.

(B) For purposes of subparagraph (A), the term ‘‘public international organization’’ means—

(i) an organization that is designated by Executive order pursuant to section 1 of the International Organiza-tions Immunities Act (22 U.S.C. 288); or

(ii) any other international organization that is des-ignated by the President by Executive order for the pur-poses of this section, effective as of the date of publication of such order in the Federal Register. (2)(A) A person’s state of mind is ‘‘knowing’’ with respect

to conduct, a circumstance, or a result if—


(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or

(ii) such person has a firm belief that such cir-cumstance exists or that such result is substantially cer-tain to occur. (B) When knowledge of the existence of a particular cir-

cumstance is required for an offense, such knowledge is estab-lished if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.

(3)(A) The term ‘‘routine governmental action’’ means only an action which is ordinarily and commonly performed by a foreign official in—

(i) obtaining permits, licenses, or other official docu-ments to qualify a person to do business in a foreign coun-try;

(ii) processing governmental papers, such as visas and work orders;

(iii) providing police protection, mail pick-up and deliv-ery, or scheduling inspections associated with contract per-formance or inspections related to transit of goods across country;

(iv) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable prod-ucts or commodities from deterioration; or

(v) actions of a similar nature. (B) The term ‘‘routine governmental action’’ does not in-

clude any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a particular party, or any action taken by a foreign official in-volved in the decisionmaking process to encourage a decision to award new business to or continue business with a par-ticular party. (g) ALTERNATIVE JURISDICTION.—

(1) It shall also be unlawful for any issuer organized under the laws of the United States, or a State, territory, possession, or commonwealth of the United States or a political subdivi-sion thereof and which has a class of securities registered pur-suant to section 12 of this title or which is required to file re-ports under section 15(d) of this title, or for any United States person that is an officer, director, employee, or agent of such issuer or a stockholder thereof acting on behalf of such issuer, to corruptly do any act outside the United States in further-ance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or au-thorization of the giving of anything of value to any of the per-sons or entities set forth in paragraphs (1), (2), and (3) of sub-section (a) of this section for the purposes set forth therein, ir-respective of whether such issuer or such officer, director, em-ployee, agent, or stockholder makes use of the mails or any means or instrumentality of interstate commerce in further-ance of such offer, gift, payment, promise, or authorization.


(2) As used in this subsection, the term ‘‘United States per-son’’ means a national of the United States (as defined in sec-tion 101 of the Immigration and Nationality Act (8 U.S.C. 1101)) or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship organized under the laws of the United States or any State, territory, possession, or commonwealth of the United States, or any political subdivision thereof.

(June 6, 1934, ch. 404, title I, Sec. 30A, as added Dec. 19, 1977, Pub. L. 95-213, title I, Sec. 103(a), 91 Stat. 1495; amended Aug. 23, 1988, Pub. L. 100-418, title V, Sec. 5003(a), 102 Stat. 1415; Nov. 10, 1998, Pub. L. 105-366, Sec. 2(a)-(c), 112 Stat. 3302, 3303.)

SEC. 31. TRANSACTION FEES.

(a) RECOVERY OF COSTS OF ANNUAL APPROPRIATION.—The Commission shall, in accordance with this section, collect trans-action fees and assessments that are designed to recover the costs to the Government of the annual appropriation to the Commission by Congress.

(b) EXCHANGE-TRADED SECURITIES.—Subject to subsection (j), each national securities exchange shall pay to the Commission a fee at a rate equal to $15 per $1,000,000 of the aggregate dollar amount of sales of securities (other than bonds, debentures, other evidences of indebtedness, security futures products, and options on securities indexes (excluding a narrow-based security index)) trans-acted on such national securities exchange.

(c) OFF-EXCHANGE TRADES OF EXCHANGE REGISTERED AND LAST-SALE- REPORTED SECURITIES.—Subject to subsection (j), each national securities association shall pay to the Commission a fee at a rate equal to $15 per $1,000,000 of the aggregate dollar amount of sales transacted by or through any member of such association otherwise than on a national securities exchange of securities (other than bonds, debentures, other evidences of indebtedness, se-curity futures products, and options on securities indexes (exclud-ing a narrow-based security index)) registered on a national securi-ties exchange or subject to prompt last sale reporting pursuant to the rules of the Commission or a registered national securities as-sociation.

(d) ASSESSMENTS ON SECURITY FUTURES TRANSACTIONS.—Each national securities exchange and national securities association shall pay to the Commission an assessment equal to $0.009 for each round turn transaction (treated as including one purchase and one sale of a contract of sale for future delivery) on a security fu-ture traded on such national securities exchange or by or through any member of such association otherwise than on a national secu-rities exchange, except that for fiscal year 2007 and each suc-ceeding fiscal year such assessment shall be equal to $0.0042 for each such transaction.

(e) DATES FOR PAYMENTS.—The fees and assessments required by subsections (b), (c), and (d) of this section shall be paid—

(1) on or before March 15, with respect to transactions and sales occurring during the period beginning on the preceding


September 1 and ending at the close of the preceding Decem-ber 31; and

(2) on or before September 25, with respect to transactions and sales occurring during the period beginning on the pre-ceding January 1 and ending at the close of the preceding Au-gust 31. (f) EXEMPTIONS.—The Commission, by rule, may exempt any

sale of securities or any class of sales of securities from any fee or assessment imposed by this section, if the Commission finds that such exemption is consistent with the public interest, the equal regulation of markets and brokers and dealers, and the develop-ment of a national market system.

(g) PUBLICATION.—The Commission shall publish in the Fed-eral Register notices of the fee or assessment rates applicable under this section for each fiscal year not later than 30 days after the date on which an Act making a regular appropriation to the Commission for such fiscal year is enacted, together with any esti-mates or projections on which such fees are based.

(h) PRO RATA APPLICATION.—The rates per $1,000,000 required by this section shall be applied pro rata to amounts and balances of less than $1,000,000.

(i) DEPOSIT OF FEES.—(1) OFFSETTING COLLECTIONS.—Fees collected pursuant to

subsections (b), (c), and (d) for any fiscal year—(A) shall be deposited and credited as offsetting collec-

tions to the account providing appropriations to the Com-mission; and

(B) except as provided in subsection (k), shall not be collected for any fiscal year except to the extent provided in advance in appropriation Acts. (2) GENERAL REVENUES PROHIBITED.—No fees collected

pursuant to subsections (b), (c), and (d) for fiscal year 2002 or any succeeding fiscal year shall be deposited and credited as general revenue of the Treasury. (j) ADJUSTMENTS TO FEE RATES.—

(1) ANNUAL ADJUSTMENT.—Subject to subsections (i)(1)(B) and (k), for each fiscal year, the Commission shall by order ad-just each of the rates applicable under subsections (b) and (c) for such fiscal year to a uniform adjusted rate that, when ap-plied to the baseline estimate of the aggregate dollar amount of sales for such fiscal year, is reasonably likely to produce ag-gregate fee collections under this section (including assess-ments collected under subsection (d) of this section) that are equal to the regular appropriation to the Commission by Con-gress for such fiscal year.

(2) MID-YEAR ADJUSTMENT.—Subject to subsections (i)(1)(B) and (k), for each fiscal year, the Commission shall determine, by March 1 of such fiscal year, whether, based on the actual aggregate dollar volume of sales during the first 5 months of such fiscal year, the baseline estimate of the aggregate dollar volume of sales used under paragraph (1) for such fiscal year is reasonably likely to be 10 percent (or more) greater or less than the actual aggregate dollar volume of sales for such fiscal year. If the Commission so determines, the Commission shall


by order, no later than March 1, adjust each of the rates appli-cable under subsections (b) and (c) for such fiscal year to a uni-form adjusted rate that, when applied to the revised estimate of the aggregate dollar amount of sales for the remainder of such fiscal year, is reasonably likely to produce aggregate fee collections under this section (including fees collected during such five-month period and assessments collected under sub-section (d) of this section) that are equal to the regular appro-priation to the Commission by Congress for such fiscal year. In making such revised estimate, the Commission shall, after con-sultation with the Congressional Budget Office and the Office of Management and Budget, use the same methodology re-quired by subsection (l).

(3) REVIEW.—In exercising its authority under this sub-section, the Commission shall not be required to comply with the provisions of section 553 of title 5, United States Code. An adjusted rate prescribed under paragraph (1) or (2) and pub-lished under subsection (g) shall not be subject to judicial re-view.

(4) EFFECTIVE DATE.—(A) ANNUAL ADJUSTMENT.—Subject to subsections

(i)(1)(B) and (k), an adjusted rate prescribed under para-graph (1) shall take effect on the later of—

(i) the first day of the fiscal year to which such rate applies; or

(ii) 60 days after the date on which an Act making a regular appropriation to the Commission for such fiscal year is enacted. (B) MID-YEAR ADJUSTMENT.—An adjusted rate pre-

scribed under paragraph (2) shall take effect on April 1 of the fiscal year to which such rate applies.

(k) LAPSE OF APPROPRIATION.—If on the first day of a fiscal year a regular appropriation to the Commission has not been en-acted, the Commission shall continue to collect (as offsetting collec-tions) the fees and assessments under subsections (b), (c), and (d) at the rate in effect during the preceding fiscal year, until 60 days after the date such a regular appropriation is enacted.

(l) BASELINE ESTIMATE OF THE AGGREGATE DOLLAR AMOUNT OF SALES.— The baseline estimate of the aggregate dollar amount of sales for any fiscal year is the baseline estimate of the aggregate dollar amount of sales of securities (other than bonds, debentures, other evidences of indebtedness, security futures products, and op-tions on securities indexes (excluding a narrow-based security index)) to be transacted on each national securities exchange and by or through any member of each national securities association (otherwise than on a national securities exchange) during such fis-cal year as determined by the Commission, after consultation with the Congressional Budget Office and the Office of Management and Budget, using the methodology required for making projections pursuant to section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985.

(m) TRANSMITTAL OF COMMISSION BUDGET REQUESTS.—(1) BUDGET REQUIRED.—For fiscal year 2012, and each fis-

cal year thereafter, the Commission shall prepare and submit


a budget to the President. Whenever the Commission submits a budget estimate or request to the President or the Office of Management and Budget, the Commission shall concurrently transmit copies of the estimate or request to the Committee on Appropriations of the Senate, the Committee on Appropriations of the House of Representatives, the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representatives.

(2) SUBMISSION TO CONGRESS.—The President shall submit each budget submitted under paragraph (1) to Congress, in unaltered form, together with the annual budget for the Ad-ministration submitted by the President.

(3) CONTENTS.—The Commission shall include in each budget submitted under paragraph (1)—

(A) an itemization of the amount of funds necessary to carry out the functions of the Commission.

(B) an amount to be designated as contingency fund-ing to be used by the Commission to address unanticipated needs; and

(C) a designation of any activities of the Commission for which multi-year budget authority would be suitable.

(June 6, 1934, ch. 404, title I, Sec. 31, 48 Stat. 904; Mar. 17, 1944, ch. 101, 58 Stat. 117; June 4, 1975, Pub. L. 94-29, Sec. 22, 89 Stat. 162; Oct. 11, 1996, Pub. L. 104-290, title IV, Sec. 405(a), 110 Stat. 3442; Nov. 3, 1998, Pub. L. 105-353, title III, Sec. 301(b)(14), 112 Stat. 3236; Dec. 21, 2000, Pub. L. 106-554, Sec. 1(a)(5)[title II, Sec. 206(f)], 114 Stat. 2763, 2763A-432; Jan. 16, 2002, Pub. L. 107-123, Secs. 2, 3, 115 Stat. 2390; Pub. L. 111-203, title IX, Sec. 991(a)(1), (d)(1), July 21, 2010, 124 Stat. 1950, 1954.)

PENALTIES

SEC. 32. (a) Any person who willfully violates any provision of this title (other than section 30A), or any rule or regulation there-under the violation of which is made unlawful or the observance of which is required under the terms of this title, or any person who willfully and knowingly makes, or causes to be made, any state-ment in any application, report, or document required to be filed under this title or any rule or regulation thereunder or under-taking contained in a registration statement as provided in sub-section (d) of section 15 of this title, or by any self-regulatory orga-nization in connection with an application for membership or par-ticipation therein or to become associated with a member thereof, which statement was false or misleading with respect to any mate-rial fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not ex-ceeding $25,000,000 may be imposed; but no person shall be sub-ject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.

(b) Any issuer which fails to file information, documents, or re-ports required to be filed under subsection (d) of section 15 of this


title or any rule or regulation thereunder shall forfeit to the United States the sum of $100 for each and every day such failure to file shall continue. Such forfeiture, which shall be in lieu of any crimi-nal penalty for such failure to file which might be deemed to arise under subsection (a) of this section, shall be payable into the Treas-ury of the United States and shall be recoverable in a civil suit in the name of the United States.

(c)(1)(A) Any issuer that violates subsection (a) or (g) of section 30A shall be fined not more than $2,000,000.

(B) Any issuer that violates subsection (a) or (g) of section 30A shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Commission.

(2)(A) Any officer, director, employee, or agent of an issuer, or stockholder acting on behalf of such issuer, who willfully violates subsection (a) or (g) of section 30A of this title shall be fined not more than $100,000, or imprisoned not more than 5 years, or both.

(B) Any officer, director, employee, or agent of an issuer, or stockholder acting on behalf of such issuer, who violates subsection (a) or (g) of section 30A of this title shall be subject to a civil pen-alty of not more than $10,000 imposed in an action brought by the Commission.

(3) Whenever a fine is imposed under paragraph (2) upon any officer, director, employee, agent, or stockholder of an issuer, such fine may not be paid, directly or indirectly, by such issuer.

(June 6, 1934, ch. 404, title I, Sec. 32, 48 Stat. 904; May 27, 1936, ch. 462, Sec. 9, 49 Stat. 1380; June 25, 1938, ch. 677, Sec. 4, 52 Stat. 1076; Aug. 20, 1964, Pub. L. 88-467, Sec. 11, 78 Stat. 580; June 4, 1975, Pub. L. 94-29, Sec. 23, 27(b), 89 Stat. 162, 163; Dec. 19, 1977, Pub. L. 95-213, title I, Sec. 103(b), 91 Stat. 1496; Aug. 10, 1984, Pub. L. 98-376, Sec. 3, 98 Stat. 1265; Aug. 23, 1988, Pub. L. 100-418, title V, Sec. 5003(b), 102 Stat. 1419; Nov. 19, 1988, Pub. L. 100-704, Sec. 4, 102 Stat. 4680; Nov. 10, 1998, Pub. L. 105-366, Sec. 2(d), 112 Stat. 3303; Pub. L. 107-204, title XI, Sec. 1106, July 30, 2002, 116 Stat. 810.)

SEPARABILITY OF PROVISIONS

SEC. 33. If any provision of this Act, or the application of such provision to any person or circumstances, shall be held invalid, the remainder of the Act, and the application of such provision to per-sons or circumstances other than those as to which it is held in-valid, shall not be affected thereby.


EFFECTIVE DATE

SEC. 34. This Act shall become effective on July 1, 1934, except that sections 6 and 12 (b), (c), (d), and (e) shall become effective on September 1, 1934; and sections 5, 7, 8, 9(a)(6), 10, 11, 12(a), 13, 14, 15, 16, 17, 18, 19, and 30 shall become effective on October 1, 1934.



SEC. 35. AUTHORIZATION OF APPROPRIATIONS.

In addition to any other funds authorized to be appropriated to the Commission, there are authorized to be appropriated to carry out the functions, powers, and duties of the Commission—

(1) for fiscal year 2011, $1,300,000,000; (2) for fiscal year 2012, $1,500,000,000; (3) for fiscal year 2013, $1,750,000,000; (4) for fiscal year 2014, $2,000,000,000; and (5) for fiscal year 2015, $2,250,000,000.

(June 6, 1934, ch. 404, title I, Sec. 35, as added June 4, 1975, Pub. L. 94-29, Sec. 24, 89 Stat. 162; amended Apr. 13, 1977, Pub. L. 95-20, 91 Stat. 47; Dec. 19, 1977, Pub. L. 95-211, 91 Stat. 1492; Oct. 6, 1978, Pub. L. 95-425, Sec. 1, 92 Stat. 962; Oct. 21, 1980, Pub. L. 96-477, title IV, Sec. 401, 94 Stat. 2291; Dec. 4, 1987, Pub. L. 100-181, title I, Sec. 101, 101 Stat. 1249; Nov. 19, 1988, Pub. L. 100-704, Sec. 8, 102 Stat. 4683; Nov. 15, 1990, Pub. L. 101-550, title I, Sec. 102, 104 Stat. 2713; Oct. 11, 1996, Pub. L. 104-290, title IV, Sec. 403, 110 Stat. 3441; Nov. 3, 1998, Pub. L. 105-353, title II, Sec. 201, 112 Stat. 3233; Pub. L. 107-204, title VI, Sec. 601, July 30, 2002, 116 Stat. 793; Pub. L. 111-203, title IX, Sec. 991(c), July 21, 2010, 124 Stat. 1953.)

REQUIREMENTS FOR THE EDGAR SYSTEM

SEC. 35A. The Commission, by rule or regulation—(1) shall provide that any information in the EDGAR sys-

tem that is required to be disseminated by the contractor—(A) may be sold or disseminated by the contractor only

pursuant to a uniform schedule of fees prescribed by the Commission;

(B) may be obtained by a purchaser by direct inter- connection with the EDGAR system;

(C) shall be equally available on equal terms to all persons; and

(D) may be used, resold, or redisseminated by any per-son who has lawfully obtained such information without restriction and without payment of additional fees or roy-alties; and (2) shall require that persons, or classes of persons, re-

quired to make filings with the Commission submit such filings in a form and manner suitable for entry into the EDGAR sys-tem and shall specify the date that such requirement is effec-tive with respect to that person or class; except that the Com-mission may exempt persons or classes of persons, or filings or classes of filings, from such rules or regulations in order to pre-vent hardships or to avoid imposing unreasonable burdens or as otherwise may be necessary or appropriate.


(June 6, 1934, ch. 404, title I, Sec. 35A, as added Pub. L. 100-181, title I, Sec. 102, Dec. 4, 1987, 101 Stat. 1249; amended Pub. L. 105-353, title II, Sec. 202, Nov. 3, 1998, 112 Stat. 3234.)

SEC. 36. GENERAL EXEMPTIVE AUTHORITY.

(a) AUTHORITY.—(1) IN GENERAL.—Except as provided in subsection (b), but

notwithstanding any other provision of this title, the Commis-sion, by rule, regulation, or order, may conditionally or uncon-ditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this title or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.

(2) PROCEDURES.—The Commission shall, by rule or regu-lation, determine the procedures under which an exemptive order under this section shall be granted and may, in its sole discretion, decline to entertain any application for an order of exemption under this section. (b) LIMITATION.—The Commission may not, under this section,

exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions from section 15C or the rules or regulations issued thereunder or (for purposes of section 15C and the rules and regulations issued thereunder) from any defini-tion in paragraph (42), (43), (44), or (45) of section 3(a).

(c) DERIVATIVES.—Unless the Commission is expressly author-ized by any provision described in this subsection to grant exemp-tions, the Commission shall not grant exemptions, with respect to amendments made by subtitle B of the Wall Street Transparency and Accountability Act of 2010, with respect to paragraphs (65), (66), (68), (69), (70), (71), (72), (73), (74), (75), (76), and (79) of sec-tion 3(a), and sections 10B(a), 10B(b), 10B(c), 13A, 15F, 17A(g), 17A(h), 17A(i), 17A(j), 17A(k), and 17A(l); provided that the Com-mission shall have exemptive authority under this title with re-spect to security-based swaps as to the same matters that the Com-modity Futures Trading Commission has under the Wall Street Transparency and Accountability Act of 2010 with respect to swaps, including under section 4(c) of the Commodity Exchange Act.

(June 6, 1934, ch. 404, title I, Sec. 36, as added Pub. L. 104-290, title I, Sec. 105(b), Oct. 11, 1996, 110 Stat. 3424; amended Pub. L. 111-203, title VII, Sec. 772(a), July 21, 2010, 124 Stat. 1801.)

SEC. 37. TENNESSEE VALLEY AUTHORITY.

(a) IN GENERAL.—Commencing with the issuance by the Ten-nessee Valley Authority of an annual report on Commission Form 10-K (or any successor thereto) for fiscal year 2006 and thereafter, the Tennessee Valley Authority shall file with the Commission, in accordance with such rules and regulations as the Commission has prescribed or may prescribe, such periodic, current, and supple-mentary information, documents, and reports as would be required


pursuant to section 13 if the Tennessee Valley Authority were an issuer of a security registered pursuant to section 12. Notwith-standing the preceding sentence, the Tennessee Valley Authority shall not be required to register any securities under this title, and shall not be deemed to have registered any securities under this title.

(b) LIMITED TREATMENT AS ISSUER.—Commencing with the issuance by the Tennessee Valley Authority of an annual report on Commission Form 10-K (or any successor thereto) for fiscal year 2006 and thereafter, the Tennessee Valley Authority shall be deemed to be an issuer for purposes of section 10A, other than for subsection (m)(1) or (m)(3) of section 10A. The Tennessee Valley Authority shall not be required by this subsection to comply with the rules issued by any national securities exchange or national se-curities association in response to rules issued by the Commission pursuant to section 10A(m)(1).

(c) NO EFFECT ON TVA AUTHORITY.—Nothing in this section shall be construed to diminish, impair, or otherwise affect the au-thority of the Board of Directors of the Tennessee Valley Authority to carry out its statutory functions under the Tennessee Valley Au-thority Act of 1933.

(June 6, 1934, ch. 404, title I, Sec. 37, as added Pub. L. 108-447, div. H, title V, Sec. 520(2), Dec. 8, 2004, 118 Stat. 3267.)

SEC. 38. FEDERAL NATIONAL MORTGAGE ASSOCIATION, FEDERAL HOME LOAN MORTGAGE CORPORATION, FEDERAL HOME LOAN BANKS.

(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION AND FEDERAL HOME LOAN MORTGAGE CORPORATION.—No class of equity securi-ties of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation shall be treated as an exempted security for purposes of section 12, 13, 14, or 16.

(b) FEDERAL HOME LOAN BANKS.—(1) REGISTRATION.—Each Federal Home Loan Bank shall

register a class of its common stock under section 12(g), not later than 120 days after the date of enactment of the Federal Housing Finance Regulatory Reform Act of 2008, and shall thereafter maintain such registration and be treated for pur-poses of this title as an ‘‘issuer’’, the securities of which are re-quired to be registered under section 12, regardless of the number of members holding such stock at any given time.

(2) STANDARDS RELATING TO AUDIT COMMITTEES.—Each Federal Home Loan Bank shall comply with the rules issued by the Commission under section 10A(m). (c) DEFINITIONS.—For purposes of this section, the following

definitions shall apply: (1) FEDERAL HOME LOAN BANK; MEMBER.—The terms ‘‘Fed-

eral Home Loan Bank’’ and ‘‘member’’, have the same mean-ings as in section 2 of the Federal Home Loan Bank Act.

(2) FEDERAL NATIONAL MORTGAGE ASSOCIATION.—The term ‘‘Federal National Mortgage Association’’ means the corpora-tion created by the Federal National Mortgage Association Charter Act.


(3) FEDERAL HOME LOAN MORTGAGE CORPORATION.—The term ‘‘Federal Home Loan Mortgage Corporation’’ means the corporation created by the Federal Home Loan Mortgage Cor-poration Act.

(June 6, 1934, ch. 404, title I, Sec. 38, as added Pub. L. 110-289, div. A, title I, Sec. 1112, July 30, 2008, 122 Stat. 2677.)

SEC. 39. INVESTOR ADVISORY COMMITTEE.

(a) ESTABLISHMENT AND PURPOSE.—(1) ESTABLISHMENT.—There is established within the Com-

mission the Investor Advisory Committee (referred to in this section as the ‘‘Committee’’).

(2) PURPOSE.—The Committee shall—(A) advise and consult with the Commission on—

(i) regulatory priorities of the Commission; (ii) issues relating to the regulation of securities

products, trading strategies, and fee structures, and the effectiveness of disclosure;

(iii) initiatives to protect investor interest; and (iv) initiatives to promote investor confidence and

the integrity of the securities marketplace; and (B) submit to the Commission such findings and rec-

ommendations as the Committee determines are appro-priate, including recommendations for proposed legislative changes.

(b) MEMBERSHIP.—(1) IN GENERAL.—The members of the Committee shall

be—(A) the Investor Advocate; (B) a representative of State securities commissions; (C) a representative of the interests of senior citizens;

and (D) not fewer than 10, and not more than 20, members

appointed by the Commission, from among individuals who—

(i) represent the interests of individual equity and debt investors, including investors in mutual funds;

(ii) represent the interests of institutional inves-tors, including the interests of pension funds and reg-istered investment companies;

(iii) are knowledgeable about investment issues and decisions; and

(iv) have reputations of integrity. (2) TERM.—Each member of the Committee appointed

under paragraph (1)(B) shall serve for a term of 4 years. (3) MEMBERS NOT COMMISSION EMPLOYEES.—Members ap-

pointed under paragraph (1)(B) shall not be deemed to be em-ployees or agents of the Commission solely because of member-ship on the Committee. (c) CHAIRMAN; VICE CHAIRMAN; SECRETARY; ASSISTANT SEC-

RETARY.—


(1) IN GENERAL.—The members of the Committee shall elect, from among the members of the Committee—

(A) a chairman, who may not be employed by an issuer;

(B) a vice chairman, who may not be employed by an issuer;

(C) a secretary; and (D) an assistant secretary.

(2) TERM.—Each member elected under paragraph (1) shall serve for a term of 3 years in the capacity for which the mem-ber was elected under paragraph (1). (d) MEETINGS.—

(1) FREQUENCY OF MEETINGS.—The Committee shall meet—

(A) not less frequently than twice annually, at the call of the chairman of the Committee; and

(B) from time to time, at the call of the Commission. (2) NOTICE.—The chairman of the Committee shall give

the members of the Committee written notice of each meeting, not later than 2 weeks before the date of the meeting. (e) COMPENSATION AND TRAVEL EXPENSES.—Each member of

the Committee who is not a full-time employee of the United States shall—

(1) be entitled to receive compensation at a rate not to ex-ceed the daily equivalent of the annual rate of basic pay in ef-fect for a position at level V of the Executive Schedule under section 5316 of title 5, United States Code, for each day during which the member is engaged in the actual performance of the duties of the Committee; and

(2) while away from the home or regular place of business of the member in the performance of services for the Com-mittee, be allowed travel expenses, including per diem in lieu of subsistence, in the same manner as persons employed inter-mittently in the Government service are allowed expenses under section 5703(b) of title 5, United States Code. (f) STAFF.—The Commission shall make available to the Com-

mittee such staff as the chairman of the Committee determines are necessary to carry out this section.

(g) REVIEW BY COMMISSION.—The Commission shall—(1) review the findings and recommendations of the Com-

mittee; and (2) each time the Committee submits a finding or rec-

ommendation to the Commission, promptly issue a public statement—

(A) assessing the finding or recommendation of the Committee; and

(B) disclosing the action, if any, the Commission in-tends to take with respect to the finding or recommenda-tion.

(h) COMMITTEE FINDINGS.—Nothing in this section shall re-quire the Commission to agree to or act upon any finding or rec-ommendation of the Committee.


(i) FEDERAL ADVISORY COMMITTEE ACT.—The Federal Advisory Committee Act (5 U.S.C. App.) shall not apply with respect to the Committee and its activities.

(j) AUTHORIZATION OF APPROPRIATIONS.—There is authorized to be appropriated to the Commission such sums as are necessary to carry out this section.

(June 6, 1934, ch. 404, title I, Sec. 39, as added Pub. L. 111-203, title IX, Sec. 911, July 21, 2010, 124 Stat. 1822.)


17 CFR Part 275

[Release No. IA-3220; File No. S7-25-10]

RIN 3235-AK66

Family Offices

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (the “Commission”) is

adopting a rule to define “family offices” that will be excluded from the definition of an

investment adviser under the Investment Advisers Act of 1940 (“Advisers Act”) and thus

will not be subject to regulation under the Advisers Act.

EFFECTIVE DATE: [insert date 60 days after publication in the Federal Register],

2011.

FOR FURTHER INFORMATION CONTACT: Sarah ten Siethoff, Senior Special

Counsel, or Vivien Liu, Senior Counsel, at (202) 551-6787 or <[email protected]>,

Office of Investment Adviser Regulation, Division of Investment Management, U.S.

Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is

adopting rule 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1] under the Investment

Advisers Act of 1940 [15 U.S.C. 80b] (the “Advisers Act” or “Act”).1

15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 80b of the United States Code, at which the Advisers Act is codified.

1

2

TABLE OF CONTENTS

I. BACKGROUND II. DISCUSSION III. PAPERWORK REDUCTION ACT IV. ECONOMIC ANALYSIS V. FINAL REGULATORY FLEXIBILITY ANALYSIS VI. STATUTORY AUTHORITY TEXT OF RULE

I. BACKGROUND

On October 12, 2010, the Commission issued a release proposing new rule

202(a)(11)(G)-1 that would exempt “family offices” from regulation under the Advisers

Act.2 We proposed this rule in anticipation of the Dodd-Frank Wall Street Reform and

Consumer Protection Act’s (the “Dodd-Frank Act”)3 repeal of the private adviser

exemption from registration contained in section 203(b)(3) of the Advisers Act, effective

July 21, 2011, upon which many family offices currently rely.4

The Dodd-Frank Act creates in its place a new exclusion from the Advisers Act in

section 202(a)(11)(G) under which family offices, as defined by the Commission, are not

investment advisers subject to the Advisers Act.5 Historically, family offices that fell

outside the private adviser exemption have sought and obtained from us orders under the

Advisers Act declaring those offices not to be investment advisers within the intent of

2 See Family Offices, Investment Advisers Act Release No. 3098 (Oct. 12, 2010) [75 FR 63753 (Oct. 18, 2010)] (“Proposing Release”). “Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members. See section I of the Proposing Release for a discussion of family offices.

3 Pub. L. No. 111-203, 124 Stat. 1376 (2010), at section 403.

4 15 U.S.C. 80b-2(b)(3). This provision exempts from registration any adviser that during the course of the preceding 12 months had fewer than 15 clients and neither held itself out to the public as an investment adviser nor advised any registered investment company or business development company.

5 See section 409 of the Dodd-Frank Act.

3

section 202(a)(11) of the Advisers Act.6 Recognizing this past practice, section 409 of

the Dodd-Frank Act instructs that any family office definition the Commission adopts

should be “consistent with the previous exemptive policy” of the Commission and

recognize “the range of organizational, management, and employment structures and

arrangements employed by family offices.”7

We received approximately 90 comments on the proposed rule, most of which

were submitted by law firms representing family offices.8 Many urged that we adopt a

broader exemption to accommodate typical family office structures that were not

reflected in our previous exemptive orders.9 Some urged us to include exceptions in

various aspects of the rule to allow individuals or entities with no family relations to

nevertheless receive investment advice from the family office without the protections of

6 See, e.g., Bear Creek Inc., Investment Advisers Act Release Nos. 1931 (Mar. 9, 2001) (notice) [66 FR 15150 (Mar. 15, 2001)] and 1935 (Apr. 4, 2001) (order); Riverton Management, Inc., Investment Advisers Act Release Nos. 2459 (Dec. 9, 2005) [70 FR 74381 (Dec. 15, 2005)] and 2471 (Jan. 6, 2006) (order). We are troubled by comment letters we receive by counsel to some family offices that appear to acknowledge that their clients were operating as unregistered investment advisers, although they were not eligible for the private adviser exemption and had not obtained an exemptive order from us. We note that an adviser may not “rely” on exemptive orders issued to other persons.

7 Section 409(b) of the Dodd-Frank Act. Section 409 also includes a “grandfathering clause” that precludes us from excluding certain family offices from the definition solely because they provide investment advice to certain clients and had provided investment advice to those clients before January 1, 2010. See section 409(b)(3) of the Dodd-Frank Act.

8 The public comments we received on the Proposing Release are available on our website at http://www.sec.gov/comments/s7-25-10/s72510.shtml.

9 See, e.g., Comment Letter of the American Bar Association, Section of Business Law and Section of Real Property, Trust and Estate Law (Nov. 18, 2010) (“ABA Letter”); Comment Letter of Perkins Coie/Private Investor Coalition Inc. (Nov. 11, 2010) (“Coalition Letter”); Comment Letter of Tannenbaum, Helpern, Syracuse & Hirschtritt LLP (Nov. 18, 2010) (“Tannenbaum Letter”).

4

the Advisers Act.10 Some disputed our interpretation of the legislative direction we

received to define the term “family office” consistent with our previous exemptive

orders.11 After careful consideration of these comment letters, we are adopting rule

202(a)(11)(G)-1, with certain modifications from our proposal as further described

below.

II. DISCUSSION

We are adopting new rule 202(a)(11)(G)-1 under the Advisers Act to define the

term “family office” for purposes of the Act. Family offices, as so defined, are excluded

from the Act’s definition of “investment adviser,” and are thus not subject to any of the

provisions of the Act. The scope of the rule is generally consistent with the conditions of

exemptive orders that we have issued to family offices. As with the proposal, and as

discussed in more detail below, our final rule in some cases has modified those

conditions to turn the fact-specific exemptive orders into a rule of general applicability

and to take into account the need for certain clarifications and further modifications

identified by commenters.

As we discussed in the Proposing Release, our orders have provided an exclusion

for family offices because we viewed them as not the sort of arrangement that the

10 See, e.g., Comment Letter of Miller & Martin PLLC (Nov. 18, 2010) (“Miller Letter”) (recommending that non-family clients be permitted de minimis investments in family limited liability companies, partnerships, corporations and other entities and be permitted de minimis ownership stakes in the family office itself); Comment Letter of Porter Wright (Nov. 10, 2010) (supporting various forms of non-family client investment through the family office with five percent de minimis maximums for each type of exception).

11 See, e.g., Coalition Letter.

5

Advisers Act was designed to regulate.12 Disputes among family members concerning the

operation of the family office could, as we noted in the Proposing Release, be resolved

within the family unit or, if necessary, through state courts under laws designed to govern

family disputes. In light of the purpose of the exclusion and the legislative instructions

we received, we have not expanded the exclusion, as several commenters suggested, to

permit family offices to provide advisory services to multiple families or to clients who

are not family members, other than certain key employees.

The failure of a family office to be able to meet the conditions of the rule will not

preclude the office from providing advisory services to family members either

collectively or individually. Rather, the family office will need to register under the

Advisers Act (unless another exemption is available) or seek an exemptive order from the

Commission. A number of family offices currently are registered under the Advisers

Act.

A. Family Office Structure and Scope of Activities

As proposed, rule 202(a)(11)(G)-1 contains three general conditions. First, the

exclusion is limited to family offices that provide advice about securities only to certain

“family clients.” Second, it requires that family clients wholly own the family office and

family members and/or family entities control the family office. Third, it precludes a

family office from holding itself out to the public as an investment adviser. In addition to

these conditions, we have incorporated into the rule the “grandfathering” provision

required by section 409 of the Dodd-Frank Act.13

12 See Proposing Release, supra note 2, at sections I and II for a discussion of the rationale for the family office exclusion.

13 See supra note 7 and section II.A.5 of this Release.

6

1. Family Clients

A family office excluded from the Act is limited to an office that advises only

“family clients.”14 As discussed in more detail below, family clients include current and

former family members, certain employees of the family office (and, under certain

circumstances, former employees), charities funded exclusively by family clients, estates

of current and former family members or key employees, trusts existing for the sole

current benefit of family clients or, if both family clients and charitable and non-profit

organizations are the sole current beneficiaries, trusts funded solely by family clients,

revocable trusts funded solely by family clients, certain key employee trusts, and

companies wholly owned exclusively by, and operated for the sole benefit of, family

clients (with certain exceptions).15

a. Family Member

Under the rule, a “family member” includes all lineal descendants of a common

ancestor (who may be living or deceased) as well as current and former spouses or

spousal equivalents of those descendants, provided that the common ancestor is no more

than 10 generations removed from the youngest generation of family members.16 All

children by adoption and current and former stepchildren also are considered family

members.

14 Rule 202(a)(11)(G)-1(b)(1).

15 The term “company” used throughout this Release and rule 202(a)(11)(G)-1 has the same meaning as in section 202(a)(5) of the Advisers Act, which defines “company” as “a corporation, a partnership, an association, a joint-stock company, a trust, or any organized group of persons, whether incorporated or not; or any receiver, trustee in a case under title 11, or similar official, or any liquidating agent for any of the foregoing, in his capacity as such.”

16 Rule 202(a)(11)(G)-1(d)(6).

7

We have expanded persons who may be considered family members in response

to several comments we received. We had proposed to define the term “family member”

by reference to the “founder” of the family office, and generally to include the founder’s

spouse (or spousal equivalent), their parents, their lineal descendants, and their siblings

and their lineal descendants.17 Commenters observed that the proposed rule implicitly

assumed that the founder of the family office is the initial generator of the family’s

wealth and is an individual or couple.18 They noted that in many cases, however, family

offices are established by persons several generations remote from the initial wealth

generator.19 Some commenters also criticized our proposed approach because it would

treat who could be a family member differently depending on when the family office was

established.20 For example, one commenter stated that our proposal would have allowed

a family office that was formed a long time ago to provide services to persons that are

currently third or fourth cousins to each other, but that a family office established today

17 Proposed rule 202(a)(11)(G)-1(d)(5) (defining the founders as the “natural person and his or her spouse or spousal equivalent for whose benefit the family office was established and any subsequent spouse of such individuals.” Proposed rule 202(a)(11)(G)-1(d)(3) (defining family members as “the founders, their lineal descendants (including by adoption and stepchildren), and such lineal descendants’ spouses or spousal equivalents; the parents of the founders; and the siblings of the founders and such siblings’ spouses or spousal equivalents and their lineal descendants (including by adoption and stepchildren) and such lineal descendants’ spouses or spousal equivalents”).

18 See, e.g., Comment Letter of Dechert LLP (Nov. 29, 2010) (“Dechert Letter”); Comment Letter of Fried, Frank, Harris, Shriver & Jacobs LLP (Nov. 18, 2010) (“Fried Frank Letter”).

19 See, e.g., Coalition Letter; Comment Letter of the New York State Bar Association, Business Law Section, Securities Regulation Committee (Dec. 10, 2010) (“NY Bar Letter”).

20 See, e.g., NY Bar Letter; Comment Letter of Skadden, Arps, Slate, Meagher & Flom LLP (Nov. 17, 2010) (“Skadden Letter”).

8

may need to wait at least 40 or 50 years before being able to provide services to

equivalent types of family members.21

Some commenters recommended that the Commission address these concerns by

leaving the term “family member” undefined,22 while others recommended that the

Commission retain the approach of the proposed rule, but expand the rule to treat as

family members grandparents, great-grandparents, aunts, uncles, great aunts, and great

uncles of the founders and their spouses and children.23 Leaving the term family member

undefined could allow typical commercial investment advisory businesses to rely on the

exclusion (by, for example, designating an extremely remote family member as a

common ancestor). On the other hand, attempting to expand the family member

definition by ascending up the family tree from the founders would not address the

difficulty in identifying the founders of the family office as identified by commenters and

would not address the concern, depending on when the family office was founded, that

the definition will not capture many family members of family offices established several

generations after the initial family wealth was created.

We are adopting, instead, an approach suggested in several comment letters that

permits a family to choose a common ancestor (who may be deceased) and define family

21 Skadden Letter.

22 See, e.g., Comment Letter of Foley & Lardner LLP (Nov. 18, 2010) (“Foley Letter”); Miller Letter; Comment Letter of Northern Trust (Nov. 18, 2010) (“Northern Trust Letter”).

23 See, e.g., Comment Letter of the American Institute of Certified Public Accountants (Nov. 16, 2010) (“AICPA Letter”); Comment Letter of The Blum Firm, P.C./Blum (Nov. 18, 2010) (“Blum Letter”); Comment Letter of Hogan Lovells US LLP (Nov. 18, 2010) (“Hogan Letter”).

9

members by reference to the degree of lineal kinship to the designated relative.24 This

approach avoids any assumptions regarding the source of family wealth and the

inconsistent treatment of extended family members compared to the approach we

proposed.25 In order to prevent families from choosing an extremely remote ancestor,

which could allow commercial advisory businesses to rely on the rule, we are imposing a

10 generation limit between the oldest and youngest generation of family members. Such

a limit, suggested by several commenters, would constrain the scope of persons

considered family members while accommodating the typical number of generations

served by most family offices.26

24 See, e.g., ABA Letter; Comment Letter of Duncan Associates (Nov. 18, 2010) (“Duncan Letter”); Comment Letter of Kozusko Harris Vetter Wareh LLP (Nov. 18, 2010) (“Kozusko Letter”).

25 Moreover, the approach we are adopting has been used in other contexts to delimit members of a family for purposes of special regulatory treatment. See, e.g., Section 1361(c)(1)(B) of the Internal Revenue Code of 1986, as amended (treating members of a family as a single shareholder of an S Corporation and defining family members as “a common ancestor, any lineal descendant of such common ancestor, and any spouse or former spouse of such common ancestor or any such lineal descendant” but providing that an “individual shall not be considered to be a common ancestor if, on the applicable date, the individual is more than 6 generations removed from the youngest generation of shareholders”); Nevada Revised Statutes section 669.042 (defining a family trust company subject to special trust company regulation as having family members within 10 degrees of lineal kinship or 9 degrees of collateral kinship to the designated relative); New Hampshire Revised Statutes section 392-B:1 (defining a family trust company subject to special banking regulation as having family members within 5 degrees of lineal kinship or 9 degrees of collateral kinship to a designated relative).

26 See, e.g., ABA Letter (suggesting a 9 generation limit); Duncan Letter (recommending that the Commission follow that used for Nevada family trust companies, which allows for 10 degrees of lineal kinship and 9 degrees of collateral kinship and stating that other states’ family trust company laws with fewer degrees of kinship allowed had resulted in some family office clientele being outside the limitations); Kozusko Letter (recommending 10 generations (but not counting minors as a separate generation from their parents) as a size that, based on its experience and client base and on studies of family businesses, would comfortably accommodate most family offices but that would not open up the family office to abuse as a disguised commercial enterprise); Northern Trust Letter (stating that of the over 400 family offices they represent, some are now focused on their fifth through seventh generations). We have determined not to include a

10

Under this approach, the family office will be able to choose the common

ancestor and may change that designation over time such that the family office clientele

is able to shift over time along with the family members served by the family office. A

family office exempt under the rule with a common ancestor several generations up from

current family members will be able to serve a greater number of current collateral family

members but fewer future lineal members.

For example, G1 (who is deceased) founded a business and placed his fortune into

a trust for the benefit of his heirs. G4 founded a family office to manage that wealth for

the ever growing number of family members descended from G1 and treated G1 as the

common ancestor for purposes of which family members the family office could advise

under the exclusion. At the time G4 created the family office, current clients extended as

far as G4’s great-grandchildren (or G7). Over time the family grows and additional

generations are born. Eventually, to allow the family office to serve later generations that

would otherwise extend beyond the 10 generation limit, the family office redesignates its

common ancestor to an individual in G3.27 The family office can do this under rule

202(a)(11)(G)-1 because the rule does not specify which individual the common ancestor

is and it does not specify that it always has to be the same common ancestor. As a result

of this redesignation, the family office is able to advise clients two generations younger,

separate limit on degrees of permissible collateral kinship because, given our relatively expansive 10 generation lineal limit, a reasonable collateral limit would not in practice expand the range of family members covered by the rule.

No formal documentation or procedure is required for designating or redesignating a common ancestor.

27

11

but would no longer be able to advise certain branches of G1’s family tree without

registering under the Advisers Act.28

The rule, as proposed, treats lineal descendants and their spouses, spousal

equivalents, stepchildren, and adopted children as family members.29 Most commenters

generally supported our inclusion of spousal equivalents, stepchildren and children by

adoption,30 but two commenters31 opposed the inclusion of spousal equivalents, invoking

the Defense of Marriage Act (“DOMA”).32 Because the term “spouse” is not defined in

the rule and a “spousal equivalent” is identified as a category of person, separate and

distinct from a “spouse,” that meets the definition of a “family member,” we do not

believe that the rule violates that Act.

In response to comments we have expanded the definition to include foster

children and persons who were minors when another family member became their legal

guardian.33 We are persuaded by the commenters that argued that foster children and

children in a guardianship relationship often have familial ties indistinguishable from that

28 See Annex A for an illustration of the impact of redesignating the common ancestor.

29 Rule 202(a)(11)(G)-1(d)(6). As proposed, we are using the definition of spousal equivalent currently used under our auditor independence rules. See Proposing Release, supra note 2, at n.24.

30 See, e.g., Coalition Letter; NY Bar Letter.

31 Comment Letter of Alliance Defense Fund (Nov. 18, 2010); Comment Letter of Thomas V. Cliff (Nov. 1, 2010).

32 1 U.S.C. 7. The Act provides that in “determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States…the word ‘spouse’ refers only to a person of the opposite sex who is a husband or wife.”

33 See, e.g., ABA Letter; Dechert Letter; Tannenbaum Letter.

12

of children and stepchildren, and that including such individuals would not cause the

family office to resemble a typical commercial investment adviser.34

Finally, the rule treats former family members (i.e., former spouses, spousal

equivalents and stepchildren) as family members.35 We had proposed permitting former

family members to retain any investments held through the family office at the time they

became a former family member, but to limit them from making any new investments

through the family office.36 Commenters pointed out that a former spouse’s financial

arrangements often remain intertwined with those of the family, particularly if they

provide for children who remain family members.37 Some argued that stepchildren of a

divorced spouse may remain close to the family after the divorce.38 We are persuaded by

these arguments and have modified the definition of former family member to include

stepchildren.39

b. Involuntary Transfers

As proposed, rule 202(a)(11)(G)-1 prevents an involuntary transfer of assets to a

person who is not a family client (e.g., a bequest to a friend of assets in a family office-

34 See, e.g., Hogan Letter; Tannenbaum Letter. Guardianship arrangements for adults, however, can raise unique conflicts and issues as compared to guardianships for minors that we believe are more appropriately addressed through an exemptive order process where the Commission can consider the specific facts and circumstances, than through a rule of general applicability.

35 Rule 202(a)(11)(G)-1(d)(4)(ii).

36 Proposed rule 202(a)(11)(G)-1(d)(2)(vi), and (d)(4).

37 See, e.g., Comment Letter of Perkins Coie/Lindquist (Nov. 18, 2010) (“Lindquist Letter”); Comment Letter of Proskauer Rose LLP (Nov. 16, 2010).

38 See, e.g., Coalition Letter; Comment Letter of Kramer Levin Naftalis & Frankel LLP (Nov. 17, 2010) (“Kramer Levin Letter”).

39 Rule 202(a)(11)(G)-1(d)(7).

13

advised private fund) from causing the family office to lose its exclusion. Under the rule,

a family office may continue to provide advice with respect to such assets following an

involuntary transfer for a transition period of up to one year.40 The transition period

permits the family office to orderly transition that client’s assets to another investment

adviser or otherwise restructure its activities to comply with the Advisers Act.

We proposed to allow the family office to continue to advise a non-family client

for four months following the transfer of assets resulting from the involuntary event.41 A

number of commenters argued that four months is an inadequate period of time to

transition investment advice arrangements as a result of an involuntary transfer,42

particularly for illiquid assets such as investments in private funds.43 Some suggested

that the family office be required to transfer the assets as soon as legally and practically

feasible.44 Others suggested that we treat involuntary transfers in the same manner as we

had proposed treating former family members—permitting their existing investments to

40 Rule 202(a)(11)(G)-1(b)(1).

41 Proposed rule 202(a)(11)(G)-1(b)(1).

42 See, e.g., Comment Letter of Davis Polk (Nov. 18, 2010) (“Davis Polk Letter”); Fried Frank Letter.

43 See, e.g., ABA Letter; Comment Letter of Withers Bergman LLP (Nov. 17, 2010) (“Withers Bergman Letter”).

44 See, e.g., Comment Letter of Barnes & Thornburg LLP (“as soon as legally and reasonably practical, or in the alternative, within one year”); Coalition Letter (“as soon as it is both legally and practically feasible, and in any event would have a grace period of at least one year”).

14

remain with the family office but prohibiting new investments.45 Still others suggested

that the transfer period be lengthened to anywhere from one year to three years.46

After an involuntary transfer, such as a bequest, the office would no longer be

providing advice solely to members of a single family, and after several such bequests the

office could cease to operate in any way as a family office. Thus, we believe that relief

for involuntary transfers must be temporary. We are persuaded, however, that the four

month transition period we proposed would be inadequate and have extended the period

to one year.47

c. Family Trusts and Estates

Rule 202(a)(11)(G)-1 treats as a family client certain family trusts established for

testamentary and charitable purposes. We have expanded the types of trusts that may be

treated as a family client in response to several comments that our proposal failed to take

into account certain aspects of trust and estate planning.48 As discussed in more detail

45 See, e.g., Fried Frank Letter; Comment Letter of Sidley Austin LLP (Nov. 18, 2010).

46 See, e.g., AICPA Letter (1 year); Comment Letter of Bessemer Securities Corporation (Nov. 17, 2010) (“Bessemer Letter”) (1 year); Davis Polk Letter (3 years); Dechert Letter (2 years); Hogan Letter (2 years); Comment Letter of Kleinberg, Kaplan, Wolff & Cohen, P.C. (Nov. 17, 2010) (“Kleinberg Letter”) (2 years); Kramer Levin Letter (1 year).

47 The one year period would not begin to run until completion of the transfer of legal title to the assets resulting from the involuntary event. We note also that if the involuntary transferee does not receive investment advice about securities for compensation from the family office, then the availability of rule 202(a)(11)(G)-1 would be unaffected. For a discussion of the Commission’s and the staff’s views on when investment advice about securities for compensation is provided under the Advisers Act, see Applicability of the Investment Advisers Act to Financial Planners, Pensions Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services, Investment Advisers Act Release No. 1092 (Oct. 8, 1987) [52 FR 38400 (Oct. 16, 1987)] (“Release 1092”).

48 See rule 202(a)(11)(G)-1(d)(4). Several commenters questioned whether the identity of the trustee matters under the rule. See, e.g., Comment Letter of SchiffHardin LLP/Debra L. Stetter (Nov. 18, 2010) (“Schiff/Stetter Letter”); Comment Letter of Vinson & Elkins

15

below, these expansions accommodate common estate planning and charitable giving

plans and do not suggest that the family office is engaging in a commercial enterprise.

Irrevocable trusts. The rule treats as a family client any irrevocable trust in

which one or more family clients are the only current beneficiaries.49 We proposed

including as a family client any trust or estate existing for the sole benefit of one or more

family clients.50

As suggested by commenters, the final rule disregards contingent beneficiaries of

trusts, which commenters explained are often named in the event that all family members

are deceased to prevent the trust from distributing assets to distant relatives or escheating

to the state.51 If the contingent beneficiary later becomes an actual beneficiary and is not

a permitted current beneficiary of a family trust under the exclusion (such as a family

friend), the rule’s provisions concerning involuntary transfers allow for an orderly

transition of investment advice regarding those assets away from the family office.

Also in response to commenters, the rule permits the family office to advise

irrevocable trusts funded exclusively by one or more other family clients in which the

only current beneficiaries, in addition to other family clients, are non-profit organizations,

charitable foundations, charitable trusts, or other charitable organizations.52 Several

commenters noted that families often establish and fund trusts whose sole current

LLP (Nov. 15, 2010). A trust that meets the conditions in the rule for qualifying as a family client is unaffected by whether the trust is managed by an independent trustee.

49 Rule 202(a)(11)(G)-1(d)(4)(vii).

50 Proposed rule 202(a)(11)(G)-1(d)(2)(iv).

51 See, e.g., Comment Letter of Arnold & Porter LLP (Nov. 11, 2010); Bessemer Letter.

52 Rule 202(a)(11)(G)-1(d)(4)(viii).

16

beneficiaries are both family clients and public charities.53 Such an entity may not be a

“charitable trust” as a technical manner, but we see no reason for treating them

differently under the rule from charitable trusts funded exclusively by family clients.

Other commenters argued that a trust should be permitted to have current

beneficiaries that are not family clients and that the rule instead should merely require

that the trust be for the primary benefit of one or more family clients.54 These

commenters argued that the family office’s provision of investment advice to these kinds

of trusts would not change the family office’s character and that it is the trust that is the

client of the family office, rather than the beneficiary. We disagree. Current

beneficiaries of a trust are greatly affected by the nature and quality of investment advice

provided to the trust and would be harmed if there were fraud committed by the family

office in managing trust assets. Even if in small numbers, these individuals and entities

stand to benefit substantially from the protections of the Advisers Act and do not

necessarily have any family ties or investment sophistication to stand in the Act’s stead.

Revocable Trusts. The rule also treats as a family client a revocable trust of

which one or more family clients are the sole grantors.55 Accordingly, a revocable trust

may be advised by a family office relying on the rule regardless of whether the

beneficiaries of the trust are family members. We received several comments that argued

that revocable trusts should be treated differently than irrevocable trusts, since the grantor

53 See, e.g., Comment Letter of Jones Day (Nov. 11, 2010) (“Jones Day Letter”); Comment Letter of McDermott Will & Emery/Edwin C. Laurenson (Nov. 18, 2010) (“McDermott/Laurenson Letter”).

54 See, e.g., Comment Letter of Dorsey & Whitney LLP/Bruce A. MacKenzie (Nov. 17, 2010) (“Dorsey Letter”); McDermott/Laurenson Letter.

55 Rule 202(a)(11)(G)-1(d)(4)(ix).

17

of a revocable trust effectively controls the trust and the beneficiaries of the trust have no

reasonable expectation of obtaining any benefit from the trust until the trust becomes

irrevocable (generally upon the death of the grantor).56 Therefore, the identity of the

beneficiaries of the trust should not matter so long as one or more family clients are the

sole grantors of the trust. We agree that in the case of a revocable trust, the contingent

nature of any beneficiary’s expectation that it will benefit from the trust’s assets supports

disregarding a revocable trust’s beneficiaries under the exclusion, just as other contingent

beneficiaries are disregarded.

Estates. The final rule treats as a family client an estate of a family member,

former family member, key employee or former key employee.57 As suggested by

several commenters, this provision permits a family office to advise the executor of a

family member’s estate even if that estate will be distributed to (and thus be for the

benefit of) non-family members.58 The executor of an estate is acting in lieu of the

deceased family client in managing and distributing the family client’s assets. Therefore,

advice to the executor is equivalent to providing advice to that family client.59

d. Non-Profit and Charitable Organizations

The rule treats as a family client any non-profit organization, charitable

foundation, charitable trust (including charitable lead trusts and charitable remainder

56 See, e.g., Davis Polk Letter; Comment Letter of Lee & Stone (Nov. 17, 2010) (“Lee & Stone Letter”).

57 Rule 202(a)(11)(G)-1(d)(4)(vi). For former key employees, the advice is subject to the condition contained in rule 202(a)(11)(G)-1(d)(4)(iv).

58 See, e.g., ABA Letter; AICPA Letter.

59 See, e.g., Comment Letter of K&L Gates/Paul T. Metzger (Nov. 17, 2010); Comment Letter of Levin Schreder & Carey Ltd (Nov. 18, 2010) (“Levin Schreder Letter”).

18

trusts whose only current beneficiaries are other family clients and charitable or non-

profit organizations), or other charitable organization, in each case funded exclusively by

one or more other family clients.60 We understand that some family offices currently

advise charitable or non-profit organizations that have accepted funding from non-family

clients.61 So that these family offices have sufficient time to transition such advisory

arrangements or restructure the charitable or non-profit organization, we are including a

transition period of until December 31, 2013 before family offices have to comply with

this aspect of the exclusion.62

We had proposed treating as a family client any charitable foundation, charitable

organization, or charitable trust established and funded exclusively by one or more family

members.63 Some commenters recommended that the Commission change the

requirement that charities be established and funded “by family members” to “by family

clients” because they asserted that family charities are often established and funded by

family trusts, corporations or estates, and not exclusively by family members.64 We

agree that making this change is consistent with our view of the scope of persons that

should be permitted to be served by the family office. Several commenters also believed

that we should not require that a charitable organization be established by family

members or family clients in order to receive investment advice from the family office

60 Rule 202(a)(11)(G)-1(d)(4)(v).

61 See, e.g., Foley Letter; Comment Letter of Morgan, Lewis & Bockius LLP (Nov. 18, 2010) (“Morgan Lewis Letter”).

62 Rule 202(a)(11)(G)-1(e)(1).

63 Proposed rule 202(a)(11)(G)-1(d)(2)(iii).

64 See, e.g., Dorsey Letter; Levin Schreder Letter.

19

under the exclusion because in some cases such charitable organizations may have been

originally established by distant relatives that do not currently qualify as “family

members.”65 We agree that as long as all the funding currently held by the charitable

organization came solely from family clients, the individuals or entities that originally

established it are not of import for our policy rationale.66 We have changed the rule

accordingly.

A number of commenters stated that “charitable organization” can have varying

meanings when considered under trust and estate law versus under tax law.67 Some of

these commenters suggested that we add the term “non-profit organization” to ensure that

we capture what is generally considered a charitable organization under both trust and tax

law and based on their view that, as long as the non-profit organization is solely funded

by family clients, the family office providing it with investment advice under the

exclusion should not be of concern as a policy matter.68 We intended to broadly capture

charitable and non-profit organizations as commonly understood under both trust law and

tax law and have modified the rule as suggested. Other commenters asked that we clarify

that charitable lead trusts and charitable remainder trusts are included as family clients

65 See, e.g., Comment Letter of Goodwin Procter LLP (Nov. 17, 2010) (“Goodwin Letter”); Comment Letter of Willkie Farr & Gallagher LLP (Nov. 17, 2010).

66 We note that only the actual contributions to the non-profit or charitable organization need be examined for this purpose, and not any income, gains or losses relating to those contributions. For purposes of determining whether funding provided by a non-family client to the non-profit or charitable organization is “currently held” by the organization, the non-profit or charitable organization may offset any spending by the organization occurring at any time in the year of that non-family client contribution or any subsequent year against the non-family client contribution (i.e., the organization may treat the non-family client contributions as the first funding spent).

67 See, e.g., Goodwin Letter; Kozusko Letter.

68 See, e.g., Coalition Letter; Kozusko Letter.

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under the exclusion.69 The rule we are adopting today clarifies that such trusts are

included if their sole current beneficiaries are other family clients and charitable or non-

profit organizations and if they meet the terms of other charitable organizations that may

be advised by the family office—namely that they are funded exclusively by other family

clients.70 We believe this treatment of charitable lead trusts and charitable remainder

trusts ensures that they are treated consistently with other trusts and charitable or non-

profit organizations under the exclusion.

Finally, several commenters stated that the Commission should permit the family

office to provide investment advice under the exclusion to charitable organizations even

if funded in part by non-family clients.71 They argued that because the contributed assets

will not be invested for the benefit of the donors, as long as the family controlled the

charitable entity or was its substantial contributor, it served no public policy purpose to

preclude third party contributions.72 We are leaving this aspect of the proposal

unchanged because a non-profit or charitable organization that currently holds non-family

funding lacks the characteristics necessary to be viewed as a member of a family unit.

Permitting such organizations to be advised by a family office would be inconsistent with

69 See, e.g., Dechert Letter; Fried Frank Letter. Charitable lead trusts are entities in which a charity receives payments from the trust for a specified period as a current beneficiary, but the remainder of the trust is distributed to specified beneficiaries. Charitable remainder trusts are entities in which specified individuals or entities receive payments from the trust for a specified period as a current beneficiary, but a charity receives the remainder of the trust.

70 See our discussion about family trusts in section II.A.1.c of this Release.

71 See, e.g., Foley Letter; Kleinberg Letter.

72 See, e.g., Ropes & Gray Letter; Skadden Letter.

21

the exclusion’s underlying rationale that recognizes that the Advisers Act is not designed

to regulate families managing their own wealth.

As noted above, however, we do recognize that some non-profit or charitable

organizations advised by family offices have accepted non-family client funding. Such

organizations may need time to spend the non-family funding so that none of it is

“currently held” by the organization or to transition advisory arrangements. The rule

provides until December 31, 2013 before this condition to the exclusion becomes

applicable to family offices (i.e., if the only reason the family office would not meet the

exclusion is because it advises a non-profit or charitable organization that currently holds

non-family client funding, the family office generally may nevertheless rely on the

exclusion until December 31, 2013).73 To rely on this transition period, a non-profit or

charitable organization advised by the family office must not accept any additional

funding from any non-family clients after August 31, 2011, except that during the

transition period the non-profit or charitable organization may accept funding provided in

fulfillment of any pledge made prior to August 31, 2011.

e. Other Family Entities

To allow the family office to structure its activities through typical investment

structures, rule 202(a)(11)(G)-1 treats as a family client any company,. including a pooled

investment vehicle, that is wholly owned, directly or indirectly, by one or more family

clients and operated for the sole benefit of family clients.74 Some commenters objected

73 Rule 202(a)(11)(G)-1(e)(1).

74 Rule 202(a)(11)(G)-1(d)(4)(xi). Under rule 202(a)(11)(G)-1(d)(2), control is defined as the power to exercise a controlling influence over the management or policies of an entity, unless such power is solely the result of being an officer of such entity. If any of these companies are pooled investment vehicles, they must be exempt from registration

22

to the requirement in our proposal that these entities be wholly owned and controlled by,

and operated for the sole benefit of, family clients to qualify for the exclusion.75 These

commenters generally suggested modifying this aspect of the family client definition to

require only that the entity be majority owned or controlled and operated for the primary

benefit of family clients or similar variations.76 One commenter suggested such an

expansion to allow employees of the family that do not qualify as “key employees” to

have a management role in the entity.77 Others believed that non-family clients more

broadly should be able to have a greater role in family office-advised entities.78

We believe that the elements of ownership and benefit are important to ensuring

that the policy objectives underlying the family office exclusion are preserved. If non-

family clients own a portion of such an entity, they have a vested interest in how the

assets of that entity are managed—it is the source of their ownership stake’s value. This

is also true of a non-family client who is a beneficiary of that entity. As long as the entity

is wholly owned by and for the sole benefit of family clients, however, we agree that, as

with family trusts and family charitable organizations, the entity having non-family client

as an investment company under the Investment Company Act of 1940 because the Advisers Act requires that an adviser to a registered investment company must register. See 15 U.S.C. 80b-3a(a)(1)(B).

75 See, e.g., Blum Letter; Kramer Levin Letter (suggesting that the requirement be modified to require only that the entity be controlled and 80% owned by family clients to qualify as a family client).

76 See, e.g., Coalition Letter; Kramer Levin Letter. See also Levin Schreder Letter (suggesting that the entity be controlled and substantially owned (80%) by family clients); Miller Letter (suggesting that the entity be wholly owned or controlled by and operated for the primary benefit of family clients).

77 Morgan Lewis Letter.

78 See, e.g., Kramer Levin Letter; Miller Letter.

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control does not change that family clients are the ultimate beneficiaries of the

investment advice, and thus we have eliminated the requirement for control by family

clients in the final rule.

f. Key Employees

The final rule treats certain key employees of the family office, their estates, and

certain entities through which key employees may invest as family clients so that they

may receive investment advice from, and participate in investment opportunities provided

by, the family office. More specifically, the final rule permits the family office to

provide investment advice to any natural person (including any key employee’s spouse or

spousal equivalent who holds a joint, community property or other similar shared

ownership interest with that key employee) who is (i) an executive officer, director,

trustee, general partner, or person serving in a similar capacity at the family office or its

affiliated family office or (ii) any other employee of the family office or its affiliated

family office (other than an employee performing solely clerical, secretarial, or

administrative functions) who, in connection with his or her regular functions or duties,

participates in the investment activities of the family office or affiliated family office,

provided that such employee has been performing such functions or duties for or on

behalf of the family office or affiliated family office, or substantially similar functions or

duties for or on behalf of another company, for at least twelve months.79 The final rule

also permits the family office to advise certain trusts of key employees, as further

described below. Finally, in addition to receiving direct advice from the family office,

key employees (because they are “family clients”) may indirectly receive investment

Rule 202(a)(11)(G)-1(d)(8). 79

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advice through the family office by their investment in family office-advised private

funds, charitable organizations, and other family entities, as described in previous

sections of this Release.

Many commenters supported the inclusion of key employees as family clients.80

They agreed that permitting investment participation by key employees of family offices

would align their interests with those of family members and enable family offices to

attract highly skilled investment professionals who may not otherwise be attracted to

work at a family office.81

Some commenters, however, urged us to include key employees of family entities

other than the family office as family clients.82 Some reasoned that since the definition of

key employee is based on the knowledgeable employee standard used in Investment

Company Act rule 3c-5,83 it should be expanded to cover key employees of any entity

related to the family office because rule 3c-5 allows knowledgeable employees to be

employees of certain affiliated entities.84 Such an approach would extend Investment

Company Act rule 3c-5 beyond its intended scope. That rule permits knowledgeable

employees of affiliated entities to count as knowledgeable employees of the covered

private fund only if the affiliated entity is participating in the investment activities of the

80 See, e.g., ABA Letter; Coalition Letter.

81 Id.

82 See, e.g., Fried Frank Letter; NY Bar Letter; Skadden Letter.

83 See Proposing Release, supra note 2, at n.46 and accompanying text.

84 See, e.g., NY Bar Letter; Skadden Letter.

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covered private fund.85 Because of this role, these individuals could be presumed to have

sufficient financial sophistication, experience, and knowledge to evaluate investment

risks and to take steps to protect themselves, even without the protection of the

Investment Company Act.86

Many family entities advised by the family office, however, are not involved in

providing investment advisory services to the family office or its clients and rather have

principal business activities in a variety of industries unrelated to investment

management. There is no reason to expect that their key employees have a level of

knowledge and experience in financial matters sufficient to protect themselves without

the protections afforded by the Advisers Act.87 We agree, however, that if a person

qualifies as a knowledgeable employee of an affiliated family office, that those

employees should be in a position to protect themselves in receiving investment advice

from a family office excluded from regulation under the Advisers Act.88 We have

modified the rule to include knowledgeable employees of an affiliated family office in

the definition of key employee.89

85 See Section III.B of Privately Offered Investment Companies, Investment Company Act Release 22597 (April 3, 1997) [62 FR 17512 (April 7, 1997)] (“3(c)(7) Release”).

86 See 3(c)(7) Release, supra note 85, at Section III.A.2.B.

87 As we explained when we adopted rule 3c-5, employees who simply “obtain information” but do not “participate in” the investment activities of the fund are not included in the definition of knowledgeable employee because they may not have investment experience. See 3(c)(7) Release, supra note 85, at Section III.B.

88 Some commenters pointed out that a family may establish more than one family office for tax or other structuring reasons and recommended that the definition of key employee include employees of multiple family offices that serve the same family. See, e.g., Davis Polk Letter; Fried Frank Letter.

89 Rule 202(a)(11)(G)-1(d)(8). “Affiliated family office” is defined as “a family office wholly owned by family clients of another family office and that is controlled (directly or

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A few commenters suggested that we include as family clients long-term

employees of the family, even if they do not meet the knowledgeable employee

standard.90 Expanding the family client definition in this way would exclude from the

Advisers Act’s protections individuals for whom we have no basis on which to conclude

that they can protect themselves.91 We therefore decline to make the change suggested

by commenters.

We have made two other changes to definitions relating to key employees in

response to recommendations from commenters. First, in response to commenters and to

reduce uncertainty identified by commenters we have included a definition of “executive

officer,” which is virtually identical to the definition of the same term used in Advisers

Act rule 205-3 and Investment Company Act rule 3c-5.92 Similar to those rules, this

indirectly) by one or more family members of such other family office and/or family entities affiliated with such other family office and has no clients other than family clients of such other family office.” Rule 202(a)(11)(G)-1(d)(1).

90 See, e.g., NY Bar Letter; Skadden Letter. Similarly, a few commenters suggested that we define key employees using the accredited investor standard from Regulation D under the Securities Act of 1933. See, e.g., Comment Letter of Schulte Roth & Zabel LLP (Dec. 8, 2010); Lee & Stone Letter. We believe the knowledgeable employee standard more accurately encompasses employees that are likely to be financially sophisticated and to not need the protections of the Advisers Act.

91 Exemptive orders issued in the past 10 years generally did not permit family offices to provide investment advice to non-key employees. The two exemptive orders issued to family offices permitting such advice contained grandfathering provisions that restricted these employees’ investments to the existing ones and prohibited the advisers from establishing new advisory relationships with a non-family member. Adler Management, L.L.C., Investment Advisers Act Release Nos. 2500 (Mar. 21, 2006) [71 FR 15498 (Mar. 28, 2006)] (notice) and 2508 (Apr. 14, 2006) (order); Longview Management Group LLC, Investment Advisers Act Release Nos. 2008 (Jan. 3, 2002) [67 FR 1251 (Jan. 9, 2002)] (notice) and 2013 (Feb. 7, 2002) (order).

92 Commenters recommending this change include the Fried Frank Letter and the Skadden Letter. Paragraph (d)(3) of the rule, however, differs from rule 205-3 and section 3c-5 in that it does not include executives in charge of sales because such a function is not applicable to a family office.

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definition delineates executive officers that should have enough financial experience and

sophistication to invest without the protection of the Advisers Act. Second, the final rule

clarifies that family clients include trusts of which the key employee generally is the sole

contributor to the trust and the sole person authorized to make decisions with respect to

the trust.93

Commenters recommended that we permit a trust established by a key employee

with his or her lineal descendants or immediate family members as beneficiaries to be a

family client, to allow typical estate planning by key employees.94 We do not believe it is

appropriate to broadly permit trusts for which the key employee is not the sole person

authorized to make investment decisions to be a family client. Since a non-family client

will be making investment decisions for this type of trust, and its beneficiaries are not

family members or key employees, this type of trust stands to benefit from the

protections of the Advisers Act. However, we are persuaded that it is appropriate to

allow the family office to advise trusts for which the key employee is the sole person

making investment decisions.95 Permitting the family office to provide advice to this

type of entity tracks a parallel concept included in the definition of “qualified purchaser”

under the Investment Company Act96 and thus creates consistency in entities considered

not to need investor protection under our rules because investment decisions are made

93 Rule 202(a)(11)(G)-1(d)(4)(x). The grantor of the trust could also be a current or former spouse or spousal equivalent of the key employee if, at the time of contribution, the spouse or spousal equivalent held a joint, community property, or other similar shared ownership interest in the trust with the key employee.

94 See, e.g., Withers Bergman Letter (suggesting lineal descendants); Kleinberg Letter (suggesting immediate family members).

95 Rule 202(a)(11)(G)-1(d)(4)(x).

96 Section 2(a)(51)(A)(iii) of the Investment Company Act.

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solely by individuals that we have already concluded should have sufficient financial

experience and sophistication to act without the protection provided by our regulations.

Some commenters urged us to even further expand the definition of key employee

to include their spouses and spousal equivalents (even if not with respect to joint

property) or all of their immediate family members.97 There is no reason to believe that

the key employee’s spouse or immediate family members independently have the

financial sophistication and experience to protect themselves when receiving investment

advice from the family office. Such individuals are not considered to be knowledgeable

employees under Advisers Act rule 205-3 or Investment Company Act rule 3c-5. We see

no basis for following a different approach in this context. The premise of the rule is to

allow families to manage their own wealth. Key employee receipt of family office advice

is permitted because their position and experience should enable them to protect

themselves and to allow family offices to attract talented investment professionals as

employees. This underlying rationale does not support as a general rule including key

employees’ family members unless there is a joint property interest involved.

Several commenters disagreed with the 12-month experience requirement for key

employees who are not executive officers, directors, trustees, general partners, or persons

serving in similar capacities of the family office, arguing that employees a family office

would hire into these roles would presumably possess adequate knowledge and

sophistication in financial matters regardless of whether he or she met the 12-month

experience requirement.98 We believe that the 12-month experience requirement is an

97 See, e.g., Kleinberg Letter; Kramer Levin Letter.

98 See, e.g., ABA Letter; Comment Letter of Cadwalader, Wickersham & Taft LLP (Nov. 18, 2010) (“Cadwalader Letter”).

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important part of limiting employees who receive investment advice without the protections

of the Advisers Act (or family membership) to those employees that are likely to be in a

position or have a level of knowledge and experience in financial matters sufficient to be able

to evaluate the risks and take steps to protect themselves. In addition, commenters’

argument is equally applicable in a private fund or performance fee context, and we see

no basis for distinguishing treatment of key employees of family offices from key

employees of private funds or qualified client advisers under Investment Company Act

rule 3c-5 and Advisers Act rule 205-3, respectively.99 We therefore adopt this

requirement as proposed.

Finally, as proposed, the final rule prohibits key employees (including their trusts

and controlled entities) from making additional investments through the family office

upon the end of the key employees’ employment by the family office, but will not require

former key employees to liquidate or transfer investments held through the family office

to avoid imposing possible adverse tax or investment consequences that might otherwise

result.100 While some commenters supported this limitation,101 one commenter expressed

objections to it, asserting that former key employees of family offices often continue to

have a close relationship with the family and it should be the family’s decision whether to

99 This analysis is consistent with our analysis in the 3(c)(7) Release where we stated that the 12-month experience requirement was designed to limit investments to employees that have the requisite experience to appreciate the risks of investing in the fund. 3(c)(7) Release, supra note 85, at Section III.B. As is the case under rule 3c-5, an employee need not work for a particular family office for the entire 12-month period. The time performing substantially similar functions or duties by that employee for or on behalf of another company may be counted toward the 12 month requirement. See 3(c)(7) Release, supra note 85.

100 Rule 202(a)(11)(G)-1(d)(4)(iv). 101 See, e.g., ABA Letter; Coalition Letter.

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terminate their family office’s services to them.102 We are including key employees as

family clients because their particular role in the family office causes us to believe that

the employee should be in a position to protect him or herself without the need for the

protections of the Advisers Act. Once the employee is no longer in that role, this policy

rationale no longer holds true to the same degree. Accordingly, we are adopting this

aspect of the rule as proposed.103

2. Ownership and Control

The final rule requires that, to qualify for the exclusion from regulation under the

Advisers Act, the family office must be wholly owned by family clients and exclusively

controlled, directly or indirectly, by one or more family members or family entities.104

Our final rule expands who may own the family office from “family members,” as

proposed, to “family clients.” However, the rule continues to require that control of the

102 Schiff/Stetter Letter. 103 A number of commenters requested that we clarify the extent to which a family office

could provide investment advice to an employee benefit plan or pension plan sponsored by the family office without registering under the Act. See, e.g., Comment Letter of the American Benefits Council/Committee on the Investment of Employee Benefit Assets (Nov. 18, 2010); Coalition Letter; Withers Bergman Letter. In our view, a family office or other employer that merely establishes an employee benefit plan or pension plan and selects one or more investment advisers for that plan would not be an investment adviser subject to the Advisers Act because it would not be an “investment adviser” within the meaning of section 202(a)(11). A family office (as defined in rule 202(a)(11)(G)-1) thus would not be required to register under the Act if, in addition to providing advice to family clients, its advisory activities are so limited. However, a family office providing additional advisory services to an employee benefit plan all of whose participants are not family clients may be required to register under the Act unless another exemption is available.

104 Rule 202(a)(11)(G)-1(b)(2). We have added the word “exclusively” to clarify that “control” cannot be shared with individuals or companies that are not family members or family entities. A family entity is defined as any of the trusts, companies or other entities set forth in paragraphs (v), (vi), (vii), (viii), (ix), or (xi) of subsection (d)(4) of rule 202(a)(11)(G)-1, but excluding key employees and their trusts from the definition of family client solely for purposes of this definition.

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family office remain, directly or indirectly, with family members and their related

entities.

Commenters urged us to expand both who could own the family office and who

could control a family office under the rule.105 Some stated that many family offices are

owned by family trusts, and that allowing family members to indirectly own and control

the family office did not provide sufficient clarity that such a trust could own and control

the family office.106 Commenters also pointed out that many family offices permit their

employees to own equity interest in family offices as an incentive to attract and retain

talented employees, and urged us not to prohibit such arrangements.107 These

commenters asked us to explicitly broaden the ownership requirement from “family

members” to “family clients” to permit these types of arrangements. Other commenters

argued more broadly that the “wholly owned and controlled” aspect of the proposed

definition does not adequately reflect the variety of organizational arrangements already

in place at family offices and that the Commission should focus as a policy matter solely

on whether the family office is being operated for the benefit of members of a single

family.108

Commenters persuaded us to expand who may own the family office from

“family members” to “family clients.” This change is consistent with the intent behind

our proposed language (which contemplated that the family could own the family office

105 See, e.g., Coalition Letter; Comment Letter of McDermott Will & Emery/Richard L. Dees (Nov. 18, 2010) (“McDermott Dees Letter”).

106 See, e.g., Dorsey Letter; Comment Letter of McGuire Woods LLP (Nov. 18, 2010).

107 See, e.g., AICPA Letter; Davis Polk Letter; Dechert Letter. 108 See, e.g., Coalition Letter; Levin Schreder Letter; McDermott Dees Letter.

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indirectly) and more clearly allows family members to structure their ownership of the

family office for tax or other reasons. We also agree with suggestions that the rule permit

key employees to own a non-controlling stake in the family office to serve as part of an

incentive compensation package for key employees. We remain convinced, however,

that for our core policy rationale to be fulfilled—that a family office is essentially a

family managing its own wealth—the family, directly or indirectly, should control the

family office. Accordingly, the final rule provides that while family clients may own the

family office, family members and family entities (i.e., their wholly owned companies or

family trusts) must control the family office.109

3. Holding Out

As proposed, the final rule prohibits a family office relying on the rule from

holding itself out to the public as an investment adviser.110 Commenters supported this

prohibition.111 Holding itself out to the public as an investment adviser suggests that the

family office is seeking to enter into typical advisory relationships with non-family

109 We note that, as proposed, we are not limiting the exclusion to a family office that is not operated for the purpose of generating a profit. We also note that some family offices may be structured such that all or a portion of family client investment gains are distributed as dividends from the family office (when family clients own the family office) and that a not-for-profit requirement would preclude this family office structure. We were persuaded by several commenters who cautioned against limiting the exclusion for family offices to those that operate on a not-for-profit basis, arguing that it would be difficult to administer and is unnecessary given the limited clientele that a family office may advise and rely on the exclusion. See, e.g., AICPA Letter; Davis Polk Letter; Kozusko Letter.

110 Rule 202(a)(11)(G)-1(b)(3). For purposes of this rule, despite language under rule 203(b)(3)-1(c) regarding holding out, a family office could not market non-public offerings to persons or entities that are not family clients since such activity would not be consistent with a family office that only provides investment advice to family clients and does not hold itself out to the public as an investment adviser.

111 See, e.g., Coalition Letter; ABA letter.

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clients, and thus is inconsistent with the basis on which we have provided exemptive

orders and are adopting this rule.112

4. Multifamily Offices

The exclusion we are adopting today does not extend to family offices serving

multiple families, as urged by several commenters.113 Comments we received did not

persuade us that the rule could be drafted to distinguish in any meaningful way between

such offices and family-owned commercial advisory firms that offer their services to

other families.114 Moreover, they did not persuade us that the protections of the Advisers

Act, including the application of the anti-fraud provisions of the Act, would not be

relevant to a family obtaining services from an office established by another family with

which it could have conflicts of interest. Families, of course, may have conflicts among

members leading to disputes. But, as discussed in our Proposing Release, the premise of

the exclusion is that such disputes could be worked out within the family unit or, if

necessary, by state courts under laws that facilitate resolution of family disputes. In a

multifamily office, these clients would be without the protections of the Advisers Act or

112 See footnote 56 of the Proposing Release, supra note 2. In response to one commenter’s request, we clarify that a family office that is currently registered as an investment adviser and expects to de-register in reliance on rule 202(a)(11)(G)-1, will not be prohibited from relying on the rule solely because it held itself out to the public as an investment adviser while it was registered under the Advisers Act. See Dechert Letter.

113 See, e.g., Cadwalader Letter; Comment Letter of Lowenstein Sandler PC (Nov. 12, 2010); Comment Letter of Stradling Yocca Carlson & Rauth (Nov. 16, 2010).

114 We note that under section 208(d) of the Advisers Act, it is unlawful for any person indirectly to do anything that would be unlawful for such person to do directly under the Advisers Act or rules thereunder. Therefore, if several families that are unrelated through a common ancestor within 10 generations have established a separate family office for each of the families, but have staffed these family offices with the same or substantially the same employees such employees are managing a de facto multifamily office. As a result, these family offices may not claim the family office exclusion.

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family relationships for preventing or handling any discriminatory or fraudulent treatment

of different families.

B. Grandfathering Provisions, Transition Period and Effect of Rule on Previously Issued Exemptive Orders

The Dodd-Frank Act prohibits us from excluding from our definition of family

office persons not registered or required to be registered on January 1, 2010 that would

meet all of the required conditions under rule 202(a)(11)(G)-1 but for their provision of

investment advice to certain clients specified in section 409(b)(3) of the Dodd-Frank

Act.115 We have incorporated this required grandfathering into paragraph (c) of our

rule.116 We received two comments on such incorporation. One commenter suggested

that we incorporate the grandfathering provision only by reference to section 409(b)(3) of

the Dodd-Frank Act.117 We believe that incorporating the grandfathering provision of

Dodd-Frank Act is a more user friendly approach for those attempting to comply with the

Advisers Act compared to directing them to look up the grandfathering provision in a

separate statute. Another commenter requested clarification of the Dodd-Frank

grandfathering provision.118 We believe clarification or interpretation of this provision

would involve applying the provision to specific facts, and this release is not an

115 See section 409(b)(3) and (c) of the Dodd-Frank Act.

116 We note that section 409(c) of the Dodd-Frank Act provides that “a family office that would not be a family office, but for section 409(b)(3) of the Dodd-Frank Act, shall be deemed to be an investment adviser for the purposes of paragraphs (1), (2) and (4) of section 206 of the Advisers Act.” This provision is reflected in paragraph (3) of rule 202(a)(11)(G)-1(c).

117 Coalition Letter.

118 AICPA Letter.

35

appropriate means to provide such a clarification. Therefore, we are adopting

paragraph (c) of the rule as proposed.

Several commenters suggested that we provide a transition period to allow family

offices time to determine whether they meet the exclusion or to restructure or register

under the Advisers Act if they do not.119 We recognize that the time period between the

adoption of this rule and the repeal of the private adviser exemption from registration

contained in section 203(b)(3) of the Advisers Act, effective July 21, 2011, may not be

sufficient for every family office to conduct such an evaluation, restructure or register.

Accordingly, the rule provides that family offices currently exempt from registration

under the Advisers Act in reliance on the private adviser exemption and that do not meet

the new family office exclusion are not required to register with the Commission as

investment advisers until March 30, 2012.120 We believe that this aspect of the rule is

necessary or appropriate in the public interest and is consistent with the protection of

investors, and the purposes fairly intended by the policy and provisions of the Advisers

Act.

119 See, e.g., Lee & Stone Letter (to provide time to restructure certain “club deals” in which clients of the family office may have engaged); Comment Letter of Paul, Hastings, Janofsky & Walker LLP (Nov. 17, 2010) (requesting an expanded grandfather provision to allow more time for an orderly restructuring); Ropes & Gray Letter.

120 Rule 202(a)(11)(G)-1(e)(2). See also Letter from Robert E. Plaze, Associate Director, Division of Investment Management, U.S. Securities and Exchange Commission, to David Massey, Deputy Securities Administrator, North Carolina Securities Division and President, NASAA (Apr. 8, 2011) available at http://www.sec.gov/rules/proposed/2010/ia-3110-letter-to-nasaa.pdf (stating that the Commission would potentially consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012). Because initial applications for registration can take up to 45 days to be approved, family offices that determine they will need to register with the Commission should file a complete application, both Part 1 and a brochure(s) meeting the requirements of Part 2 of Form ADV, at least by February 14, 2012.

36

We have determined not to rescind exemptive orders previously issued to family

offices under section 202(a)(11)(G) of the Advisers Act. As discussed above, the

Commission has issued orders under section 202(a)(11)(G) of the Advisers Act to certain

family offices declaring them and their employees acting within the scope of their

employment to not be investment advisers within the intent of the Act. In some areas

these exemptive orders may be slightly broader than the rule we are adopting today, and

in other areas they may be narrower. We proposed not to rescind these exemptive orders

and requested comment. All commenters addressing this subject supported our proposal.

Thus, family offices currently operating under these orders may continue to rely on them.

III. PAPERWORK REDUCTION ACT

Rule 202(a)(11)(G)-1 does not contain a “collection of information” requirement

within the meaning of the Paperwork Reduction Act of 1995.121 Accordingly, the

Paperwork Reduction Act is not applicable.

IV. ECONOMIC ANALYSIS

We are adopting rule 202(a)(11)(G)-1 in anticipation of the Dodd-Frank Act’s

repeal of section 203(b)(3) of the Advisers Act, which provides an exemption from

registration for certain private fund advisers, and in light of the Dodd-Frank Act’s

directive that the Commission define family offices that will be excluded from regulation

under the Advisers Act.122 The rule we are adopting today defines a family office as a

company that, with limited exceptions, has only family clients, is wholly owned by

family clients and controlled by family members and/or family entities, and does not hold

121 44 U.S.C. 3501 et seq.

122 See section 409 of the Dodd-Frank Act.

37

itself out to the public as an investment adviser. The definition of family office provided

in the rule is designed to limit the exclusion from Advisers Act regulation solely to those

private advisory offices that we believe the Advisers Act was not designed to regulate

and to prevent circumvention of the Adviser Act’s protections by firms that are operating

as commercial investment advisory firms.

As a preliminary matter, and as discussed earlier, as a result of the repeal of

section 203(b)(3) of the Advisers Act a number of private advisory offices that may

consider themselves to be family offices and that are not currently registered as

investment advisers in reliance on that provision will be required to register under the

Advisers Act after July 21, 2011 unless those advisers are eligible for a new exemption.

The benefits and costs associated with the elimination of section 203(b)(3) are

attributable to the Dodd-Frank Act. However, while Congress also adopted a family

office exclusion, it directed the Commission to adopt rules defining the terms of that

exclusion, subject to the terms of section 409 of the Dodd-Frank Act, and thus we discuss

below the costs and benefits of our determination of which private advisory offices are

deemed family offices and therefore excluded from regulation.

In proposing the rule, we requested comment on all aspects of our cost benefit

analysis, including the accuracy of our estimates of costs and benefits, identification and

assessment of any costs and benefits not discussed in our analysis, and data relevant to

these costs and benefits.123 While some commenters predicted that many private

advisory offices would have to restructure or apply for an exemptive order and thus incur

Section V of the Proposing Release. 123

38

substantial costs if the definition of family office were not expanded,124 no estimates of

such costs were provided.. We discuss these comments more specifically below.

A. Benefits

As discussed in the Proposing Release, we expect that rule 202(a)(11)(G)-1 will

result in several important benefits. First, family offices, as defined by this rule, will not

be subject to the mandatory costs of registering with the Commission as an investment

adviser and the associated compliance costs. Some investment advisers currently

registered with us may qualify as family offices under the rule and have the choice to

deregister. These reduced regulatory costs should result in direct cost savings to these

family offices, and thus to their family clients.

Second, the rule will benefit family offices, as defined by the rule, and their

clients by eliminating the costs of seeking (and considering) individual exemptive orders.

Without rule 202(a)(11)(G)-1, the repeal of the exemption contained in section 203(b)(3)

would result in a great number of family offices having to apply for exemptive relief and

thus incurring significant costs for these family offices and their clients. We estimate that

a typical family office will incur legal fees of $200,000 on average to engage in the

exemptive order application process, including preparation and revision of an application

and consultations with Commission staff.125 The rule will benefit family offices and their

family clients by eliminating the costs of applying to the Commission for an exemptive

order that the Commission would grant and the associated uncertainty that they might not

obtain such an order. Estimates of the number of family offices in the United States vary

124 See, e.g., Jones Day Letter; Withers Bergman Letter.

125 We included the same estimate in the Proposing Release. We received no comments on this estimate.

39

widely—ranging from less than 1,000 to 5,000.126 If all of these family offices qualify

for the new exclusion and otherwise would have applied for an exemptive order, the rule

will provide a benefit ranging from $200 million to $1 billion by eliminating the costs of

applying for those exemptive orders.127

Finally, the rule also will benefit the Commission by freeing staff resources from

reviewing and processing large numbers of family office exemptive applications resulting

from the repeal of section 203(b)(3) of the Advisers Act that the Commission would grant

and allowing the staff to target its work more efficiently, and thus will indirectly benefit

public investors.

B. Costs

We recognize that some private advisory offices that today consider themselves to

be family offices likely will incur expenses to evaluate whether they meet the terms of

the exclusion. One commenter estimated that such an office would incur expenses of

$25,000 to $35,000 to hire a consulting firm or law firm to determine if it meets the

exclusion provided by the rule.128 If all family offices estimated to exist in the United

States noted above129 hire a consulting firm or law firm to determine if they meet the

126 See, e.g., Pamela J. Black, The Rise of the Multi-Family Office, FINANCIAL PLANNING (Apr. 27, 2010) (estimating 2,500 to 3,000 single family offices); Robert Frank, Minding the Money—‘Family Office’ Chiefs Get Plied with Perks; Club Membership, Jets, THE WALL STREET JOURNAL (Sept. 7, 2007), at W2 (estimating 3,000 to 5,000 family offices in the United States); Second Annual Single-Family Office Study, the Family Wealth Alliance (2010) (estimating 2,500 U.S.-based single family offices); Creating a Single Family Office for Wealth Creation and Family Legacy Sustainability, Family Office Association (2009) (estimating 1,000 single family offices worldwide).

127 $200,000 cost of applying for an exemptive order multiplied by a range of 1,000 family offices to 5,000 family offices.

128 Lindquist Letter.

129 See supra note 126 and accompanying text.

40

exclusion at such a cost, they would incur an aggregate cost ranging from $25 million to

$175 million for this evaluation.130

Some of these private advisory offices may decide to restructure their businesses

to meet the conditions imposed by rule 202(a)(11)(G)-1. Many commenters stated that

the proposed definition of family office was too narrow, and that if it was adopted

without changes, absent an exemptive order, many such advisory offices would be

required to restructure themselves in order to qualify as family offices.131 Restructuring

or obtaining an exemptive order, some commenters asserted, would result in substantial

costs to the advisory office and its clients.132 We expect that each such office will weigh

the costs of such restructuring under its particular circumstances against the costs and

burdens of registration or seeking an exemptive order.

Our final rule broadens the definition of “family client” and “family office” from

that proposed, particularly concerning permissible clients of the family office and

ownership of the family office.133 As a result, we expect that substantially fewer private

advisory offices will need to confront these trade-offs than would have been the case

under our proposal. Nevertheless, we recognize that some offices may decide to

restructure their businesses in order to meet even the expanded family office definition

under the final rule, rather than register or seek an exemptive order. The costs of any

such restructuring will be highly dependent on the nature and extent of the restructuring,

130 ($25,000 evaluation cost) x (1,000 family offices) = $25 million. ($35,000 evaluation cost) x (5,000 family offices) = $175 million.

131 See, e.g., Lindquist Letter; Lee & Stone Letter; Withers Bergman Letter.

132 See, e.g., Coalition Letter; Lee & Stone Letter.

133 See Section II of this Release for discussion of these expansions.

41

which we understand may vary significantly from office to office. No commenters

provided an estimate of the costs to carry out any necessary restructuring.

We do not expect that the rule will impose any significant costs on family offices

currently operating under a Commission exemptive order. We are permitting these

family offices to continue to rely on their exemptive orders. They may choose, of course,

to qualify for exclusion under the rule. We expect that most of these family offices will

satisfy all the conditions of the rule without changing their structure or operations. However,

these family offices may incur one-time “learning costs” in determining the differences

between their orders and the rule. We estimate that such costs will be no more than $5,000

on average for a family office if it hires an external consulting firm or law firm to assist in

determining the differences. Because the terms of these advisers’ exemptive orders were

similar to rule 202(a)(11)(G)-1, these family offices should incur significantly lower costs to

evaluate the new rule than family offices that do not have an exemptive order. There are 13

family offices that have obtained exemptive orders. Accordingly, we estimate that these

family offices collectively would incur outside consulting or legal expenses of $65,000 to

discern the differences between their orders and the rule.

Finally, if there were any family offices that previously registered with the

Commission, but now may de-register in reliance on the new family office exclusion in

the Advisers Act, the rule may have competitive effects on investment advisers that may

compete with the family office for the provision of investment management services to

family clients since these third party investment advisers would bear the regulatory costs

associated with compliance with the Advisers Act or state investment adviser regulatory

requirements. We do not expect that the rule will impact capital formation.

42

V. FINAL REGULATORY FLEXIBILITY ANALYSIS

The Commission has prepared the following Final Regulatory Flexibility Analysis

(“FRFA”) regarding rule 202(a)(11)(G)-1 in accordance with section 604 of the

Regulatory Flexibility Act.134 We prepared an Initial Regulatory Flexibility Analysis

(“IRFA”) in conjunction with the Proposing Release in October 2010.135

A. Need for the Rule

We are adopting rule 202(a)(11)(G)-1 defining family offices excluded from

regulation under the Advisers Act because we are required to do so under section 409 of

the Dodd-Frank Act.

B. Significant Issues Raised by Public Comment

In the Proposing Release, we requested comment on the IRFA. None of the

comment letters we received specifically addressed the IRFA. None of the comment

letters made specific comments about the proposed rule’s impact on smaller family

offices.

C. Small Entities Subject to the Rule

Under Commission rules, for purposes of the Advisers Act and the Regulatory

Flexibility Act, an investment adviser generally is a small entity if it: (i) has assets under

management having a total value of less than $25 million; (ii) did not have total assets of

$5 million or more on the last day of its most recent fiscal year; and (iii) does not control,

is not controlled by, and is not under common control with another investment adviser

that has assets under management of $25 million or more, or any person (other than a

134 5 U.S.C. 604(a).

135 See Proposing Release, supra note 2, at Section VI.

43

natural person) that had $5 million or more on the last day of its most recent fiscal

136year.

We do not have data and are not aware of any databases that compile information

regarding how many family offices will be a small entity under this definition, but since

family offices only are established for the very wealthy and given the statistics included in

the Proposing Release showing that they generally serve families with at least $100 million

or more of investable assets and have an average net worth of $517 million, we believe it is

unlikely that any family offices would be small entities.137

D. Projected Reporting, Recordkeeping, and other Compliance Requirements

Rule 202(a)(11)(G)-1 imposes no reporting, recordkeeping or other compliance

requirements.

E. Agency Action to Minimize Effect on Smaller Entities

The Regulatory Flexibility Act directs the Commission to consider significant

alternatives that would accomplish the stated objective, while minimizing any significant

impact on small entities. In connection with the rule, the Commission considered the

following alternatives: (i) the establishment of differing compliance or reporting

requirements or timetables that take into account the resources available to small entities;

(ii) the clarification, consolidation, or simplification of compliance and reporting

requirements under the rule for small entities; (iii) the use of performance rather than

136 17 CFR 275.0-7(a).

137 See Proposing Release, supra note 2, at n.2 and accompanying text. One commenter (Comment Letter of Robert Stenson (Oct. 18, 2010)) cited a 1999 survey which estimated that 32% of family offices had investment assets of less than $100 million. However, this commenter did not indicate how many family offices had assets under management of less than $25 million and thus qualified as “small entities” as defined in Advisers Act rule 0-7, supra note 136 and accompanying text.

44

design standards; and (iv) an exemption from coverage of the rule, or any part thereof, for

small entities.

Rule 202(a)(11)(G)-1 is exemptive and compliance with the rule is voluntary. We

therefore do not believe that different or simplified compliance, timetable, or reporting

requirements, or an exemption from coverage of the rule for small entities, is appropriate.

The conditions in the rule are designed to ensure that family offices operating under the

rule provide advice only to the family itself and not the general public and, accordingly,

the protections of the Advisers Act are not warranted. Reducing these conditions for

smaller family offices would be inconsistent with the policy underlying the exclusion and

would harm investor protection.

Our prior exemptive orders have not made any differentiation based on the size of

the family office. In addition, as discussed above, we expect that very few, if any, family

offices are small entities. The Commission also believes that rule 202(a)(11)(G)-1 will

decrease burdens on small entities by making it unnecessary for most of them to seek an

exemptive order from the Commission to operate without registration under the Advisers

Act. As a result, we do not anticipate that the potential impact of the rule on small

entities will be significant.

The rule specifies broad conditions with which a family office must comply to

rely on the exclusion; the rule leaves to each family office how to structure its specific

operations to meet these conditions. The rule thus already incorporates performance

rather than design standards. For these reasons, alternatives to the rule appear

unnecessary and in any event are unlikely to minimize any impact that the rule might

have on small entities.

45

VI. STATUTORY AUTHORITY

We are adopting rule 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1] pursuant to

our authority set forth in sections 202(a)(11)(G) and 206A of the Advisers Act [15 U.S.C.

80b-2(a)(11)(G) and 80b-6A].

LIST OF SUBJECTS IN 17 CFR PART 275

Reporting and recordkeeping requirements, Securities.

TEXT OF RULE

For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal

Regulations is amended as follows.

PART 275 – RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

1. The authority citation for Part 275 continues to read in part as follows:

Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-

6(4), 80b-6a, and 80b-11, unless otherwise noted.

* * * * *

2. Section 275.202(a)(11)(G)-1 is added to read as follows:

§ 275.202(a)(11)(G)-1 Family offices.

(a) Exclusion. A family office, as defined in this section, shall not be

considered to be an investment adviser for purpose of the Act.

(b) Family office. A family office is a company (including its directors,

partners, members, managers, trustees, and employees acting within the scope of their

position or employment) that:

(1) Has no clients other than family clients; provided that if a person that is

not a family client becomes a client of the family office as a result of the death of a

46

family member or key employee or other involuntary transfer from a family member or

key employee, that person shall be deemed to be a family client for purposes of this

section 275.202(a)(11)(G)-1 for one year following the completion of the transfer of legal

title to the assets resulting from the involuntary event;

(2) Is wholly owned by family clients and is exclusively controlled (directly

or indirectly) by one or more family members and/or family entities; and

(3) Does not hold itself out to the public as an investment adviser.

(c) Grandfathering. A family office as defined in paragraph (a) above shall

not exclude any person, who was not registered or required to be registered under the Act

on January 1, 2010, solely because such person provides investment advice to, and was

engaged before January 1, 2010 in providing investment advice to:

(1) Natural persons who, at the time of their applicable investment, are

officers, directors, or employees of the family office who have invested with the family

office before January 1, 2010 and are accredited investors, as defined in Regulation D

under the Securities Act of 1933;

(2) Any company owned exclusively and controlled by one or more family

members; or

(3) Any investment adviser registered under the Act that provides investment

advice to the family office and who identifies investment opportunities to the family

office, and invests in such transactions on substantially the same terms as the family

office invests, but does not invest in other funds advised by the family office, and whose

assets as to which the family office directly or indirectly provides investment advice

represents, in the aggregate, not more than 5 percent of the value of the total assets as to

47

which the family office provides investment advice; provided that a family office that

would not be a family office but for this subsection (c) shall be deemed to be an

investment adviser for purposes of paragraphs (1), (2) and (4) of section 206 of the Act.

(d) Definitions. For purposes of this section:

(1) Affiliated Family Office means a family office wholly owned by family

clients of another family office and that is controlled (directly or indirectly) by one or

more family members of such other family office and/or family entities affiliated with

such other family office and has no clients other than family clients of such other family

office.

(2) Control means the power to exercise a controlling influence over the

management or policies of a company, unless such power is solely the result of being an

officer of such company.

(3) Executive officer means the president, any vice president in charge of a

principal business unit, division or function (such as administration or finance), any other

officer who performs a policy-making function, or any other person who performs similar

policy-making functions, for the family office.

(4) Family client means:

(i) Any family member;

(ii) Any former family member;

(iii) Any key employee;

(iv) Any former key employee, provided that upon the end of such individual’s

employment by the family office, the former key employee shall not receive investment

advice from the family office (or invest additional assets with a family office-advised

48

trust, foundation or entity) other than with respect to assets advised (directly or indirectly)

by the family office immediately prior to the end of such individual’s employment,

except that a former key employee shall be permitted to receive investment advice from

the family office with respect to additional investments that the former key employee was

contractually obligated to make, and that relate to a family-office advised investment

existing, in each case prior to the time the person became a former key employee.

(v) Any non-profit organization, charitable foundation, charitable trust

(including charitable lead trusts and charitable remainder trusts whose only current

beneficiaries are other family clients and charitable or non-profit organizations), or other

charitable organization, in each case for which all the funding such foundation, trust or

organization holds came exclusively from one or more other family clients;

(vi) Any estate of a family member, former family member, key employee, or,

subject to the condition contained in paragraph (d)(4)(iv) of this section, former key

employee;

(vii) Any irrevocable trust in which one or more other family clients are the

only current beneficiaries;

(viii) Any irrevocable trust funded exclusively by one or more other family

clients in which other family clients and non-profit organizations, charitable foundations,

charitable trusts, or other charitable organizations are the only current beneficiaries;

(ix) Any revocable trust of which one or more other family clients are the sole

grantor;

(x) Any trust of which: (A) each trustee or other person authorized to make

decisions with respect to the trust is a key employee; and (B) each settlor or other person

49

who has contributed assets to the trust is a key employee or the key employee’s current

and/or former spouse or spousal equivalent who, at the time of contribution, holds a joint,

community property, or other similar shared ownership interest with the key employee;

or

(xi) Any company wholly owned (directly or indirectly) exclusively by, and

operated for the sole benefit of, one or more other family clients; provided that if any

such entity is a pooled investment vehicle, it is excepted from the definition of

“investment company” under the Investment Company Act of 1940.

(5) Family entity means any of the trusts, estates, companies or other entities

set forth in paragraphs (v), (vi), (vii), (viii), (ix), or (xi) of subsection (d)(4) of this

section, but excluding key employees and their trusts from the definition of family client

solely for purposes of this definition.

(6) Family member means all lineal descendants (including by adoption,

stepchildren, foster children, and individuals that were a minor when another family

member became a legal guardian of that individual) of a common ancestor (who may be

living or deceased), and such lineal descendants’ spouses or spousal equivalents;

provided that the common ancestor is no more than 10 generations removed from the

youngest generation of family members.

(7) Former family member means a spouse, spousal equivalent, or stepchild

that was a family member but is no longer a family member due to a divorce or other

similar event.

(8) Key employee means any natural person (including any key employee’s

spouse or spouse equivalent who holds a joint, community property, or other similar

50

shared ownership interest with that key employee) who is an executive officer, director,

trustee, general partner, or person serving in a similar capacity of the family office or its

affiliated family office or any employee of the family office or its affiliated family office

(other than an employee performing solely clerical, secretarial, or administrative

functions with regard to the family office) who, in connection with his or her regular

functions or duties, participates in the investment activities of the family office or

affiliated family office, provided that such employee has been performing such functions

and duties for or on behalf of the family office or affiliated family office, or substantially

similar functions or duties for or on behalf of another company, for at least 12 months.

(9) Spousal equivalent means a cohabitant occupying a relationship generally

equivalent to that of a spouse.

(e) Transition.

(1) Any company existing on July 21, 2011 that would qualify as a family

office under this section but for it having as a client one or more non-profit organizations,

charitable foundations, charitable trusts, or other charitable organizations that have

received funding from one or more individuals or companies that are not family clients

shall be deemed to be a family office under this section until December 31, 2013,

provided that such non-profit or charitable organization(s) do not accept any additional

funding from any non-family client after August 31, 2011 (other than funding received

prior to December 31, 2013 and provided in fulfillment of any pledge made prior to

August 31, 2011).

(2) Any company engaged in the business of providing investment advice,

directly or indirectly, primarily to members of a single family on July 21, 2011, and that

51

is not registered under the Act in reliance on section 203(b)(3) of this title on July 20,

2011, is exempt from registration as an investment adviser under this title until March 30,

2012, provided that the company:

(1) During the course of the preceding twelve months, has had fewer than

fifteen clients; and

(2) Neither holds itself out generally to the public as an investment adviser

nor acts as an investment adviser to any investment company registered under the

Investment Company Act of 1940 (15 U.S.C. 80a), or a company which has elected to be

a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-54)

and has not withdrawn its election.

By the Commission.

Elizabeth M. Murphy Secretary

June 22, 2011

Annex A

The following diagram illustrates the effect of a family office redesignating its common ancestor. In the first chart, the green/shaded boxes indicate persons in various generations that are “family members” of the family office. The double-outlinedboxes indicate persons in various generations that are outside the 10-generation limit and thus may not be advised by the family office under the exclusion. The lower diagram shows the impact of redesignating the common ancestor from an individual in generation 1 to an individual in generation 5. The single-outlined boxes indicate the new group of family clients that the family office may advise and maintain its exclusion. The green/shaded boxes indicate individuals that previously the family office could advise, but that are no longer “family members” due to the redesignation. The double-outlined boxes indicate individuals that were too remote from the common ancestor in both cases to be considered “family members.”

G10

G14

G10

G14

G6

G9

G13

G6

G9

G13

G5

G8

G10

G12

G5

G8

G10

G12

Ancestor for Original Family Office

G1

Branch 1 of the Family

G2 G2 G3 G3

G4 G4 G4 G5 G5

G6 G6 G6 G7 G7 G7

G8 G8 G8 G8 G9 G9

G10 G10 G10

G11 G11

G12 G12

G13 G13

G14 G14 G14

Branch 2 of the Family

G2 G3 G3

G4 G4 G4 G5 G5

G6 G6 G6 G7 G7 G7

G8 G8 G8 G8 G9 G9

G10 G10 G10

G11 G11 G11

G12 G12 G12

G13 G13

G14 G14

Branch 2 of Family is below

Generations Not Part of Family Office

Ancestor for New Family Office

G13

G14


17 CFR PARTS 240 and 249 Release No. 34-64976; File No. S7-10-10 RIN 3235-AK55 Large Trader Reporting AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting new Rule

13h-1 and Form 13H under Section 13(h) of the Securities Exchange Act of 1934 (“Exchange

Act”) to assist the Commission in both identifying, and obtaining trading information on, market

participants that conduct a substantial amount of trading activity, as measured by volume or

market value, in the U.S. securities markets. Rule 13h-1 will require a “large trader,” defined as

a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million

during any calendar day, or 20 million shares or $200 million during any calendar month, to

identify itself to the Commission and make certain disclosures to the Commission on Form 13H.

Upon receipt of Form 13H, the Commission will assign to each large trader an identification

number that will uniquely and uniformly identify the trader, which the large trader must then

provide to its registered broker-dealers. Such registered broker-dealers will then be required to

maintain records of two additional data elements in connection with transactions effected

through accounts of such large traders (the large trader identification number, and the time

transactions in the account are executed). In addition, the Commission is requiring that such

broker-dealers report large trader transaction information to the Commission upon request

through the Electronic Blue Sheets systems currently used by broker-dealers for reporting trade

2

information. Finally, certain registered broker-dealers subject to the Rule will be required to

perform limited monitoring of their customers’ accounts for activity that may trigger the large

trader identification requirements of Rule 13h-1.

The large trader reporting requirements are designed to provide the Commission with a

valuable source of useful data to support its investigative and enforcement activities, as well as

facilitate the Commission’s ability to assess the impact of large trader activity on the securities

markets, to reconstruct trading activity following periods of unusual market volatility, and to

analyze significant market events for regulatory purposes.

DATES: Effective Date: October 3, 2011

Compliance Dates: [Insert date 120 days after publication in the Federal Register] for the requirement on large traders to identify to the Commission pursuant to Rule 13h-1(b).

[Insert date 270 days after publication in the Federal

Register] for broker-dealers to maintain records, report, and monitor large trader activity pursuant to Rule 13h-1(d), (e), and (f).

FOR FURTHER INFORMATION CONTACT: Richard R. Holley III, Assistant Director, at

(202) 551-5614, Christopher W. Chow, Special Counsel, at (202) 551-5622, Gary M. Rubin,

Attorney, at (202) 551-5669, or Kathleen Gray, Attorney, at (202) 551-5305, Division of Trading

and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-

7010.

SUPPLEMENTARY INFORMATION

Table of Contents

I. Introduction II. Background

A. The Market Reform Act B. Rule 17a-25 and the Enhanced EBS System

3

C. The Need for Large Trader Reporting D. Relation to Consolidated Audit Trail Proposal

III. Description of Adopted Rule and Form A. Large Traders

1. Large Trader Status a. Who Should Register as a Large Trader?

i. Persons Who Exercise Investment Discretion ii. Parent Company Level Registration

A. Use of LTID Suffixes B. Control and Minority-Owned Entities

b. Identifying Activity Level c. Voluntary Registration

2. Duties of a Large Trader a. File Form 13H with the Commission

i. Initial Filings – Who Must File? ii. Annual Filings iii. Amended Filings iv. Inactive Status v. Reactivated Status vi. Termination Filings b. Self-Identification to Broker-Dealers

3. Overview of Form 13H a. Item 1 b. Item 2 c. Item 3 d. Item 4 e. Item 5 f. Item 6

g. Confidentiality B. Broker-Dealers: Recordkeeping, Reporting, and Monitoring

1. Recordkeeping Requirements 2. Reporting Requirements 3. Monitoring Requirements

C. Foreign Entities D. Three Specific Factors Considered by the Commission Pursuant to Section 13(h)

of the Exchange Act 1. Existing Reporting Systems 2. Costs Associated with Maintaining and Reporting Large Trader

Transaction Data 3. Relationship Between U.S. and International Securities Markets

E. Implementation and Compliance Dates, Exemptive Authority IV. Paperwork Reduction Act

A. Summary of Collection of Information B. Use of Information C. Respondents 1. Number of Large Traders

4

2. Number of Broker-Dealers Affected D. Total Initial and Annual Burdens

1. Burden on Large Traders a. Duties of Large Traders b. Initial and Annual Burdens 2. Burden on Registered Broker-Dealers

a. Recordkeeping b. Reporting c. Monitoring d. Total Burden

E. Collection of Information is Mandatory F. Confidentiality G. Record Retention Period

V. Consideration of Costs and Benefits A. Benefits B. Costs

1. Large Traders 2. Registered Broker-Dealers

a. Recordkeeping b. Reporting c. Monitoring

VI. Consideration of Burden on Competition, and Promotion of Efficiency, Competition, and Capital Formation A. Competition B. Capital Formation C. Efficiency

VII. Regulatory Flexibility Act Certification VIII. Statutory Authority IX. Text of the Amendments I.

The Commission’s ability to analyze market movements and investigate the causes of

market events in an expeditious manner, as well as efficiently conduct investigations of regulated

entities and bring and prosecute enforcement matters, is influenced greatly by its ability to

promptly and efficiently identify significant market participants across equities and options

markets and collect uniform data on their trading activity. Though the large trader rule was

proposed before the market events of May 6, 2010, that incident has emphasized the importance

of enhancing the Commission’s ability to quickly and accurately analyze and investigate major

Introduction

5

market events, and has highlighted the need for an efficient and effective mechanism for

gathering data on the most active market participants.1 The large trader reporting requirements

that the Commission is now adopting will enhance, in the near term, the Commission’s ability to

identify, and collect information on the trading activity of, the most significant participants in the

U.S. markets.2

On April 23, 2010, Proposed Rule 13h-1 was published for public comment in the

Federal Register.

3 The Commission received 87 comment letters on the proposal from

investment advisers, broker-dealers, institutional and individual investors, industry trade groups,

and other market participants.4

1 On May 6, 2010, the prices of many U.S.-based equity products experienced an extraordinarily

rapid decline and recovery. See Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues at

Commenters generally supported the goals of the proposal. As

further discussed below, however, some commenters expressed concern about certain aspects of

the proposal and recommended that the proposal be amended or clarified in certain respects.

http://www.sec.gov/news/studies/2010/marketevents-report.pdf. See also Preliminary Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues at http://www.sec.gov/sec-cftc-prelimreport.pdf.

2 Longer term, the Commission expects the consolidated audit trail proposal, if adopted, to further enhance access by the Commission and self-regulatory organizations to order and trade data from all market participants. See Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) (proposed Consolidated Audit Trail) (File No. S7-11-10) (“CAT Proposal”). As discussed further below, the aspects of the large trader reporting rule that enable the collection of information on the identity of large traders, including a large trader identification number, would not be replicated or superseded by the consolidated audit trail and would remain as a key tool in the Commission’s oversight of the markets for the long term.

3 See Securities Exchange Act Release No. 61908 (April 14, 2010), 75 FR 21456 (April 23, 2010) (File No. S7-10-10) (“Proposing Release”).

4 Copies of comments received on the proposal are available on the Commission’s website at http://www.sec.gov/comments/s7-10-10/s71010.shtml.

http://www.sec.gov/news/studies/2010/marketevents-report.pdf�

http://www.sec.gov/sec-cftc-prelimreport.pdf�

http://www.sec.gov/sec-cftc-prelimreport.pdf�

http://www.sec.gov/comments/s7-10-10/s71010.shtml�

6

Some commenters also expressed concern with the proposed rule in light of the separate proposal

to establish a consolidated audit trail.5

After careful review and consideration of the comment letters, the Commission is

adopting Rule 13h-1 (the “Rule”) and Form 13H (the “Form”) with certain modifications,

discussed below, to address concerns expressed by some commenters.

II.

The Commission is in the process of conducting a broad and critical look at U.S. market

structure in light of the rapid development in trading technology and strategies. The

Commission has proposed several rulemakings, including this rulemaking, to address potential

discrete issues in the current market structure.

Background

6 In addition, last year the Commission published

a concept release on equity market structure designed to further the Commission’s broad review

of whether its rules have kept pace with, among other things, changes in trading technology and

practices.7

The Commission’s ongoing review of market structure comes at a time when U.S.

securities markets are experiencing a dynamic transformation, reflecting a decades-long

evolution from a market structure with primarily manual trading to a market structure with

primarily automated trading. Electronic trading allows ever-increasing volumes of securities

transactions to take place across an expanding multitude of trading systems that together

5 See CAT Proposal, supra note 2. 6 See, e.g., Securities Exchange Act Release Nos. 60684 (September 18, 2009), 74 FR 48632

(September 23, 2009) (proposal to eliminate flash order exception from Rule 602 of Regulation NMS) (File No. S7-21-09); 60997 (November 13, 2009), 74 FR 61208 (November 23, 2009) (proposal to regulate non-public trading interest) (File No. S7-27-09); 63241 (November 3, 2010), 75 FR 69792 (November 15, 2010) (File No. S7-03-10) (adopting Rule 15c3-5 under the Exchange Act addressing risk management controls for brokers or dealers with market access); and CAT Proposal, supra note 2.

7 See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (File No. S7-02-10).

7

constitute the U.S. national market system. Competition among markets has facilitated the

ability of large institutional and other professional market participants to employ sophisticated

trading methods to trade electronically on multiple venues simultaneously in huge volumes with

great speed.8

Given the dramatic changes to the securities markets, the Commission believes it is

appropriate to exercise its authority under Section 13(h) of the Exchange Act

9

Currently, to support its regulatory and enforcement activities, the Commission collects

transaction data from registered broker-dealers through the Electronic Blue Sheets (“EBS”)

system.

to establish large

trader reporting requirements. Large trader reporting requirements will provide the Commission

with a valuable source of useful data that will greatly enhance the Commission’s ability to

identify large market participants, and collect and analyze information on their trading activity.

10

8 Market analysts have offered a wide range of estimates for the level of activity attributable to one

category of large traders -- high frequency traders -- but these estimates typically exceed 50% of total volume. See, e.g., Preliminary Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, May 18, 2010, at Appendix A-11 (“Estimates of HFT volume in the equity markets vary widely, though they often are 50 percent of total volume or higher.”). See also, e.g., Scott Patterson and Goeffrey Rogow, What’s Behind High-Frequency Trading, Wall Street Journal, August 1, 2009 (“High frequency trading now accounts for more than half of all stock-trading volume in the U.S.”); and Rob Iati, The Real Story of Trading Software Espionage, Advanced Trading, July 10, 2009, available at

The EBS system generally is used to analyze trading in a small sample of securities

http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501 (high frequency trading accounts for 73% of U.S. equity trading volume). One source estimates that, five years ago, that number was less than 25%. See Rob Curran & Geoffrey Rogow, Rise of the (Market) Machines, Wall Street Journal, June 19, 2009, available at http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/. The trend is clear that high frequency traders now play an increasingly prominent role in the securities markets.

9 15 U.S.C. 78m(h), as adopted by the Market Reform Act of 1990 (“Market Reform Act”), PL 101-432 (HR 3657), October 16, 1990.

10 See 17 CFR 240.17a-25 (Electronic Submission of Securities Transaction Information by Exchange Members, Brokers, and Dealers).

http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501�

http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/�

8

over a limited period of time.11 However, the EBS system lacks two important data elements

that limit its usefulness when reconstructing market activity: time of execution for the order and

a uniform identifier to identify the participant that effected the trade.12 In addition, EBS does not

require, as is contemplated by the large trader reporting system outlined by Section 13(h)(2) of

the Exchange Act,13

A.

that transaction data be available on a next-day basis, which can delay the

Commission’s ability to promptly collect and begin to analyze transaction data following a

market event. The Commission’s adoption today of Rule 13h-1 and Form 13H is designed to

address certain of these limitations of EBS.

Following declines in the U.S. securities markets in October 1987 and October 1989,

Congress recognized that the Commission’s ability to analyze the causes of a market crisis was

impeded by its lack of authority to gather trading information.

The Market Reform Act

14

11 The difficulties in collecting trading data for analysis are reflected in the Commission’s

preliminary report on the events of May 6, 2010. See Preliminary Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, May 18, 2010, at 1 (“The reconstruction of even a few hours of trading during an extremely active trading day in markets as broad and complex as ours—involving thousands of products, millions of trades and hundreds of millions of data points—is an enormous undertaking. Although trading now occurs in microseconds, the framework and processes for creating, formatting, and collecting data across various types of market participants, products and trading venues is neither standardized nor fully automated. Once collected, this data must be carefully validated and analyzed.”)

To address this concern,

12 The shortcomings of the EBS system were noted by the Senate Committee on Banking, Housing and Urban Affairs in the Senate Report accompanying the Market Reform Act of 1990. See Senate Report, infra note 14, at 48.

13 See 15 U.S.C. 78m(h)(2) (“…records shall be available for reporting to the Commission… on the morning of the day following the day the transactions were effected....”).

14 The legislative history accompanying the Market Reform Act also noted the Commission’s limited ability to analyze the causes of the market declines of October 1987 and 1989. See generally Senate Comm. on Banking, Housing, and Urban Affairs, Report to accompany the Market Reform Act of 1990, S. Rep. No. 300, 101st Cong. 2d Sess. (May 22, 1990) (reporting S. 648) (“Senate Report”) and House Comm. on Energy and Commerce, Report to accompany the Securities Market Reform Act of 1990, H.R. Rep. No. 524, 101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657) (“House Report”).

9

Congress passed the Market Reform Act, which, among other things, amended Section 13 of the

Exchange Act to add new subsection (h), authorizing the Commission to establish a large trader

reporting system under such rules and regulations as the Commission may prescribe.15

The Market Reform Act authorizes the Commission to require large traders to self-

identify to the Commission.

16 In addition, the Market Reform Act authorizes the Commission to

collect from registered brokers or dealers information on the trading activity of large traders.17

In particular, the Commission is authorized to require every registered broker or dealer to make

and keep records with respect to securities transactions of large traders that equal or exceed a

certain “reporting activity level” and report such transactions upon request of the Commission.18

B.

15 See Market Reform Act, supra note

Rule 17a-25 and the Enhanced EBS System

9. 16 Section 13(h) of the Exchange Act defines a “large trader” as “every person who, for his own or

an account for which he exercises investment discretion, effects transactions for the purchase or sale of any publicly traded security or securities by use of any means or instrumentality of interstate commerce or of the mails, or of any facility of a national securities exchange, directly or indirectly by or through a registered broker or dealer in an aggregate amount equal to or in excess of the identifying activity level.” See 15 U.S.C. 78m(h)(8)(A). The term “identifying activity level” is defined in Section 13(h) as “transactions in publicly traded securities at or above a level of volume, fair market value, or exercise value as shall be fixed from time to time by the Commission by rule or regulation, specifying the time interval during which such transactions shall be aggregated.” See 15 U.S.C. 78m(h)(8)(C). The “identifying activity level” is set forth in paragraph (a)(7) of new Rule 13h-1.

17 See Senate Report, supra note 14, at 4, 44, and 71. In this respect, though self-regulatory organization (“SRO”) audit trails provide a time-sequenced report of broker-dealer transactions, those audit trails do not identify the large trader in a uniform manner on an inter-market basis. Accordingly, the Commission is not presently able to utilize existing SRO audit trail data to accomplish the objectives of the Market Reform Act.

18 See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the Commission with authority to determine the manner in which transactions and accounts should be aggregated, including aggregation on the basis of common ownership or control. See 15 U.S.C. 78m(h)(3). The term “reporting activity level” is defined in Section 13(h)(8)(D) of the Exchange Act to mean “transactions in publicly traded securities at or above a level of volume, fair market value, or exercise value as shall be fixed from time to time by the Commission by rule, regulation, or order, specifying the time interval during which such transactions shall be aggregated.” See 15 U.S.C. 78m(h)(8)(D). The “reporting activity level” is set forth in paragraph (a)(8) of new Rule 13h-1.

10

In 2001, the Commission adopted Rule 17a-25 to enhance the EBS system and facilitate

the Commission’s ability to collect electronic transaction data to support its investigative and

enforcement activities.19 Rule 17a-25 enhanced the EBS system in three primary areas. First, it

requires broker-dealers to submit to the Commission securities transaction information

responsive to a Blue Sheets request in electronic format.20

19 See Securities Exchange Act Release No. 44494 (June 29, 2001), 66 FR 35836 (July 9, 2001)

(S7-12-00) (final rulemaking) (“Rule 17a-25 Release”); and 42741 (May 2, 2000), 65 FR 26534 (May 8, 2000) (proposed rulemaking) (“Rule 17a-25 Proposing Release”). In the late 1980s, the Commission and the SROs worked together to develop and implement a system with a uniform electronic format, commonly known as the EBS system, to replace the process by which the Commission would request and collect securities trading records from broker-dealers through mailed questionnaires (known as “blue sheets”). See Rule 17a-25 Proposing Release, 65 FR at 26534-35.

Second, the rule modified the EBS

In the 1990s, the Commission twice proposed to use its authority under Section 13(h) of the Exchange Act to establish a large trader reporting system; neither system was adopted. In 1991, the Commission proposed a large trader reporting system that would have required large traders to disclose to the Commission their accounts and affiliations, and would have imposed recordkeeping and reporting requirements on broker-dealers with respect to the activity of their large trader customers. See Securities Exchange Act Release No. 29593 (August 22, 1991), 56 FR 42550 (August 28, 1991) (S7-24-91) (“1991 Proposal”). The 1991 proposal included an “identifying activity level,” the triggering level at which large traders would be required to identify themselves to the Commission, of aggregate transactions during any 24-hour period that equals or exceeds either 100,000 shares or fair market value of $4,000,000, or any transactions that constitute program trading. See 1991 Proposal, 56 FR at 42551. Commenters expressed concerns about the initial proposal, including about the definition of large trader, the identifying activity level, the duty to supervise compliance, its costs, as well as various technical aspects of reporting. See Securities Exchange Act Release No. 33608 (February 9, 1994), 59 FR 7917 (February 17, 1994) (S7-24-91) (“1994 Reproposal”). In 1994, the Commission again proposed a large trader reporting system which, among other things, included an increased “identifying activity level” of aggregate transactions in publicly traded securities effected during a calendar day where the account is located that are equal to or greater than the lesser of 200,000 shares and fair market value of $2,000,000 or fair market value of $10,000,000. See 1994 Reproposal.

20 See 17 CFR 240.17a-25. Rule 17a-25 requires submission of the same standard customer and proprietary transaction information that SROs request in connection with their market surveillance and enforcement inquiries. For a proprietary transaction, the broker-dealer must include the following information: (1) clearing house number or alpha symbol used by the broker-dealer submitting the information; (2) clearing house number(s) or alpha symbol(s) of the broker-dealer(s) on the opposite side to the trade; (3) identifying symbol assigned to the security; (4) date transaction was executed; (5) number of shares, or quantity of bonds or options contracts, for each specific transaction; whether each transaction was a purchase, sale, or short sale; and, if an options contract, whether open long or short or close long or short; (6) transaction price; (7) account number; (8) identity of the exchange or market where each transaction was executed; (9) prime broker identifier; (10) average price account identifier; and (11) the identifier assigned to

11

system to take into account evolving trading strategies used primarily by institutional and

professional traders. Specifically, the rule requires broker-dealers to supply three additional data

elements (beyond what was required under Exchange Act Rules 17a-3 and 17a-4) – namely,

prime brokerage identifiers,21 average price account identifiers,22 and depository institution

identifiers23 – to assist the Commission in aggregating securities transactions by entities trading

through multiple accounts at more than one broker-dealer.24 Finally, the rule requires broker-

dealers to update their contact person information to provide the Commission with up-to-date

information necessary for the Commission to direct EBS requests to the appropriate staff.25

C.

the account by a depository institution. For customer transactions, the broker-dealer also is required to include the customer’s name, customer’s tax identification number, customer’s address(es), branch office number, registered representative number, whether the order was solicited or unsolicited, and the date the account was opened. If the transaction was effected for a customer of another member, broker, or dealer, the broker-dealer must include information on whether the other party was acting as principal or agent on the transaction.

The Need for Large Trader Reporting

21 The Commission requires prime brokerage identifiers to avoid double-counting of transactions where EBS submissions reflect the same trade by both the executing broker-dealer and the broker-dealer acting as the prime broker. See Rule 17a-25 Release, supra note 19, 66 FR at 35838.

22 Some broker-dealers use “average price accounts” as a mechanism to buy or sell large amounts of a given security for their customers. Under this arrangement, a broker-dealer’s average price account may buy or sell a security in small increments throughout a trading session and then transfer the accumulated long or short position to one or more accounts for an average price or volume-weighted average price after the market close. Similar to prime brokerage identifiers, the Commission requires average price account identifiers to avoid double-counting where the EBS submission reflects the same transaction for both the firm’s average price account and the accounts receiving positions from the average price account. See Rule 17a-25 Release, supra note 19, 66 FR at 35838-39.

23 The inclusion of a depository identifier in EBS reports was designed to expedite the Commission’s efforts to aggregate trading when conducting complex trading reconstructions. See Rule 17a-25 Release, supra note 19, 66 FR at 35839.

24 See 17 CFR 240.17a-25(b). 25 This provision was designed to address the recurring problem of frequent staff turnover and re-

organizations at broker-dealers to ensure the Commission directs EBS requests to the appropriate personnel. See Rule 17a-25 Release, supra note 19, 66 FR at 35839.

12

While Rule 17a-25 enhanced the Commission’s EBS system and improved the

Commission’s ability to obtain electronic transaction records, it is insufficient to accomplish the

objectives of Section 13(h) of the Exchange Act and is inadequate with respect to the

Commission’s efforts to monitor the impact of large trader activity on the securities markets.26

Most importantly, the data gathered by the EBS system does not include information on

the time of the trade or the identity of the trader.

The limitations of the current EBS system also inhibit the usefulness of EBS data in the conduct

of the Commission’s investigative and enforcement activities.

27 While the Commission may be able to use

price as a proxy for execution time when reconstructing trading history in a particular security

when, in limited cases, the trading therein is characterized by a generally unidirectional trend in

price, such analysis does not necessarily produce accurate results, is resource intensive, and

hinders the Commission’s ability to promptly analyze data.28 Further, information to identify

each large trader in a uniform manner across markets is necessary to permit the Commission to

fully track and analyze large trader activity, especially with respect to large traders that trade

through multiple accounts at multiple broker-dealers or trade using direct market access

arrangements.29

26 See 15 U.S.C. 78m(h)(1).

27 As noted above, the Commission has proposed to establish a consolidated audit trail for equities and options that would collect and consolidate detailed information about orders entered and trades executed on any exchange or in the over-the-counter market. See CAT Proposal, supra note 2. The large trader reporting requirements we are adopting today are designed to address the near-term need for access to more information about large traders and their activities.

28 In addition, Rule 17a-25 does not require EBS data to be available for reporting to the Commission on a next-day basis, and therefore the Commission may face delays when obtaining transaction data.

29 The Commission has separately adopted a rule that addresses direct market access to exchanges and alternative trading systems (“ATSs”). See Securities and Exchange Act Release Nos. 63241 (November 3, 2010), 75 FR 69792 (November 15, 2010) (File No. S7-03-10) (final rule) and 61379 (January 26, 2010), 75 FR 4713 (January 29, 2010) (proposed rule).

13

The Commission believes that the Rule is necessary because, as noted above, large

traders appear to be playing an increasingly prominent role in the securities markets. For

example, market observers have offered a wide range of estimates for the percent of overall

volume attributable to one potential subcategory of large trader – high frequency traders – which

is typically estimated at 50% or higher of total volume.30

As the events of May 6, 2010 demonstrated, the reconstruction of trading activity during

an extremely active trading day in our high-speed, diverse, and complex markets can involve an

enormous undertaking to collect uniform data and analyze thousands of products, millions of

trades, and hundreds of millions (and perhaps even billions) of data points.

The large trader reporting

requirements will provide the Commission a mechanism for obtaining the information necessary

to reliably identify the most significant of these market participants and promptly and efficiently

obtain information on their trading on a market-wide basis.

31

This release first gives a general description of Rule 13h-1 as adopted and then discusses

the specific provisions of the Rule and the accompanying Form 13H on which large traders will

self-identify to the Commission. It then discusses the recordkeeping, reporting, and monitoring

responsibilities applicable to registered broker-dealers under the Rule. The release highlights

While the large

trader reporting requirements will not be a panacea for the challenges facing the Commission in

its oversight of the markets, it represents an important enhancement to the Commission’s

capabilities to uniformly identify large traders and quickly obtain information on their trading

activity in a manner that can be implemented expeditiously by leveraging an existing reporting

system.

30 See supra note 8 (discussing analyst estimates of high frequency trader activity). 31 See supra note 11 (citing from the Report of the Staffs of the CFTC and SEC to the Joint

Advisory Committee on Emerging Regulatory Issues, May 18, 2010).

14

various comments received and outlines the modifications made to the Rule and Form 13H from

the Proposing Release in light of these comments.

D.

Separately from this rulemaking, the Commission has also proposed to establish a

consolidated audit trail for equities and options that would capture customer and order event

information for most orders in NMS securities across all markets, from time of order inception

through routing, cancellation, modification, or execution.

Relation to Consolidated Audit Trail Proposal

32

The recordkeeping and reporting provisions of Rule 13h-1 are based substantially on

existing Rule 17a-25 and the Commission’s current EBS system, and therefore can be

implemented more expeditiously and at less cost than the consolidated audit trail proposal. In

particular, the large trader reporting requirements would involve an enhancement to the existing

EBS system for broker-dealers to add two new data fields (i.e., LTID and execution time of the

trade) and require that transaction records be available for reporting on a next-day basis. In

addition, the large trader reporting requirements would involve a new web-based form (Form

13H) that large traders would file and update to identify themselves to the Commission.

Accordingly, through relatively modest steps, the large trader reporting requirements will

address the Commission’s near-term need for access to more information about large traders and

their trading activities and begin to improve the Commission’s ability to analyze such

information. In contrast, the consolidated audit trail, if adopted, would require the development

For the reasons described below, the

large trader requirements adopted today, while important, are much more limited in terms of

their scope, objectives, and implementation burden than the consolidated audit trail system that is

still under consideration by the Commission.

32 See CAT Proposal, supra note 2.

15

over a longer time frame of significant technology systems to collect and consolidate more

extensive information regarding orders, trades, and customers in a uniform manner across all

markets and other execution venues.

In addition, key aspects of the large trader reporting requirements adopted today are not

addressed by, and would continue to be necessary upon any adoption of, a consolidated audit

trail. In particular, Rule 13h-1 requires large traders to self-identify to the Commission by filing

Form 13H, obtain a unique LTID, and provide that LTID to their broker-dealers. As noted

above, this requirement will assist the Commission in efficiently identifying and obtaining

trading and other information on market participants that conduct a substantial amount of trading

activity. Further, these requirements are compatible with, rather than duplicative of, the

Commission’s proposed consolidated audit trail. Indeed, by incorporating the LTID information

into the data elements that would be reported through the consolidated audit trail, the large trader

requirements adopted today will ultimately enrich the data that would be available for regulatory

purposes through the proposed consolidated audit trail system.

The Commission recognizes the concerns of some commenters that unnecessary overlap

or duplication between large trader reporting requirements and a consolidated audit trail could

result in additional costs and other burdens for market participants.33

Although for the reasons

described above the Commission believes that adoption of the large trader rule is appropriate at

this time, it expects to take these concerns into account in considering the scope and

requirements of any consolidated audit trail.

33 See, e.g., Managed Funds Association Letter and Wellington Management Letter.

16

III.

The large trader reporting requirements have two primary components: (1) registration of

large traders with the Commission; and (2) recordkeeping, reporting, and monitoring duties

imposed on registered broker-dealers that service large trader customers. First, large traders

must register with the Commission by filing and periodically updating Form 13H on which they

will provide contact information and report general information concerning their business,

regulatory status, affiliates, governance, and broker-dealers. Upon receipt of an initial Form

13H, the Commission will assign and issue to a large trader a unique LTID. The large trader

must disclose its LTID to all of its broker-dealers and must highlight to each such broker-dealer

all accounts to which the LTID applies. Second, registered broker-dealers must: (1) maintain

specified records of transactions effected by or through accounts of large traders as well as

Unidentified Large Traders;

Description of Adopted Rule and Form

34

A.

(2) electronically report all transactions by such persons to the

Commission upon request utilizing the existing EBS infrastructure; and (3) perform a limited

monitoring function to promote awareness of and foster compliance with the Rule. The specific

requirements applicable to large traders and registered broker-dealers are discussed in detail

below.

1.

Large Traders

Rule 13h-1(a)(1) defines a “large trader” as “any person that: (i) directly or indirectly,

including through other persons controlled by such person, exercises investment discretion over

one or more accounts and effects transactions for the purchase or sale of any NMS security for or

on behalf of such accounts, by or through one or more registered broker-dealers, in an aggregate

Large Trader Status

34 See new Rule 13h-1(a)(9) (defining the term “Unidentified Large Trader”) and discussion infra at

Section III.B.

17

amount equal to or greater than the identifying activity level; or (ii) voluntarily registers as a

large trader by filing electronically with the Commission Form 13H.” This definition is

substantially the same as the proposed definition of the term but, as discussed below, takes into

account comments received on that proposed definition.

a.

The definition of large trader is designed to focus on the ultimate parent company of an

entity or entities that employ or otherwise control the individuals that exercise investment

discretion. Accordingly, the definition of large trader, in conjunction with the provision that

allows the parent company to comply with the self-identification requirement on behalf of its

subsidiaries,

Who Should Register as a Large Trader?

35

The Commission received several comments relating to the proposed scope of the term

large trader.

is intended to allow the Commission to gather information about the primary

institutions that conduct a large trading business while at the same time mitigating the burden of

the Rule by focusing the filing requirement on persons and entities that control large traders.

36 The various components of the definition of large trader, and the comments

received about them, are discussed below. In addition, one commenter questioned whether the

Rule would violate the Fourth and Fifth Amendments of the U.S. Constitution.37 The

Commission believes that the Rule does not infringe upon these rights.38

35 The rule, however, also permits compliance by a controlled person. See new Rule 13h-

1(b)(3)(ii), which is discussed infra at Section III.A.2.a.

i. 36 See, e.g., SIFMA Letter at 7; American Benefits Council Letter at 2-3; and Financial Engines

Letter at 2-4. 37 See Harris Letter. 38 The United States Court of Appeals for the District of Columbia Circuit has found that disclosure

to the Commission does not constitute a regulatory taking. See Full Value Advisors LLC v. SEC, 633 F.3d 1101, 2011 WL 339210 (D.C. Cir. February 4, 2011). The Commission believes that the same reasoning applies in the case of Rule 13h-1. The Commission also, to the extent permissible under the federal securities laws, holds and treats as confidential certain legally-protected proprietary information that it receives in connection with its regulatory activities.

18

i.

A large trader is any person that “directly or indirectly, including through other persons

controlled by such person, exercises investment discretion over one or more accounts…”

Persons Who Exercise Investment Discretion

39 Rule

13h-1(a)(4) provides that the term “investment discretion” has “the same meaning as in Section

3(a)(35) of the Securities Exchange Act of 1934.” One commenter objected to this definition,

asserting that the definition under the Exchange Act is “fraught with ambiguities” and therefore

would be unhelpful in “deciphering investment relationships.”40 The commenter offered no

alternative definition, but asked for clarification regarding what is meant by “exercising

investment discretion.” The definition of “investment discretion” in Section 3(a)(35) of the

Exchange Act encompasses a person who is “authorized to determine what securities or other

property shall be purchased or sold by or for the account” as well as a person that “makes

decisions as to what securities or other property shall be purchased or sold by or for the account

even though some other person may have responsibility for such investment decisions….”41

Further, the Commission believes that Rule 13h-1 is an appropriate exercise of its regulatory authority and does not violate the Fourth Amendment.

Rule 13h-1(a)(4) further specifies that a “person’s employees who exercise investment discretion

within the scope of their employment are deemed to do so on behalf of such person.” To the

extent that an entity employs a natural person that individually, or collectively with others, meets

39 See new Rule 13h-1(a)(1). 40 See SIFMA Letter at 17, n.23. 41 15 U.S.C. 78c(a)(35). See also Rule 13h-1(a)(3) (defining control the term “control” to mean

“the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of securities, by contract, or otherwise. For purposes of this rule only, any person that directly or indirectly has the right to vote or direct the vote of 25% or more of a class of voting securities of an entity or has the power to sell or direct the sale of 25% or more of a class of voting securities of such entity, or in the case of a partnership, has the right to receive, upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that entity”).

19

the definition of a “large trader,” then, for purposes of Rule 13h-1, the entity that controls that

person or those persons would be a large trader.

One commenter recommended excluding regulated investment companies and pension

fund managers from the definition of large trader.42

ii.

The Commission notes that an investment

company is a legal structure for the management of pooled assets by an investment adviser. As

such, the investment adviser exercises investment discretion over the assets of the investment

company. Accordingly, the Commission believes that the requested exclusion for regulated

investment companies is not necessary because an investment adviser to an investment company,

like a pension manager to a pension fund, is the entity that exercises investment discretion either

solely or in connection with other investment managers. The large trader reporting requirements

are designed to collect information about important market participants that exercise investment

discretion. Accordingly, the Commission is not adopting the suggested exclusion for pension

fund managers because it would undermine the purposes of the large trader reporting

requirements. The Commission is adopting the definition of investment discretion substantially

as proposed.

As noted above, the definition of large trader is designed to focus on the ultimate parent

company of an entity or entities that employ or otherwise control the individuals that exercise

investment discretion. A number of commenters recommended limiting the application of the

Rule to include as large traders only those entities that directly exercise investment discretion.

Parent Company Level Registration

43

42 See SIFMA Letter at 18.

43 See Financial Information Forum Letter at 5; Managed Funds Association Letter at 3; T. Rowe Price Letter at 2; and SIFMA Letter at 9.

20

These commenters also raised a number of concerns with the proposal’s focus on placing the

filing requirement at the parent company level.

After considering the comments received, the Commission has determined to adopt the

scope of the large trader identification requirement substantially as proposed. While the Rule’s

broader focus on identification at the parent company level may provide less detailed

information on the activity of individual traders within a large trader complex,44

Some commenters noted that parent companies of financial services organizations often

do not take part in the day-to-day activities of their subsidiaries and, as a result, employees of

those parent companies are not knowledgeable about the trading activities of their subsidiaries

and would not be able, for example, to readily respond to any follow-up questions from the

Commission.

it nevertheless

will facilitate the Commission’s ability to collect data on the full extent of trading by persons and

entities under common control. The Commission also notes that, in addition to promoting the

Commission’s regulatory and enforcement responsibilities, the large trader reporting

requirements also are intended to facilitate the reconstruction of market events using transaction

data. To that end, parent company-level aggregation should enhance the Commission’s ability to

reconstruct trading by significant market participants by providing the Commission with access

to a broad set of useful data.

45

44 For purposes of the large trader reporting rule, references to the “large trader complex” is

intended to refer to all entities under the control of the large trader parent company.

The Commission notes that, to determine whether a parent company is a large

trader, the aggregate trading activity of all entities controlled by the parent company must be

collected. Controlled entities need produce only aggregated statistics in summary form, which

would be added together at the parent level to determine whether the identifying activity level

45 See, e.g., Prudential Letter at 3.

21

has been met. If it has, then the parent company is a large trader and will be required to provide

information about itself and its affiliates, unless all of its affiliates comply on its behalf pursuant

to Rule 13h-1(b)(3)(ii). Further, the Commission believes that the additional identifying

information requested on Form 13H could most easily be collected by a parent company

employee from the entities controlled by the parent company. The Commission expects that

communication of the basic information required by the Form, as well as aggregate securities

transactions to determine whether the identifying activity threshold has been met, between a

parent company and the entities that it controls should not be burdensome and should not require

the development of new integrated trading systems. To the extent a parent company is unaware

of its subsidiaries’ aggregate transaction levels and other basic identifying information, the

Commission believes that implementing control systems to capture such information will be

consistent with appropriate risk management considerations.

One commenter expressed concern that the filing by a parent company of a Form 13H on

behalf of its subsidiaries may give the impression that its firewalls are weak.46 The Commission

does not believe a parent company’s duty to determine whether it is a large trader based on

aggregated statistics that summarize the trading activity of its subsidiaries should violate or

undermine the effectiveness of existing firewalls. The Rule only requires that a parent company

aggregate and consider daily and monthly share volume and dollar value of certain transactions

in NMS securities effected by the persons it controls. The Rule does not require the disclosure of

any particular transaction information (e.g.

46 See Prudential Letter at 3.

, the identity of or additional information on the

securities bought or sold). Rather, persons need only produce a total figure of the relevant

transactions for which they exercised investment discretion. The parent company would then

22

aggregate together those figures when measuring its overall activity against the applicable

trading activity threshold.

A.

Some commenters questioned the utility of the information that would be collected if

large traders were identified at the parent company level, including whether grouping together

persons who make trading decisions independently of each other would cloud the Commission’s

view when investigating for certain trading behavior, such as manipulation.

Use of LTID Suffixes

47 As an alternative,

some commenters suggested that the Rule permit, but not compel, identification at the parent

company level.48 Another commenter suggested eliminating the requirement that an LTID be

affixed to the trades of affiliates that do not independently qualify as large traders.49 With

respect to the concern about the Commission’s ability to identify trading activity within a large

trader with more particularity, as discussed further below,50

47 See, e.g., Prudential Letter at 2 and Investment Adviser Association Letter at 4.

Item 4(d) of Form 13H permits a

large trader to assign LTID suffixes to sub-identify persons, divisions, groups, and entities under

its control. For example, a large trader may choose to assign a suffix to each independent

division within the large trader. Use of suffixes to identify various sub-groups within a large

trader could facilitate a large trader’s ability to accurately and efficiently track with more

particularity the trading for which it exercises investment discretion, and as a consequence, could

facilitate the ability of a large trader to respond to any Commission request to further identify

accounts or disaggregate trading data, as discussed below. To the extent large traders utilize

LTID suffixes, the need for the Commission to contact large traders for assistance in further

48 See Investment Company Institute Letter at 6 and Prudential Letter at 3. 49 See Investment Adviser Association Letter at 5. 50 See infra Section III.A.3.d.

23

identifying their accounts should be diminished. Accordingly, the Commission encourages large

traders to utilize LTID suffixes.

The Commission notes that, ultimately, the information limitation identified by

commenters may be addressed by the Commission’s separate rulemaking for a consolidated audit

trail which, if adopted as proposed, would require collection of information about the person

with investment discretion for each order as well as information to identify the beneficial owner

for each order.51

B.

In the meantime, allowing a parent company to comply on behalf of related

entities should provide the Commission with important information at lower cost to the industry,

by reducing the complexity and burdens of the large trader reporting requirements – such as

those proposed by the Commission during the 1990s – that could have required reporting at

multiple levels within a control group. At the same time, this provision addresses the

Commission’s near-term need for access to more information about large traders and their

trading activities, which will enable the Commission to more efficiently analyze market events.

With respect to which persons under a parent company’s control should be considered in

determining the parent company’s large trader status, Rule 13h-1(a)(3) defines “control” (and the

terms “controlling,” “controlled by,” and “under common control with”) as “the possession,

direct or indirect, of the power to direct or cause the direction of the management and policies of

a person, whether through the ownership of securities, by contract, or otherwise. For purposes of

this rule only, any person that directly or indirectly has the right to vote or direct the vote of 25%

or more of a class of voting securities of an entity or has the power to sell or direct the sale of

25% or more of a class of voting securities of such entity, or in the case of a partnership, has the

Control and Minority-Owned Entities

51 See CAT Proposal, supra note 2, 75 FR at 32572.

24

right to receive, upon dissolution, or has contributed, 25% or more of the capital, is presumed to

control that entity.”

One commenter stated that including minority-owned entities would be problematic

because it may be difficult for a large trader to obtain the information from a minority-owned

entity that would be necessary for it to complete Form 13H.52 Furthermore, according to this

commenter, the minority-owned entity may resist attaching the large trader’s LTID to its

trades.53 Another commenter suggested attributing to a large trader only the activity of majority-

owned entities that are actual operating subsidiaries, and not attributing the activity of more

remote, partially-owned entities.54

52 See Prudential Letter at 3. The Commission notes that proposed Form 13H would have required

a large trader to identify its accounts and disclose for each account the LTID of any unaffiliated large trader with whom it shares investment discretion. As discussed below, the Commission has not adopted the provisions in the Form relating to the identification of accounts, and, as a consequence, a large trader would not need to obtain the LTID of any unaffiliated large trader for purposes of completing the Form.

After considering the comments received, the Commission

has decided to adopt as proposed the definition of control solely for purposes of this Rule. In

particular, the Commission continues to believe that a minority shareholder holding at least 25%

of the ownership interests of an entity would be in a position to exercise the influence necessary

to secure that entity’s cooperation in facilitating a large trader’s compliance with the federal

securities laws, especially given that all that this entails for the controlled entity would be

providing its registered broker-dealers with the large trader’s LTID and the accounts to which it

applies. In addition, if the controlled entity refuses to cooperate, the large trader itself may be

able to notify the broker-dealer of its LTID. The Commission also continues to believe that the

definition of control is appropriate and will allow the Commission to identify, and obtain trading

53 See Prudential Letter at 3. 54 See SIFMA Letter at 18.

25

data from, controlled persons for whom a large trader is in a position to materially influence the

investment decisions made by such person.55

b.

Rule 13h-1(a)(7) defines the term “identifying activity level” as “aggregate transactions

in NMS securities that are equal to or greater than: (1) during a calendar day, either two million

shares or shares with a fair market value of $20 million; or (2) during a calendar month, either

twenty million shares or shares with a fair market value of $200 million.” One commenter

expressly supported these threshold levels.

Identifying Activity Level

56 Another commenter recommended increasing the

daily threshold limit to shares with a fair market value of $100 million during any calendar

day.57 Others advocated increased thresholds, but did not identify a particular level or provide

empirical support for their recommendations.58

Some commenters thought that the proposed identifying activity level would capture

infrequent traders, who they believe should not attract regulatory interest under a large trader

reporting rule.

59

55 The Commission considered other thresholds for control and determined that a 25% threshold

would be the appropriate level for purposes of new Rule 13h-1. As discussed in the Proposing Release, the Commission notes that the definition of control is similar to the definition of control contained in Form 1 (Application for Registration or Exemption from Registration as a National Securities Exchange). See Proposing Release, supra note

The Commission notes that nothing in Section 13(h) of the Exchange Act

suggests that the Commission should focus its attention only on those large traders that are

frequent traders. The statute permits the Commission to monitor the impact on the securities

3, 75 FR at 24161. Cf. Rule 19h-1(f)(2) under the Exchange Act, 17 CFR 240.19h-1(f)(2) (featuring a 10% threshold with respect to the right to vote 10% or more of the voting securities or receive 10% or more of the net profits).

56 See T. Rowe Price Letter at 2. 57 See Financial Engines Letter at 7. 58 See, e.g., Managed Funds Association Letter at 2. 59 See Investment Adviser Association Letter at 10; Howard Hughes Medical Institute Letter at 1;

Managed Funds Association Letter at 2; and SIFMA Letter at 8.

26

markets of securities transactions involving a substantial volume or a large fair market value or

exercise value. While frequency of trading is one factor that the Commission considered in

defining who is a large trader, it was not the only factor. In explaining why it proposed to

exclude certain transactions, the Commission stated that the proposed exclusions were designed

to exclude certain small and otherwise infrequent traders from the definition of a large trader, but

also stated: “the proposed excepted transactions are not effected with an intent that is commonly

associated with an arm’s length purchase or sale of securities in the secondary market and

therefore do not fall within the types of transactions that are characterized by the exercise of

investment discretion.”60

The Commission continues to believe that the identifying activity level is appropriate

because it will identify large traders that engage in a substantial amount of trading activity

relative to overall market volume – specifically, approximately 0.01% of the daily volume and

market value of trading in NMS securities.

To the extent that a market participant trades only infrequently, but

does so in large volume in the course of exercising investment discretion, the Commission seeks

to identify that participant as a large trader. Nevertheless, the Commission recognizes the filing

burden that could be placed on a trader whose activity only on very rare occasions meets the

identifying activity threshold. These persons may be eligible for Inactive Status, a concept

which is discussed below.

61

60 See Proposing Release, supra note

Moreover, as discussed below, Inactive Status is

available for large traders whose trading activity reaches the identifying activity level

infrequently.

3, 75 FR at 21463. 61 See Proposing Release, supra note 3, 75 FR 21463-64. An “NMS security” is “any security or

class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.” 17 CFR 242.600(b)(46). The term refers generally to exchange-listed securities, including equities and options.

27

Transactions Counted Towards the Identifying Activity Level. As proposed, Rule 13h-

1(a)(6) defined the term “transactions” as “all transactions in NMS securities, including exercises

or assignments of option contracts,” except for certain specifically enumerated transactions.62

To more closely align this definition with the aggregation provisions contained in paragraph (c)

of the Rule, the Commission is adopting a revised definition that provides that the term

“transaction” means “all transactions in NMS securities, excluding exercises or assignments of

option contracts,” except for certain specifically enumerated transactions.63

62 Specifically, under the proposal, the following would not be counted as “transactions” for

purposes of the proposed Rule: (i) any journal or bookkeeping entry made to an account in order to record or memorialize the receipt or delivery of funds or securities pursuant to the settlement of a transaction; (ii) 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, provided, however, that this exemption shall not include an offering of securities effected through the facilities of a national securities exchange; (iii) any transaction that constitutes a gift; (iv) any transaction effected by a court appointed executor, administrator, or fiduciary pursuant to the distribution of a decedent’s estate; (v) any transaction effected pursuant to a court order or judgment; (vi) any transaction effected pursuant to a rollover of qualified plan or trust assets subject to Section 402(a)(5) of the Internal Revenue Code; or (vii) any transaction between an employer and its employees effected pursuant to the award, allocation, sale, grant, or exercise of a NMS security, option or other right to acquire securities at a pre-established price pursuant to a plan which is primarily for the purpose of an issuer benefit plan or compensatory arrangement.

As noted in the

Proposing Release, for purposes of the identifying activity level with respect to options, only

purchases and sales of the options themselves, and not transactions in the underlying securities

pursuant to exercises or assignments of such options, need to be counted. However, for purposes of

the identifying activity level, the volume and value of options purchased or sold would be determined

63 As noted in the Proposing Release, the aggregation provisions in paragraph (c) are designed to require market participants to use a “gross up” approach in calculating their activity levels. Accordingly, offsetting or netting transactions among or within accounts, even for hedged positions, would be added to a participant’s activity level in order to show the full extent of a trader’s purchase and sale activity. This approach reflects the fact that substantial trading activity has the potential to impact the market regardless of the trader’s net position. See Proposing Release, supra note 3, 75 FR at 21464.

28

by reference to the securities underlying the option.64 Thus, the Rule is intended to focus on the

trading of options and the potential impact of those options positions on the underlying markets. By

excluding purchases and sales pursuant to exercises or assignments, the Rule avoids double-counting

towards the applicable identification threshold. The revised definition of “transaction” more closely

aligns it with the explanation of the aggregation provision applicable to options provided in the

Proposing Release. The Commission believes that the definition as adopted is consistent with

Section 13(h)(1) of the Exchange Act, and will advance its stated goals, including “monitoring

the impact on the securities markets of securities transactions involving a substantial volume or a

large fair market value or exercise value….”65

In addition, the Commission received comments on the enumerated exclusions from the

term “transaction.”

66 As indicated in the Proposing Release, the proposed exceptions from the

term “transaction” were designed to exclude certain transactions from the identifying activity

level calculation because they are not effected with an intent that is commonly associated with

the arm’s-length trading of securities in the secondary market and therefore do not fall within the

types of transactions that are characterized by the exercise of investment discretion.67

64 See id. For example, 50,000 shares of XYZ stock and 500 XYZ call options would count as

aggregate transactions of 100,000 shares in XYZ (i.e., 50,000 + 500 x 100 = 100,000). With respect to index options, the market value would be computed by multiplying the number of contracts purchased or sold by the market price of the options and the applicable multiplier. For example, if ABC Index has a multiplier of 100, a person who purchased 200 ABC call options for $400 would have effected aggregate transaction of $8 million (i.e., 200 x 400 x 100 = $8,000,000). Transactions in index options are not required to be “burst” into share equivalents for each of the underlying component equities.

One

65 See 15 U.S.C. 78m(h)(1). 66 See, e.g., American Benefits Council Letter; Financial Engines Letter; Howard Hughes Medical

Institute Letter; and SIFMA Letter. 67 See Proposing Release, supra note 3, 75 FR at 21463 (“The proposed exclusions are designed to

exempt certain small and otherwise infrequent traders from the definition of a large trader as well as activity that is not characterized by active investment discretion or is associated with capital raising or employee compensation. Specifically, the Commission preliminarily believes that the proposed excepted transactions are not effected with an intent that is commonly associated with

29

commenter requested that the Commission allow registered broker-dealers to include the

excluded transactions when reporting transaction data to the Commission pursuant to Rule 13h-

1(e).68

an arm’s-length purchase or sale of securities in the secondary market and therefore do not fall within the types of transactions that are characterized by the exercise of investment discretion. While a large enough one-time transaction in the proposed categories could have an impact on the market, the Commission would be able to obtain information on that trade through other means, including the EBS system. The Commission preliminarily believes that the benefit to the Commission of identifying such person as a large trader solely through one of the enumerated excepted transactions would not be justified by the costs that would be imposed on the person and their registered broker-dealer that accompany meeting the definition of large trader.”)

The commenter explained that registered broker-dealers’ existing infrastructure may not

collect sufficient data to allow the broker-dealer to exclude excepted transactions when reporting

transaction data to the Commission. In response to this comment, the Commission is adopting a

definition of “transaction” in the Rule to reflect its limited application, as discussed in the

Proposing Release. Specifically, to underscore that the enumerated transactions are excluded

from the definition of transaction only for the purpose of determining who is a large trader, the

Commission is adopting the introductory portion of the second sentence of Rule 13h-1(a)(6) to

provide that: “The term transaction or transactions means all transactions in NMS securities,

including exercises or assignments of option contracts. For the sole purpose of determining

whether a person is a large trader, the following transactions are excluded from this

definition….” Accordingly, a person need not count trading activity that falls within one of the

listed categories of excluded transactions when it determines whether it meets the applicable

identifying activity threshold. However, in response to a Commission request for data, a broker-

dealer must report all transactions that it effected through the accounts of a large trader without

excluding any transactions listed in Rule 13h-1(a)(6).

68 See Financial Information Forum Letter at 3.

30

In the Proposing Release, the Commission requested comment about whether any of the

proposed exclusions from the definition of transaction should be eliminated or whether any other

types of transactions should be excluded.69 While no commenter recommended eliminating any

of the excluded transactions, several commenters suggested the Commission consider additional

exclusions. For example, some commenters suggested excluding all or some transactions

effected on behalf of defined contribution plans.70 The Commission does not believe that a

blanket exclusion for transactions effected on behalf of defined contribution plans is warranted

because such trades are effected through the exercise of investment discretion and are within the

scope of activity contemplated by the statute. Instead, the Commission believes it is appropriate

to provide additional guidance regarding the application of the Rule to transactions effected on

behalf of defined contribution plans. As highlighted by commenters, investment discretion may

be exercised on behalf of defined contribution plans differently, depending on the particular

structure of the plan. For example, in some defined contribution plans, participants select their

own investments from among the choices offered by their employer.71


A trustee then effects the

transactions pursuant to the instructions it receives from the plan participants. For purposes of

determining who is a large trader, the participants in such plans are the ones who exercise

investment discretion over the transactions that are effected on their behalf. In such plans, the

Commission does not view the trustee as exercising investment discretion over the transactions

3, 75 FR at 21472. 70 See Financial Engines Letter at 7 and American Benefits Council Letter at 2 (suggesting

exempting significant repositioning of portfolio balances by very large defined benefit plans; investment lineup changes by defined contribution retirement plan sponsors; and plan activity in connection with acquisitions and divestitures of businesses which may precipitate a large movement of participants out of a plan).

71 See American Benefits Council Letter at 2.

31

for purposes of the Rule.72 Additionally, solely for purposes of determining who is a large trader

pursuant to Rule 13h-1, the Commission considers an employer to not exercise investment

discretion merely by establishing investment options for its employees. Other types of defined

contribution plans may be structured differently.73

Another commenter requested clarification that only the trustee of a retirement plan, not

the plan sponsor and other parties involved in plan administration, must self-identify as a large

trader.

74

One commenter argued for broadly excluding transactions associated with corporate

actions, including mergers and acquisitions and other purchases of assets, self-tenders, buybacks

(including Rule 10b-18 buybacks), and certain internal corporate actions (such as journals

between accounts within the same entity where there is no change in the beneficial owners).

As discussed above, the Rule requires the person who exercises investment discretion

over a certain level of transactions to identify as the large trader, which may be the trustee but

would generally not be the plan sponsor or administrator if neither exercises investment

discretion.

75

72 The Commission expects that few individual defined contribution plan participants will effect

aggregate transactions greater than or equal to the identifying activity level, and the Commission therefore expects that generally they will not meet the definition of large trader.

The commenter also recommended excluding stock loans, equity repurchases, and in-kind

creations of exchange-traded funds (“ETFs”). As discussed below, the Commission agrees that

73 The Commission notes that, pursuant to Section 13(h)(6) of the Exchange Act and new Rule 13h-1, the Commission may by order exempt, upon specified terms and conditions or for stated periods, any person or class of persons or any transaction or class of transactions from the provisions of this rule to the extent that such exemption is consistent with the purposes of the Exchange Act. See new Rule 13h-1(g), which is discussed infra at Section III.E.

74 See American Benefits Council Letter at 2-3. 75 See SIFMA Letter at 8.

32

many, but not all,76

Consistent with the views outlined in the Proposing Release, the Commission believes

that these additional categories of transactions are effected for materially different reasons than

those commonly associated with the arm’s-length trading of securities in the secondary market

and the associated exercise of investment discretion. For example, transactions to effect a

business combination, as well as an issuer tender offer or other stock buyback by an issuer,

reflect fundamental corporate decision-making that involves matters much broader than those

traditionally associated with trading activity in NMS securities. Such transactions are discrete

corporate actions to effect the acquisition of a business or to manage the extent of the distribution

of an issuer’s securities. Further, stock loan and equity repurchase agreements typically are

entered into to facilitate short sale transactions or as part of a larger financing transaction, and

not as part of an investment decision traditionally associated with trading activity in NMS

securities. Accordingly, the Commission believes it appropriate to not count these transactions

for the purpose of determining whether a person meets the identifying activity level contained in

the definition of large trader.

of the additional categories of transactions identified by the commenter can

be excluded for purposes of determining large trader status. Accordingly, the Commission is

adopting subparagraph (viii) to Rule 13h-1(a)(6), which excludes the following additional

transactions for purposes of calculating the identifying activity level: “any transaction to effect a

business combination, including a reclassification, merger, consolidation, or tender offer subject

to Section 14(d) of the Securities Exchange Act; an issuer tender offer or other stock buyback by

an issuer; or a stock loan or equity repurchase agreement.”

76 For example, the Commission is not making any changes in response to the suggestion of one

commenter to essentially exempt all transactions effected on behalf of organizations dedicated to a charitable purpose. See Howard Hughes Medical Institute Letter. See also infra text accompanying note 255 and the subsequent discussion.

33

For purposes of the identifying activity level for large trader reporting, the Commission

believes that it is appropriate to count transactions effected in the secondary market to assemble,

or dispose of, securities that are transferred between an “authorized participant” and an ETF. An

authorized participant is a trader that, on its own behalf or on behalf of others, presents securities

(or other assets) to an ETF in order to create ETF shares or receives securities (or other assets)

from an ETF in connection with the redemption of ETF shares. Among other reasons,

authorized participants engage in such creations and redemptions to take advantage of arbitrage

opportunities resulting from differences in the market prices of the securities held by the ETF

and the market prices of the ETF shares. The Commission expects that, if authorized

participants are large traders, it will be useful to monitor their secondary market trading and to be

able to access records of their trading activity across broker-dealers. However, the Commission

does not believe that the actual transfer of the basket of securities between an authorized

participant and an ETF should be counted for purposes of large trader reporting. Accordingly,

the Commission will count toward the identifying activity level trading activity in the secondary

market that relates to the acquisition or disposition of securities in connection with, for example,

the creation or redemption of ETF shares, but not the transfer of such securities between an

authorized participant and an ETF.77

c.

77 Specifically, then, in connection with creation or redemption: (1) purchases of securities by an

authorized participant for the purpose of assembling a basket would count toward an authorized participant’s identifying activity level; (2) transfers of those securities by an authorized participant to the ETF would not be counted toward the ETF’s identifying activity level; (3) acquisitions of securities by an authorized participant from the ETF would not count toward the authorized participant’s identifying activity level; and (4) sales of securities by an authorized participant into the secondary market would count toward the authorized participant’s identifying activity level. No transactions effected would be counted toward an ETF’s identifying activity level because the ETF would not be exercising investment discretion by creating or redeeming ETF shares.

Voluntary Registration

34

One commenter suggested that the Commission allow a person to register voluntarily as a

large trader as that person nears the applicable trading activity threshold in order to reduce its

need to actively monitor its trading levels.78

2.

The Commission agrees with the commenter that

the ability to voluntarily register will mitigate the monitoring burden on market participants who

expect to effect transactions equal to or greater than the identifying activity level at some point in

the future. Accordingly, the Commission is adopting: (1) a definition of large trader that

includes those persons who voluntarily register as large traders; and (2) changes to Form 13H to

require a large trader to indicate in its initial filing with the Commission whether it has chosen to

voluntarily register. Any such person that elects to voluntarily file will be treated as a large

trader for purposes of the Rule, and will be subject to all of the obligations of a large trader under

the Rule, notwithstanding the fact that the person had not effected the requisite level of

transactions at the time it registered as a large trader.

Pursuant to Rule 13h-1, a large trader must self-identify by filing Form 13H with the

Commission. In addition, a large trader must disclose its LTID to the registered broker-dealers

effecting transactions on its behalf and identify for them each account to which it applies.

Duties of a Large Trader

a.

Form 13H provides for six types of filings: Initial Filing; Annual Filing; Amended

Filing; Inactive Status; Termination Filing; and Reactivated Status. Each type is discussed

below. As reflected in the instructions to the Form, large traders must file all Forms 13H

through EDGAR,

File Form 13H with the Commission

79 which is being updated to accept these submissions.80

78 See Investment Company Institute Letter at 7.

Accordingly, large

79 One commenter requested that the Commission not require filing of Forms 13H until it has an electronic filing system in place because, while the rule requires electronic filing, the

35

traders will need to have or obtain permission to access and file through EDGAR, and can obtain

the necessary access codes, if they do not already have them, by filing a Form ID (Uniform

Application for Access Codes to File on EDGAR).81

i.

Among other things, large traders will be

given a Central Index Key (“CIK”) number that uniquely identifies each filer and allows them to

submit filings through EDGAR. While Form 13H filings will be processed through the

Commission’s EDGAR system, once filed, the Form 13H filings will not be accessible through

the Commission’s website or otherwise be publicly available.

Except as provided below, each large trader must file a Form 13H “Initial Filing” to

identify itself to the Commission.

Initial Filings – Who Must File?

82

• Holding Company owns a 100% ownership interest in Broker-Dealer and

Investment Adviser. However, as a practical matter, Holding Company is not

engaged in the day-to-day operation of either entity.

In complex organizations, more than one related entity can

qualify as a large trader. Consider the following example:

• Broker-Dealer owns a 33% ownership interest in Proprietary Trading Firm. None

of the firm’s other investors own a controlling interest of 25% or more of the firm,

Commission noted the possibility in the Proposing Release that paper filings might be required for a limited period of time. See T. Rowe Price Letter at 3. See also Proposing Release, supra note 3, 75 FR at 21465, n. 80. The Commission shares the concern expressed by the commenter. Form 13H will be a web-based application and will be submitted through EDGAR, a secure web interface, on the applicable compliance date.

80 See generally 17 CFR 232 (Regulation S-T – General Rules and Regulations for Electronic Filings).

81 An applicant must file Form ID in electronic format via the Commission’s EDGAR Filer Management website. See 17 CFR 232 (Regulation S-T) and the EDGAR Filer Manual for instructions on how to file electronically, including how to use the access codes.

82 See new Rule 13h-1(b)(1).

36

and therefore no LTIDs, other than that of Broker-Dealer, would be attached to

the trades of Proprietary Trading Firm.

• Investment Adviser owns a 100% ownership interest in Sub-Adviser #1 and Sub-

Adviser #2.

• Sub-Adviser #1, on behalf of its clients, exercises investment discretion over

accounts and effects transactions in NMS securities on behalf of those accounts in

an aggregate amount greater than

• Sub-Adviser #2, on behalf of its clients, exercises investment discretion over

accounts and effects transactions in NMS securities on behalf of those accounts in

an aggregate amount

the identifying activity level.

less than

• While engaging in proprietary trading, Broker-Dealer exercises investment

discretion over accounts and effects transactions in NMS securities on behalf of

those accounts in an aggregate amount


greater than

• The Proprietary Trading Firm effects transactions in NMS securities in an

aggregate amount


greater than

All of the identified entities, except Sub-Adviser #2, independently qualify as large traders under

the Rule. Therefore, as discussed below, unless these entities rely on the provisions of Rule 13h-

1(b)(3)(i), each of them must file separate Forms 13H with the Commission.


83

Rule 13h-1(b)(3)(i) provides that a large trader shall not be required to separately comply

with the requirements of paragraph (b) if a person who controls the large trader complies with all

of the requirements under paragraphs (b)(1), (b)(2), and (b)(4) applicable to such large trader

with respect to all of its accounts. This provision allows the identification requirement to be


37

pushed up the corporate hierarchy to the parent entity (i.e.

Conversely, Rule 13h-1(b)(3)(ii) applies the same principle on a “top down” basis,

providing that a large trader shall not be required to comply with the requirements of paragraph

(b) if one or more persons controlled by such large trader collectively comply with all of the

requirements under paragraphs (b)(1), (b)(2), and (b)(4) applicable to such large trader with

respect to all of its accounts. A controlling person of one or more large traders (such as Holding

Company, in the example above) would be required to comply with all of the requirements of

paragraph (b) unless the entities that it controls discharge all of the responsibilities of the

controlling person under paragraph (b). This provision maintains the focus on the parent

company by allowing, for example, a corporate entity to comply on behalf of one or more natural

persons who are its controlling owners. In the above example, if Investment Adviser and

Broker-Dealer separately register as large traders, Holding Company would not have to

separately register as a large trader, assuming that those two entities capture all transactions and

accounts controlled by Holding Company.

, Holding Company, in the example

above).

84

84 In this case, Investment Adviser would be responsible for providing its LTID to each registered

broker-dealer that effects transactions on its behalf, on behalf of Sub-Adviser #1, or on behalf of Sub-Adviser #2. Additionally, Broker-Dealer would be responsible for providing its LTID to each registered broker-dealer that effects transactions on its behalf or on behalf of Proprietary Trading Firm. Further, Investment Adviser would be responsible for identifying each of the accounts to which its LTID applies, which would include the accounts of Sub-Adviser #1, Sub-Adviser #2, and Broker-Dealer would be responsible for identifying each of the accounts to which its LTID applies, which would include the accounts of Proprietary Trading Firm.

Instead, Investment Adviser and Broker-Dealer

would identify (in Item 4(c) of the Form) the other as an affiliate filing separately, and identify

Holding Company as their affiliate’s parent company on their respective Form 13H filings. In

this way, the Commission will be able to tell that the entities are under the common control of

Holding Company, and the Commission could assign LTIDs that reference their common parent.

38

When must an Initial Filing be submitted? A large trader must file a Form 13H Initial

Filing promptly after effecting aggregate transactions equal to or greater than the identifying

activity level.85 The Commission solicited86 and received comments about the Initial Filing

deadline.87 Some commenters requested additional guidance on what constitutes “promptly.”88

One commenter recommended that the Commission specify a 10-day filing deadline.89 In

contrast, another commenter suggested that the Commission define promptly as without delay,

but in no circumstances later than 30 days after the trader qualifies as a large trader.90 Another

commenter assumed that promptly means within 30 days.91 The Commission continues to

believe that “promptly” is an appropriate standard because it emphasizes the need for filings to

be submitted without delay to ensure their timeliness while affording filers a limited degree of

flexibility.92 However, given the requests for additional guidance, the Commission believes that

under normal circumstances, it would be appropriate for Initial Filings (and Reactivated Filings,

discussed below) to be filed within 10 days after the large trader effects aggregate transactions

equal to or greater than the identifying activity level.93


86 See Proposing Release, supra note 3, 75 FR at 21472. 87 See Investment Adviser Association Letter at 9; SIFMA Letter at 18-19; and Investment

Company Institute Letter at 10. 88 See, e.g., Investment Adviser Association Letter at 9 and SIFMA Letter at 18-19. 89 See Investment Adviser Association Letter at 9. 90 See Investment Company Institute Letter at 10. 91 See SIFMA Letter at 18-19. 92 See Securities Exchange Act Release No. 55857 (June 5, 2007), 72 FR 33564, 33567 (June 18,

2007) (in declining to define the term “promptly” as used on Section 15E(b)(1) of the Exchange Act, the Commission stated that whether an amendment is furnished promptly will depend on the facts and circumstances such as the amount of information being updated).

93 The Commission notes that the guidance provided here regarding the “promptly” standard for Form 13H filings is based on the scope of the Form, the expected time to complete the Form, and

39

ii.

All large traders must submit an Annual Filing within 45 days after the end of each full

calendar year,

Annual Filings

94 except that large traders on Inactive Status (discussed below) are not required to

file Form 13H while they are on Inactive Status.95

iii.

If any of the information contained in a Form 13H filing becomes inaccurate for any

reason, a large trader must file an Amended Filing no later than the end of the calendar quarter in

which the information became stale.

Amended Filings

96

iv.

While not required by the Rule, a large trader may

voluntarily file an amended filing more frequently than quarterly at its discretion. A large trader

on “Inactive Status” (described below) is not required to file any Amended Filings while it is on

Inactive Status.

Rule 13h-1(b)(3)(iii) permits a large trader who has not effected aggregate transactions at

any time during the previous full calendar year in an amount equal to or greater than the

identifying activity level to obtain inactive status by filing for “Inactive Status” through a Form

13H submission.

Inactive Status

97

the required submission thereof through EDGAR, and accordingly this guidance is applicable only to Form 13H filings.

Inactive Status would be effective upon such filing.

94 See new Rule 13h-1(b)(1)(ii). 95 See new Rule 13h-1(b)(3)(iii). 96 See new Rule 13h-1(b)(1)(iii). The Commission expects that significantly less information will

need to be inputted for an Amended Filing and the large trader may have a considerable amount of lead time before the end of the calendar quarter to submit the Amended Filing.

97 New Rule 13h-1(b)(3)(iii) provides: “A large trader that has not effected aggregate transactions at any time during the previous full calendar year in an amount equal to or greater than the identifying activity level shall become inactive upon filing a Form 13H and thereafter shall not be required to file Form 13H or disclose its large trader status unless and until its transactions again are equal to or greater than the identifying activity level. A large trader that has ceased operations may elect to become inactive by filing an amended Form 13H to indicate its terminated status.”

40

Inactive status is designed to reduce the burden on infrequent traders who may trip the

threshold on a particular occasion but do not regularly trade at sufficient levels to support

continued status as a large trader. In particular, Inactive Status is designed to minimize the

impact of the Rule on natural persons who infrequently effect transactions of a magnitude that

otherwise warrant the added regulatory requirements under the Rule. Inactive status relieves the

large trader from the requirement to file amended Forms 13H. It also permits the large trader to

request that its broker-dealers stop maintaining records of its transactions by LTID.

The Commission requested comment about whether the proposed provision for Inactive

Status is appropriate and sufficient and whether it should be modified or eliminated.98 The

Commission did not receive any comments regarding Inactive Status.99

v.

The Commission is

adopting this provision, as proposed.

A person on Inactive Status who effects aggregate transactions that are equal to or greater

than the identifying activity threshold must file a “Reactivated Status” Form 13H promptly after

effecting such transactions.

Reactivated Status

100 Upon filing for Reactivated Status, the person once again would

be subject to the filing requirements of Rule 13h-1 and must inform its broker-dealers of its

reactivated status.101


The Commission did not receive any comments regarding Reactivated

3, 75 FR at 21472. 99 One commenter, however, asked about broker-dealers’ duties regarding inactive persons. See

Financial Information Forum Letter at 5; see also infra text accompanying note 167. 100 See new Rule 13h-1(b)(1)(i). In addition, a person may voluntarily elect to file for Reactivated

Status prior to effecting aggregate transactions that are equal to or greater than the identifying activity threshold. As with initial filings, a person may elect to file for Reactivated Status if it did not wish to monitor its trading for purposes of the identifying activity threshold.

101 New Rule 13h-1(b)(2) provides that each large trader shall disclose to the registered broker-dealers effecting transactions on its behalf its large trader identification number and each account to which it applies. Additionally, a large trader on Inactive Status pursuant to paragraph (b)(3) of

41

Status. The Commission is adopting this provision, as proposed. In particular, the provision for

reactivated status is designed to ensure that a large trader on Inactive Status that becomes active

above the identifying activity threshold is once again required to file and update Form 13H and

inform its broker-dealers of the need to record its trading activity by its LTID.

vi.

Under Rule 13h-1(b)(3)(iii), a person, under certain narrow circumstances, may

permanently end its large trader status by submitting a “Termination Filing.” This filing is

designed to allow a large trader to inform the Commission that it has terminated operations, and

therefore there is no chance of it requalifying for large trader status in the future.

Termination Filings

102

The Commission believes it may be helpful to provide additional examples to illustrate

the narrow circumstances under which a large trader may file a “Termination Filing.” These

examples also should provide guidance to large traders on how to amend their Forms 13H when

a large trader is involved in a merger.

Termination

status is designed to signal to the Commission to not expect future amended or annual Form 13H

filings from that large trader, such as when a large trader dissolves, ceases doing business, or, in

some cases, is acquired, as described below.

• Example 1: A large trader merges into another large trader, resulting in only one

entity. The non-surviving large trader would submit a “Termination Filing” that

specifies the effective date of the merger. The surviving large trader, in an

Amended Filing or its next Annual Filing (depending on the effective date of the

merger), would update Item 4 to list the non-surviving company as an affiliate

new Rule 13h-1 must notify broker-dealers promptly after filing for reactivated status with the Commission.

102 By contrast, as described above, Inactive Status may be only temporary.

42

that files separately and provide the additional identifying information required in

Item 4. Specifically, in the Description of Business and Relationship to the Large

Trader fields, the surviving entity would disclose that the non-surviving entity has

been acquired and no longer exists as a separate entity. The non-surviving

company’s market participation identification number (“MPID”) and LTID

number (including suffix, if any) should also be listed. Capture of this

information will allow the Commission to track the control of the non-surviving

entity. In this scenario, the surviving large trader would continue using its LTID.

• Example 2: An existing large trader acquires another large trader and the target is

maintained as a separate subsidiary. Following the acquisition, the target’s

trading would need to be tagged with the acquirer’s LTID. The acquired

subsidiary company may file a Termination Filing so long as all of its trading is

tagged with its new parent’s LTID.103

•

Alternatively, the acquired entity may

maintain its original LTID and have its trading tagged with both its original LTID

and its new parent’s LTID. If a Termination Filing is not made, then both

companies would have to amend Items 4 of their Forms 13H to list the other as an

affiliate and disclose their affiliate’s information, including its MPID and LTID.

Example 3

103 If a Termination Filing is elected, the acquirer may wish to use an LTID suffix to separately

identify the acquired entity’s trading activity.

: A large trader is acquired by a company that was not previously a

large trader. The new parent company is now a “large trader” due to acquiring

control of a large trader. Accordingly, the acquirer would file an “Initial” Form

13H and obtain a new LTID, which would be used to identify all of its trades and

the trades of its affiliates (including its newly acquired large trader subsidiary).

43

The acquired subsidiary company may file a Termination Filing so long as all of

its trading is tagged with its new parent’s LTID.104

The Commission did not receive any comments regarding Termination Filings. The

Commission is adopting this provision, as proposed. In particular, the ability to submit

Termination Filings will allow the Commission to accurately track only active large traders and

will allow large traders that cease operation to formally terminate their filing obligations under

Rule 13h-1.

Alternatively, the acquired

entity may maintain its original LTID and have its trading tagged with both its

original LTID and its new parent’s LTID. If a Termination Filing is not made,

then both companies would have to identify the other as an affiliate in Items 4 of

their Forms 13H.

b.

As proposed, Rule 13h-1(b)(2) would have required a large trader to disclose to the

registered broker-dealers effecting transactions on its behalf its LTID and each account to which

it applies. Second, the provision, as proposed, would have required a large trader to disclose its

LTID to all others with whom it collectively exercises investment discretion. The Commission

received comments about the latter requirement.

Self-Identification to Broker-Dealers

105

Proposed Schedule 6 to the Form would have required a large trader, in connection with

disclosing its brokerage accounts, to also list the LTID(s) of all other large traders that exercise

investment discretion over the particular account. To assure that large traders had access to other

large traders’ LTIDs, the proposed rule would have required large traders to disclose their status

104 If a Termination Filing is elected, the acquirer may wish to use an LTID suffix to separately

identify the acquired entity’s trading activity. 105 See, e.g., Wellington Management Letter at 5.

44

to one another. One commenter requested clarification regarding whether a large trader would

be obligated to identify unaffiliated large traders only if investment discretion is exercised

collectively.106

As discussed below, the Commission is not adopting the requirement to disclose

brokerage account numbers on Form 13H and instead is requiring a large trader to provide a list

of all registered broker-dealers with whom it has an account. Consequently, the requirement to

provide the LTID(s) of all other large traders that exercise investment discretion over the

particular account now is no longer relevant and is not being adopted. Because the requirement

to disclose the information is not being adopted, it would not be necessary for large traders to

inform others of their LTIDs, and the Commission is similarly not adopting the proposed

requirement for a large trader to disclose its LTID to all others with whom it collectively

exercises investment discretion. Accordingly, Rule 13h-1(b)(2), as adopted, requires a large

trader to disclose to the registered broker-dealers effecting transactions on its behalf its LTID and

each account to which it applies.

Lastly, the requirements that a large trader provide its LTID to all registered broker-

dealers who effect transactions on its behalf, and identify each account to which it applies, are

ongoing responsibilities that must be discharged promptly. For example, if a subsidiary of a

large trader is acquired by another large trader, to the extent that subsidiary effects transactions

in NMS securities equal to or greater than the reporting activity level, both large traders must

promptly notify their registered broker-dealers of the LTID change.107

106 See Wellington Management Letter at 5-6. Another commenter recommended that the

Commission not require investment advisers to identify other advisers of a client account that trade separately and without collaboration in a different custodial account. See Investment Company Institute Letter at 10.

107 This responsibility is in addition to the large traders’ duty to amend Form 13H pursuant to Rule 13h-1(b)(1).

45

3.

Form 13H is designed to collect basic identifying information about large traders that will

allow the Commission to understand the character and operations of the large trader. The

Commission solicited

Overview of Form 13H

108 and received109 many comments regarding various aspects of proposed

Form 13H. The Commission, for example, received comments requesting clarification regarding

certain information required by the proposed Form, as well as suggestions designed to reduce

and streamline the reporting burden on large traders.110 One commenter noted that the large

trader reporting rule is only one of many proposed new regulations that are being contemplated

by Congress and various federal regulators that would affect commercial banks.111 The

Commission is sensitive to the burdens imposed by the large trader rule.112


As discussed below,

the Commission is incorporating some commenters’ suggestions in the Form as adopted, and

many of the changes from the proposed version of the Form are intended to reduce further the

burdens of the Form. The Commission believes that the version of Form 13H it is adopting

today will be less burdensome than the proposed version, most notably because, as discussed

further below, it replaces the proposed requirement to provide account numbers with a more

general requirement to identify broker-dealers at which the large trader or any of its Securities

3, 75 FR at 21472-73. 109 See, e.g., Wellington Management Letter at 3-6; American Bankers Association Letter at 2;

David L. Goret Letter at 1-3; Anonymous e-mail dated June 22, 2010; and Prudential Letter at 3-4.

110 See, e.g., SIFMA Letter; Wellington Management Letter; Investment Company Institute Letter; and American Bankers Association Letter.

111 See American Bankers Association Letter at 2. 112 As discussed infra (see Section III.D.2), Section 13(h)(5) of the Exchange Act expressly requires

the Commission to take into account, among other things, the costs associated with maintaining information with respect to transactions effected by large traders and reporting such information to the Commission.

46

Affiliates maintains an account.113

The Commission is adopting the Form with some format-driven modifications from the

proposed version to better reflect its format as an electronic, rather than paper, filing. For

example, the Commission is not adopting the proposed fields that would have required filers of

Annual Filings and Amended Filings to identify the Items and Schedules being updated since the

Commission will be able to distinguish this information more readily in an electronic filing

environment. In addition, the Commission is not adopting the Schedules to the Form, and the

information previously contained in the proposed Schedules has been realigned into the body of

the Form. References to paper-based “continuation sheets” are not being adopted. Similarly, the

concept of Schedules, while relevant to a paper-based form, is unnecessary in the context of an

all-electronic filing.

In addition, the Commission is seeking to design the

electronic filing system for Form 13H to minimize the filing burden. For example, a selection of

previously filed Form 13H submissions, including the most recently submitted version, will be

readily accessible so that large traders can simply edit and resubmit the Form when amendments

are required. The Commission believes that filing Form 13H in an electronic format will be less

burdensome and more efficient for both large traders and the Commission.

114

Voluntary Registration. For the reasons discussed above,

These and other related non-substantive changes from the proposed

version of the Form reflect that the Form will be accessed electronically and filed by large

traders exclusively online.

115

113 As defined in the instructions to Form 13H, “Securities Affiliate” means an affiliate of the large

trader that exercises investment discretion over NMS securities.

in response to a comment,

the Commission is revising Form 13H from the proposed version of the Form to allow a market

114 In addition, in response to comments and as discussed in greater detail below, the Commission is revising the scope of the data that would have been collected in the proposed Schedules.

115 See supra at Section III.A.1.c.

47

participant to register voluntarily as a large trader, even if it has not yet effected transactions

equal to or greater than the identifying activity level at the time of filing. Correspondingly, Form

13H requires a large trader to indicate whether its “Initial Filing” is voluntary. A large trader

that elects to voluntarily file is required to disclose the date upon which it filed the Form, rather

than the date on which its trading activity equaled or exceeded the identifying activity level.

Background Information About the Large Trader and its Authorized Person. Form

13H requires the large trader to provide its mailing address, which may be different than its

business address. Additionally, the Form requires that the following information be provided

about the Authorized Person (i.e.

a.

, the natural person authorized to submit the Form 13H on

behalf of the large trader): business address, telephone number, facsimile number, and email

address. This information was proposed to be required by Schedule 6 of the Form and has been

relocated to the introductory section of the Form. Proposed Item 3 of Schedule 4, which would

have mandated disclosure of the large trader’s principal place of business (if different from the

information disclosed on the cover page), has not been adopted. Instead, the requested

information has been moved to the beginning of the adopted Form, where both business and

mailing addresses are requested. All of this information is necessary for the Commission to

identify and contact large traders.

In Item 1(a) of the Form, the large trader must indicate the types of businesses that it or

any of its affiliates engage in:

Item 1

116 broker or dealer; bank holding company;117

116 Unless otherwise specified, the Form requires information about the large trader that is filing the

Form 13H. Typically, the filing large trader would be the large trader’s ultimate parent company, which means the person at the highest level of the organizational chart required under Item 4(a) that controls a large trader or multiple large traders.

non-bank holding

117 The use of the term “Holding Company” in the proposal has been clarified in the adopted Form by dividing it into two options “Bank Holding Company” and “Non-Bank Holding Company.”

48

company; government securities broker or dealer; municipal securities broker or dealer; bank;

pension trustee; non-pension trustee;118

Item 1(b) of the Form requires that the large trader provide the following for itself and

each of its Securities Affiliates: a description of the nature of its operations, including a general

description of its trading strategies.

investment adviser to one or more registered investment

companies; investment adviser to one or more hedge funds or other funds not registered under

the Investment Company Act; insurance company; commodity pool operator; or futures

commission merchant. A large trader also may check “Other” and disclose other types of

financial businesses engaged in by the large trader.

119 The instructions provide guidance regarding the level of

detail expected.120

Collection of this basic descriptive information will allow the Commission to better

understand each large trader and will allow the Commission to more carefully tailor requests

both to registered broker-dealers for large trader transaction data and, if necessary, to large

traders for additional information pursuant to Rule 13h-1(b)(4).

The Commission does not believe that the changes to the Form from the proposed version

discussed above are substantive. Instead, the changes are intended to clarify the scope of

information elicited by Item 1 and to reflect the fully-electronic nature of the Form.

b.

118 To clarify that all trustees that are large traders would be required to report, the adopted Form

includes categories for “Pension Trustee” as well as “Non-Pension Trustee.”

Item 2

119 Item 5 of proposed Schedule 4 would have required the large trader to describe the nature of the large trader’s business. Form 13H as adopted contains this requirement in Item 1.

120 For example, a large trader may describe its operations as including an “investment adviser specializing in fundamental analysis” or it may describe a broker-dealer as a “proprietary trader focusing on statistical arbitrage” or “options market maker.”

49

Item 2 of the Form requires the large trader to indicate whether it or any of its Securities

Affiliates files any other forms with the Commission.121

The Commission is narrowing the scope of Item 2 from the proposal to require the large

trader to disclose whether it or any of its affiliates that exercise investment discretion over NMS

securities (as distinguished from all of its affiliates) file any forms with the Commission.

Additionally, rather than disclosing the filers’ Central Registration Depository (“CRD”)

Numbers

If so, Item 2 requires identification of

each filing entity, the form(s) filed, and the CIK number.

122 and SEC File Numbers123 as proposed, Item 2 as adopted requires only disclosure of

their CIK numbers.124

One commenter objected to the collection of information under proposed Item 2, pointing

out that the Commission already has access to this information.

125

121 The title of Item 2 of the adopted Form has been slightly amended; its title is “Securities and

Exchange Commission Filings,” not “Securities and Exchange Commission Registration.” This non-substantive change reflects that registration is not the effect of all forms filed with the Commission.

The Commission believes

that Item 2 is useful because it centralizes information about a large trader’s various SEC filing

obligations and will thereby allow the Commission to more promptly access records of those

filers using their CIK numbers. Especially given the circumscribed scope of Item 2 as adopted,

the Commission believes that this requirement will not be unduly burdensome. Further, each

122 The CRD is a computerized database that contains information about most brokers, their representatives, and the firms for whom they work.

123 As discussed above, an SEC File Number is assigned by EDGAR to registrants and others who file materials with the Commission through EDGAR. See supra discussion at text accompanying notes 79-81.

124 CIK numbers, which are assigned to persons that file material with the Commission, are applicable to a broader universe of entities that may be large traders, as opposed to CRD numbers which are only applicable to broker-dealers.

125 See American Bankers Association Letter at 2.

50

large trader should have ready access to this information and be able to summarize it with

minimal additional burden.

c.

Item 3 of the Form requires a large trader to disclose whether it or any of its affiliates is

registered with the Commodity Futures Trading Commission (“CFTC”) or regulated by a foreign

regulator. If so, the large trader is required to identify each entity and the CFTC registration

number or primary foreign regulator, as applicable.

Item 3

The Commission received one comment about the aspect of proposed Item 3 of the Form

that would have required disclosure about bank regulation.126 The commenter argued that the

required information did not further the underlying purpose of the proposal, and recommended

that the Commission, to the extent necessary, obtain this information directly from applicable

banking regulators instead of from the large trader.127 In response to this comment, the

Commission has significantly narrowed the scope of this item by not adopting the proposed

requirement in Item 3(b) of the proposed Form to disclose information on bank regulators.

Instead, as mentioned above, the Commission is adopting the requirement to disclose whether

the large trader includes a bank128

126 See id.

or bank holding company. The Commission believes that

collection of this basic information will be sufficient to characterize a large trader’s operations,

127 Item 3(b) of the proposed Form would have required the large trader to disclose: (1) whether it or any of its affiliates is a bank holding company, national bank, state member bank of the Federal Reserve System, state non-member bank, savings bank or association, credit union, or foreign bank; if so, the large trader would have been required to identify each such affiliate and its banking regulators.

128 As adopted, the instructions for Form 13H define the term “bank” to mean a national bank, state member bank of the Federal Reserve System, state non-member bank, savings bank or association, credit union, or foreign bank.

51

and should reduce the burdens of the Form while focusing the collection of information on the

securities trading operations of each large trader.

Further, as proposed, Item 3(c) would have required the large trader to disclose whether it

or any of its affiliates is an insurance company and identify each such regulated entity and its

respective insurance regulators. One commenter recommended limiting Item 3(c) to only the

large trader and its large trader affiliates, and suggested that the Form require identification only

of their primary regulators.129 Otherwise, the commenter stated, its list of regulators would

include a long list of state insurance regulators.130

In addition, proposed Item 3(d) would have required the large trader to disclose whether

it or any of its affiliates is regulated by a foreign regulator and identify each such regulated entity

and all of its foreign regulators. One commenter recommended that the information requested in

Item 3(d) only be required of the large trader and its large trader affiliates.

In balancing the benefits of collecting such

information against the burden on large traders to provide it, the Commission has decided to not

adopt the requirements of proposed Item 3(c). The Commission again notes that Item 1 of Form

13H requires that the large trader disclose whether the large trader includes an insurance

company. The Commission believes that collection of this basic information will be sufficient to

characterize a large trader’s operations, and should reduce the burdens of the Form while

focusing the collection of information on the large trader’s securities trading operations.

131 It further suggested

that the Form require identification only of the primary foreign regulators.132

129 See Prudential Letter at 4.

The commenter

stated that its list of regulators would be very long, as some of its foreign affiliates may have 25

130 See id. 131 See id. 132 See id.

52

foreign regulators.133

d.

In balancing the benefits of collecting such information against the burden

on large traders to provide it, the Commission is not adopting the requirement as proposed. This

adopted item, renumbered as Item 3(b), requires identification only of the primary foreign

regulator. Further, the Commission is making the requirement applicable only to the large trader

and its Securities Affiliates. In addition, two separate questions proposed on CFTC registration

have been combined into one question to streamline the presentation of those items. No

substantive change has been made to either question. The Commission believes that the

requirement as adopted should not be as burdensome and yet should provide the Commission

with access to the basic information it needs to understand the identity and regulatory status of a

large trader and its affiliates.

Item 4(b) of the Form requires information on affiliates of the large trader that exercise

investment discretion over NMS securities (

Item 4

i.e., Securities Affiliates).134 Item 5 of the proposed

Form would have required a large trader to identify each affiliate that either exercises investment

discretion over accounts that hold NMS securities or that beneficially owns NMS securities. In

response to comments received, the Commission is not adopting the requirement to disclose

affiliates that merely beneficially own NMS securities.135

133 See id.

Accordingly, large traders will not

have to identify or further describe affiliates who merely beneficially own NMS securities. The

Commission believes that limiting the scope of required information to focus on affiliates that

134 Information from proposed Item 5 (on affiliates) has been integrated into Item 4 of the adopted Form, which covers the organization of the large trader generally. This change was intended to consolidate under one Item similar information that is requested on the organization of each large trader.

135 One commenter suggested that the Commission require identification of only those affiliates that trade in NMS securities. See SIFMA Letter at 17.

53

exercise investment discretion over NMS securities is appropriate and may reduce reporting

burdens, while providing the Commission with important information about affiliates that are

engaged in trading activities consistent with the primary focus of the Rule.

Given the narrower scope of affiliates about which information is now requested, the

Commission is adopting as Item 4(a) a requirement to attach an organizational chart. At a

minimum, the organizational chart must depict the large trader, its parent company (if

applicable), all of its Securities Affiliates, and all entities identified in Item 3(a).136 The

organizational chart requirement is intended to help the Commission to quickly understand the

affiliate structure of the large trader and should be useful, among other things, in assigning

LTIDs and understanding any suffixes that are assigned. At the same time, a narrative

description of the relationship between affiliates can also be useful where the relationships are

difficult to portray in an organizational chart.137

As part of Item 4(b), the Commission is adopting a requirement that the large trader list

its Securities Affiliates and all entities identified in Item 3(a). Additionally, the large trader must

describe the business and disclose the MPID (if any) for each of those entities. The MPIDs of

Securities Affiliates will be useful to the Commission when analyzing trading data on affiliates

identified on the Form. The Commission believes that MPIDs will allow the staff to more

Accordingly, as part of Item 4(b), the

Commission is requiring a narrative description of the relationship between (1) the large trader;

and (2) each Securities Affiliate and each entity identified in Item 3(a).

136 As long as its organizational chart lists all required entities, a large trader may submit its standard

organizational chart that it keeps in the ordinary course of its business. The organizational chart, as part of the Form 13H submission, would be treated as confidential by the Commission. See infra Section III.A.3.g (discussing confidentiality).

137 As proposed, Item 5 of the Form would have collected information about the relationships of affiliates in a list form.

54

carefully tailor requests to registered broker-dealers for large trader trade data, and they may

reduce the need for the Commission to send disaggregation requests to a large trader.138

Item 4(c) of the Form requires the provision of the LTIDs, including LTID suffixes, for

all entities within the large trader that file separately (if any). This requirement is very similar to

what was proposed under Item 5. Item 4(c) as adopted, however, expressly requires that a large

trader include the LTID suffix (if any) of all identified entities.

Item 4(d) of the Form allows a large trader to assign suffixes to its affiliates. In the

Proposing Release, the Commission specified that a large trader could elect to append additional

characters (a suffix) to sub-identify particular units that directly control an account.139 Use of a

suffix might be useful, for example, to facilitate a large trader’s internal recordkeeping and to

facilitate responses to Commission disaggregation requests.140 The instructions to Item 4(d) of

the Form provide guidance on the format for suffixes.141

138 One commenter suggested that assignment of a LTID to track the trades of large traders does not

go far enough. See GETCO Letter at 3. The commenter recommended that all market participants be required to have and use a unique MPID when entering orders on market centers, either directly or through sponsored market access arrangements. The Commission believes that such an initiative is beyond the scope of this particular rulemaking, which requires large traders to provide such information to the Commission. If the Commission were to consider extending such a requirement to other market participants, it would be subject to a separate rulemaking providing interested persons an opportunity to comment.

A list of the entities within the large

trader complex that have been assigned suffixes will help the Commission understand the large

trader’s use of suffixes and may facilitate the ability of a large trader to track and manage its

assigned suffixes.

139 See Proposing Release, supra note 3, 75 FR at 21460, n.40. 140 See id. at 75 FR at 21460, n.44. 141 Specifically, suffixes must have three characters, all of which must be numbers. No letters or

special characters may be used in a suffix. Further, the same suffix should not be assigned to more than one entity using the same LTID, and large traders should avoid reusing suffixes.

55

The Commission believes that the information about large trader affiliates required by

Item 4 of the Form is necessary to provide the Commission with the background necessary to

understand the character and trading activities of a large trader.

e.

Item 5 of Form 13H requires information about the governance of the large trader.

Item 5

142

Item 5(a) mandates disclosure of one or more of the following statuses of the large trader:

individual;143

Item 5(b) requires the identification of each partner in the large trader partnership and

partnership status (

partnership; limited liability partnership; limited partnership; corporation; trustee;

or limited liability company. Additionally, the Form permits the large trader to check “Other”

and specify a form of organization that is not comparable to any of the enumerated organization

types.

i.e.

Item 5(c) requires the identification of each executive officer, director, or trustee of a

large trader corporation or trustee. The column title in Item 5(c) reflects the instruction that the

large trader identify its Executive Officers.

, general partner or limited partner).

144

f.

Item 6 of Form 13H requires large traders to identify broker-dealers at which the large

trader has an account. As proposed, Item 6 would have required large traders to provide

Item 6

142 Information from proposed Schedule 4 (on governance) has been integrated into Item 5 (also on

governance). Specifically, the Commission is consolidating proposed Schedule 4 of Form 13H into Item 5 and re-titling it “Governance of the Large Trader.” This change was intended to consolidate under one Item similar information concerning the governance of each large trader.

143 The proposed categories for individuals (“self employed” and “otherwise employed”) have been condensed into a single requirement to identify a large trader as an individual.

144 Although proposed Schedule 4 to Form 13H did not specify that only the identities of executive officers were required, the proposed instructions to the Form indicated that the proposed Form did not seek to collect the identities of all officers of the large trader.

56

information concerning each broker-dealer account through which it or certain of its affiliates

trade. The Commission received several comments concerning Schedule 6 to the proposed

Form.145 As discussed below, some commenters, particularly investment advisers, noted that

this requirement would be impractical or at least very burdensome and could require disclosure

of potentially hundreds of thousands of account numbers.146 One commenter explained that

many investment advisers do not know the account numbers assigned to them by broker-dealers

because that information is not required by the software they use to communicate order

allocation and settlement instructions to broker-dealers.147 Other commenters stated that some

investment advisers for defined contribution plans do not have access to account information

because the plan record-keepers, not the investment advisers who provide instructions to the

record-keepers, establish and maintain the relationships with the broker-dealers.148 Even for

large traders that have ready access to their brokerage account numbers, commenters suggested

that the sheer volume of that information, and the frequency with which it might change, would

make regular disclosure extremely burdensome.149

145 See, e.g., Anonymous e-mail dated June 22, 2010; Wellington Management Letter at 3-6; and

Financial Engines Letter at 4-6.

Other commenters stated that account

numbers sometimes are embedded with personally identifiable information and objected to the

requirement because: (1) the Commission should not require investment advisers to disclose

146 See, e.g., Wellington Management Letter at 3-4. 147 See id. 148 See Financial Engines Letter at 4-5 and Investment Adviser Association Letter at 6. One

commenter added that some investment managers do not have account number information because they execute trades with registered broker-dealers with whom they have only an informal relationship and no contract. See Investment Adviser Association Letter at 6.

149 For example, one investment adviser stated that there are over 400,000 separate broker-dealer account numbers associated with its clients. See Wellington Management Letter at 3. It further stated that it currently does not maintain a list of those account numbers. See id.

57

their clients’ identities;150 and (2) the burdens necessary for the Commission to establish

sufficiently robust safeguards to protect the confidentiality of this information would be

considerable.151

Some commenters suggested alternatives to disclosing account numbers in the proposed

Form. One commenter suggested that the Commission instead require large traders to maintain

and submit only upon request the required brokerage account information.

152 Two other

commenters suggested revising the proposed Form to instead collect the names of broker-dealers

through which the large trader executes transactions.153

Based on the comments received, the Commission understands that the provision of

brokerage account information through Form 13H could burden some large traders in light of

current industry practices. While this information could be of value to the Commission, the

Commission has determined to not adopt Schedule 6 as proposed. Instead, the adopted Form

requires that large traders identify the registered broker-dealers at which the large trader or any

of its Securities Affiliates has an account and disclose whether each such broker-dealer provides

prime broker, executing broker, and/or clearing broker services. If the Commission needs more

specific individual account-level information, it can use the provided list of broker-dealers and

the services they provide to make targeted requests to those entities for more detailed

150 One commenter stated the requirement, which would disclose client information, may: (1) raise

numerous privacy issues, particularly with respect to transmission of confidential information from foreign jurisdictions such as members of the European Union and Switzerland and (2) harm relationships between investment managers and their clients. See Investment Adviser Association Letter at 6.

151 See David L. Goret Letter at 3. 152 See American Banking Association Letter at 2. 153 See Wellington Management Letter at 4 and Investment Company Institute Letter at 8-9.

58

information.154 In addition, the Commission notes that it may contact the large trader directly

pursuant to Rule 13h-1(b)(4) to seek additional information to further identify the large trader

and all accounts through which the large trader effects transactions.155

One of the commenters who suggested this approach cautioned that any list of broker-

dealers provided by large traders should be kept confidential because leakage of such

information (and particularly leakage of changes to such a list) could impact the stock price of

publicly traded broker-dealers on that list.

156

g.

The confidential treatment of all information

collected through Form 13H is discussed below.

A number of commenters underscored the sensitive nature of the information collected on

Form 13H and expressed support for the Commission’s position that the information would be

protected as contemplated by the Market Reform Act.

Confidentiality

157 Two commenters expressed concern

about the risk of theft and/or inadvertent disclosure of private client names and account

numbers.158

154 Under Exchange Act Rules 17a-25 and 13h-1, broker-dealers are required to maintain and report

the applicable account numbers in which a transaction was effected. Accordingly, the Commission will obtain information on account numbers in connection with a particular request for data.

One commenter asked whether the Commission would share information about

Unidentified Large Traders with other regulatory agencies for supervisory or enforcement

155 One commenter suggested it was unnecessary to collect brokerage account information because, if necessary, the Commission could request more detailed information from the large trader pursuant to proposed Rule 13h-1(b)(4). See Investment Adviser Association Letter at 7.

156 See Investment Company Institute Letter at 9, n.18. 157 See, e.g., Wellington Management Letter at 6; Financial Engines Letter at 7; Investment Adviser

Association Letter at 10; and Investment Company Institute Letter at 2, 4. 158 See Anonymous e-mail dated June 22, 2010 and Managed Funds Association Letter at 3-4.

59

purposes.159 Additionally, two commenters suggested that the Commission monitor for misuses

of confidential information such as front-running.160

The Commission is committed to maintaining the information collected pursuant to Rule

13h-1 in a manner consistent with Section 13(h)(7) of the Exchange Act.

161

Nothing in this subsection shall authorize the Commission to withhold

information from Congress, or prevent the Commission from complying with a

request for information from any other Federal department or agency requesting

information for purposes within the scope of its jurisdiction, or complying with an

order of a court of the United States in an action brought by the United States or

the Commission. For purposes of section 552 of title 5, United States Code, this

subsection shall be considered a statute described in subsection (b)(3)(B) of such

section 552.

The statute specifies

that the Commission shall not be compelled to disclose information collected from large traders

and registered broker-dealers under a large trader reporting system, subject to limited exceptions.

Specifically, the statute provides that:

162

The legislative history of Exchange Act Section 13(h) suggests that Congress: (1) understood

that confidential information that could reveal proprietary trading strategies to competitors would

be collected and correspondingly restricted public access to this information; and (2) crafted the

exceptions to (a) ensure that it could obtain information from the Commission; (b) allow the

Commission to grant access to federal departments and other federal agencies acting within the

159 See SIFMA Letter at 19. 160 See T. Rowe Price Letter at 2 and Investment Adviser Association Letter at 10. 161 See 15 U.S.C. 78m(h)(7). 162 15 U.S.C. 78m(h)(7).

60

scope of their jurisdictions; and (c) allow the Commission to comply with an order of a court of

the United States in certain actions.163

While the Commission must share the information it collects on large traders as outlined

above, the Commission is committed to protecting the confidentiality of that information to the

fullest extent permitted by applicable law. By assuring large traders of the confidentiality of

information they provide to the Commission, the Commission is addressing commenters’

concerns.

B.

As proposed, Rule 13h-1 would impose recordkeeping and reporting responsibilities on

the following: registered broker-dealers that are large traders; registered broker-dealers that,

together with a large trader or Unidentified Large Trader, exercise investment discretion over an

account; and registered broker-dealers that carry accounts for large traders or Unidentified Large

Traders or, with respect to accounts carried by a non-broker-dealer, broker-dealers that execute

transactions for large traders or Unidentified Large Traders. In addition, the proposed rule would

require certain registered broker-dealers to implement procedures to encourage and foster

compliance with the self-identification requirements of the proposed rule. As discussed in

greater detail below, after considering the comments received on the Rule’s application to

registered broker-dealers, the Commission is adopting these provisions of the Rule substantially

as proposed, but with some modifications to reflect certain comments and to clarify the

requirements applicable to registered broker-dealers.

Broker-Dealers: Recordkeeping, Reporting, and Monitoring

1.

163 See Senate Report, supra note

Recordkeeping Requirements

14, at 41.

61

The Commission received few comments concerning the proposed recordkeeping

requirements,164 and is adopting Rule 13h-1(d) substantially as proposed with one

modification.165

As described above, in connection with the requirement for large traders to disclose on

Form 13H a list of broker-dealers at which a large trader or any Securities Affiliate has an

account rather than a list of account numbers at such broker-dealers as proposed, the

Commission is not adopting the proposed requirement that large traders disclose their LTIDs to

other large traders.

As proposed, every registered broker-dealer would have been required to

maintain records of information for, among others, “(i) an account such broker-dealer carries for

a large trader or an Unidentified Large Trader, (ii) an account over which such broker-dealer

exercises investment discretion together with a large trader or an Unidentified Large Trader, or

(iii) if the broker-dealer is a large trader, any proprietary or other account over which such

broker-dealer exercises investment discretion.” The Commission is not adopting the requirement

to maintain records for accounts over which such broker-dealer exercises investment discretion

together with a large trader or an Unidentified Large Trader.

166

164 See SIFMA Letter at 10, 14 and Financial Information Forum Letter at 5.

Thererfore, large traders will not be required to communicate their LTIDs

to other traders, and, consequently, there is no mechanism in the Rule for a large trader to be

informed of the status of another trader with whom it jointly exercises investment discretion.

165 While paragraph (d)(2) of the Rule sets forth the information that is to be maintained for each transaction, subparagraph (xiii) requires that the broker-dealer record the LTIDs “associated with the account, unless the account is for an Unidentified Large Trader.” This provision effectively requires that a broker-dealer tag an LTID to an account rather than to each transaction. In addition, for an Unidentified Large Trader, the Commission expects broker-dealers to assign their own unique identifier to the applicable account(s).

166 See discussion supra at Section III.A.2.b. The proposed requirement that large traders disclose their LTIDs to other large traders was intended to facilitate the ability of a large trader to complete Form 13H, including the provisions that required it to identify its account numbers and the LTID of any trader with whom it shared investment discretion over the account.

62

Similarly, the Commission believes it is appropriate to narrow the scope of the

recordkeeping duty concerning accounts over which a broker-dealer exercises investment

discretion together with a large trader or an Unidentified Large Trader. Accordingly, under the

Rule as adopted, registered broker-dealers must maintain records for all transactions effected

directly or indirectly by or through (i) an account such broker-dealer carries for a large trader or

an Unidentified Large Trader or (ii) if the broker-dealer is a large trader, any proprietary or other

account over which such broker-dealer exercises investment discretion. As a practical matter,

however, the Commission will continue to have access to records of any account over which a

broker-dealer exercises investment discretion together with a large trader or an Unidentified

Large Trader by virtue of the fact that such an account is an account of a large trader subject to

the recordkeeping requirements.

In addition, the Commission is adopting as proposed the requirement that, where a non-

broker-dealer carries an account for a large trader or an Unidentified Large Trader, the broker-

dealer effecting transactions directly or indirectly for such large trader or Unidentified Large

Trader maintain records of all of the required information.

One commenter asked whether registered broker-dealers would be required to maintain

records of transactions by inactive large traders.167 In the Proposing Release, the Commission

stated that an inactive large trader could inform its broker-dealers of its Inactive Status and

request that they discontinue tagging its transactions with its LTID.168


The Rule does not require

168 See Proposing Release, supra note 3, at 21464. As discussed above, Inactive Status relieves a former large trader from having to file and amend Form 13H with the Commission. The Rule, however, does not specifically require a registered broker-dealer to discontinue tagging the trader’s transactions with its LTID. As discussed below, Form 13H and the information contained therein, is confidential. Accordingly, the Commission would not reveal a large trader’s status to a broker-dealer that sought to confirm a reported Inactive Status.

63

a broker-dealer to maintain records of transactions by an inactive large trader after receiving

notice from the large trader that the trader had filed for inactive status with the Commission on

Form 13H.

One commenter asked the Commission to clarify Rule 13h-1(d)(5),169 which requires

that the “records and information required to be made and kept pursuant to the provisions of this

rule shall be available on the morning after the day the transactions were effected (including

Saturdays and holidays).”170 Specifically, the commenter asked whether, by requiring that

records be available on Saturdays and holidays, the Commission expects that broker-dealers

might be required to submit transaction data on Saturdays and holidays. The Commission notes

that the Rule contemplates that broker-dealers might be called upon by the Commission to report

data to the Commission on a Saturday or holiday, consistent with the legislative history that

accompanies Section 13(h).171 Depending on the urgency of the situation, the Commission may

need prompt access to large trader data and the Rule contemplates that possibility.172

2.

The

provisions applicable to the reporting of data to the Commission are discussed below.


Reporting Requirements

170 See id. 171 See Senate Report, supra note 14, at 40. See also Section 13(h) of the Exchange Act, 15 U.S.C.

78m(h)(2), providing that “[r]ecords shall be reported to the Commission… immediately upon request by the Commission….”

172 The Commission notes that while new Rule 13h-1(d)(5) governs the availability of data, new Rule 13h-1(e) governs the reporting of transaction data by broker-dealers to the Commission. Specifically, that provision requires registered broker-dealers to submit transaction data “no later than the day and time specified in the request for transaction information, which shall be no earlier than the opening of business of the day following such request, unless in unusual circumstances the same-day submission of information is requested.” Accordingly, while information must be available on the morning after the transaction was effected, the reporting deadline is based upon the day of the Commission’s request.

64

As proposed, Rule 13h-1(e) would require every registered broker-dealer who is itself a

large trader, exercises investment discretion over an account together with a large trader or an

Unidentified Large Trader, or carries an account for a large trader or an Unidentified Large

Trader to report to the Commission upon request records they keep pursuant to Rule 13h-1(d)(1).

In addition, as proposed, where a non-broker-dealer carries an account for a large trader or an

Unidentified Large Trader, the broker-dealer effecting such transactions directly or indirectly for

a large trader would be required to report such records.

As described above, the Commission is not adopting the proposed requirement on large

traders to disclose their LTIDs to other large traders.173

Accordingly, as adopted, upon the request of the Commission, every registered broker-

dealer who is itself a large trader or carries an account for a large trader or an Unidentified Large

Trader shall electronically report to the Commission all information required under paragraphs

(d)(2) and (d)(3) for all transactions effected directly or indirectly by or through accounts carried

by such broker-dealer for large traders and Unidentified Large Traders, equal to or greater than

the reporting activity level. Additionally, where a non-broker-dealer carries an account for a

large trader or an Unidentified Large Trader, the broker-dealer effecting such transactions

directly or indirectly for a large trader shall electronically report such information.

The Commission believes it is

appropriate to similarly narrow the scope of the reporting duty to not extend the reporting

requirement to broker-dealers that exercise investment discretion over an account together with a

large trader or an Unidentified Large Trader.

173 See discussion supra at Section III.A.2.b.

65

Broker-dealers will be required to report a particular day’s trading activity if it equals or

exceeds the “reporting activity level” of 100 shares.174 Transaction reports must be submitted to

the Commission no later than the day and time specified in the request for transaction

information, which shall be no earlier than the opening of business of the day following such

request, unless in unusual circumstances the same-day submission of information is requested.175

The Commission solicited

176 and received comments regarding the reporting duty of

registered broker-dealers.177 One commenter, in observing that the proposed rule would require

registered broker-dealers to submit transaction data to the Commission before the close of

business on the day specified in the request for such transaction information, asked for

clarification about whether the day could be the same day the request is made.178 The same

commenter suggested that the Commission should allow registered broker-dealers a full business

day, based on the time of the request, to respond to data requests.179 Other commenters

suggested longer periods. One suggested two days,180

174 New Rule 13h-1(a)(8) defines the reporting activity level as: “(i) each transaction in NMS

securities, effected in a single account during a calendar day, that is equal to or greater than 100 shares; (ii) any other transaction in NMS securities, effected in a single account during a calendar day, that a registered broker-dealer may deem appropriate; or (iii) such other amount that may be established by order of the Commission from time to time.” The Commission solicited comment about a number of aspects of the proposed reporting activity level, see Proposing Release, supra note

and one suggested affording registered

3, 75 FR at 21473, but received no comments regarding the proposed threshold. 175 Cf. Exchange Act Section 13(h)(2), 15 U.S.C. 78m(h)(2), which requires that “[s]uch records

shall be available for reporting to the Commission, or any self-regulatory organization that the Commission shall designate to receive such reports, on the morning of the day following the day the transactions were effected, and shall be reported to the Commission or a self-regulatory organization designated by the Commission immediately upon request by the Commission or such a self-regulatory organization.”

176 See Proposing Release, supra note 3, 75 FR at 21473. 177 See, e.g., Financial Information Forum Letter at 4 and SIFMA Letter at 13-17. 178 See Financial Information Forum Letter at 2. 179 See id. 180 See Prudential Letter at 5.

66

broker-dealers 10 business days to respond, which could be shortened over time to three business

days.181 The latter commenter opposed the proposed deadline, stating that broker-dealers’

existing infrastructure cannot respond to data requests for large trader transactions within one

business day. As noted in the Proposing Release, the Commission expects that certain system

enhancements will be required to prepare broker-dealers’ existing EBS infrastructure for

compliance with Rule 13h-1, including the provisions regarding the availability of data.182

While the Commission does not anticipate that, under normal circumstances, it would request

delivery of large trader transaction data on the same day the request is made, the Commission

believes it is important that it have the flexibility to do so if required by the urgency of the

situation.183

In response to the requests of commenters to provide additional guidance on the expected

timeframe within which broker-dealers would need to submit transaction data to the

Commission, the Commission is adopting a modified version of Rule 13h-1(e) to provide that

reports of transactions must be “submitted to the Commission no later than the day and time

specified in the request for transaction information, which shall be no earlier than the opening of

business of the day following such request, unless in unusual circumstances the same-day

submission of information is requested.”

181 See SIFMA Letter at 15. 182 See Proposing Release, supra note 3, 75 FR at 21471. 183 The Commission notes that the Rule requires that trade data be available for reporting to the

Commission on the morning after the day the transactions were effected (which could include Saturdays and holidays). As specified in new Rule 13h-1(e), in response to a Commission request for transaction data, the information must be reported to the Commission no later than the day and time specified in the request for transaction information, which shall be no earlier than the opening of business of the day following such request, unless in unusual circumstances the same-day submission of information is requested.

67

The Commission understands from one commenter that EBS data processes are normally

done during overnight batch runs.184

However, under unusual circumstances, the Commission may request more immediate

responses that may require some broker-dealers to perform a manual process in order to provide

reports to the Commission sooner than could be accommodated by an overnight batch process.

For example, on the morning following a market event such as May 6, 2010, the Commission

could request data about the prior day to be submitted the same day as the request is made. The

Commission recognizes that under these circumstances, depending on the nature of broker-

dealer’s systems, the report data may be preliminary and require updating by the opening of

business of the day following the request. One commenter inquired whether registered broker-

dealers would be required to submit transaction data directly to the Commission instead of

through the normal channel for EBS submissions.

In light of these considerations, the Commission believes it

would be appropriate for broker-dealers to utilize any overnight process they may have currently

in production, and the Rule as adopted provides that the Commission will normally request

reports to be submitted in manner that allows time for such overnight processing.

185


As adopted, Rule 13h-1(e) requires that

reports be submitted “electronically, in machine-readable form and in accordance with a format

specified by the Commission that is based on the existing EBS system format.” Like Exchange

Act Rule 17a-25, this provision does not require (or prohibit) preparation or transmission of

reports by any intermediary. However, as stated in the Proposing Release, in order to mitigate

costs on registered broker-dealers, the Commission intends to utilize the existing infrastructure

of the EBS system for the large trader reporting rule.

185 See id.

68

Another commenter asked whether the Commission intended to request transaction data

according to LTID.186

One commenter recommended using the OATS system maintained by the Financial

Industry Regulatory Authority (“FINRA”) instead of the EBS system for the large trader

reporting rule. The commenter pointed out that, unlike the EBS system, OATS processes are

tied to front office order and execution systems and thus could more readily incorporate the

proposed new field of execution time.

The Commission expects that it would, on occasion, request EBS data

according to LTID. A narrowly-focused request for transaction records of a particular large

trader would help the Commission obtain in the most efficient manner possible targeted and

limited data and should reduce the burden on broker-dealers by allowing them to provide smaller

files in response to an EBS request for records of specific large traders.

187 Further, the commenter noted that OATS should be

able to provide next day reporting.188 The Commission, however, believes that the large trader

reporting requirements can be most efficiently implemented and operated through relatively

modest enhancements to the existing EBS system. Use of OATS, which is maintained by

FINRA, would involve expanding OATS to additional categories of securities (e.g.

3.

, options) and

making additional enhancements to accommodate the records that would need to be kept

pursuant to the Rule. For these reasons, the Commission does not believe basing the large trader

reporting rule on OATS is appropriate at this time.

Overview of Proposed Rule. Under proposed Rule 13h-1(d) and (e), certain registered

broker-dealers would be subject to recordkeeping and reporting responsibilities for their

Monitoring Requirements

186 See id. at 2. 187 See SIFMA Letter at 15. 188 See id.

69

customers that meet the criteria for Unidentified Large Traders. Proposed Rule 13h-1(a)(9)

defined “Unidentified Large Trader” as “each person who has not complied with the

identification requirements of paragraphs (b)(1) and (b)(2) of this rule that a registered broker-

dealer knows or has reason to know is a large trader.” The proposed Rule provided that a

registered broker-dealer “has reason to know whether a person is a large trader based on the

transactions in NMS securities effected by or through such broker-dealer.”

In assessing whether a broker-dealer “has reason to know” whether one of its customers

may be a large trader, the proposed rule effectively would have required the broker-dealer to take

into account trading activity in its own customer accounts.

Proposed Rule 13h-1(f) also contained a safe harbor that was designed to reduce the

broker-dealer’s burdens in connection with monitoring its customers’ trading for purposes of

identifying possible large traders.189

The proposed monitoring requirements were intended to promote awareness of and foster

compliance with Rule 13h-1 by customers who might not be aware of their large trader reporting

responsibilities. As noted in the Proposing Release, the proposed rule placed “the principal

burden of compliance with the identification requirements on large traders themselves”

The safe harbor in proposed Rule 13h-1(f) required

reasonably designed systems to detect and identify persons that may be large traders – based

upon transactions effected through an account or group of accounts or other information readily

available to the broker-dealer. Further, the proposed safe harbor required reasonably designed

systems to inform such persons of their potential obligations under Rule 13h-1.

190


while

the broker-dealer monitoring requirements were intended to be “limited” and “a necessary

3, 75 FR at 21470. 190 Id.

70

backstop to encourage compliance and fulfill the objectives of Section 13(h) of the Exchange

Act.”191

Comments Received. In the Proposing Release, the Commission requested comments on

the proposed monitoring requirements and the related safe harbor.

192 The Commission received

several comments that addressed the proposed duty to monitor customers for purposes of Rule

13h-1.193 One commenter asserted that the Commission lacks the statutory authority to impose a

monitoring requirement on registered broker-dealers in connection with the large trader reporting

rule.194 A few commenters asked for clarification of the monitoring requirements and offered

alternatives.195 Of those commenters that addressed the issue, most were critical of the proposed

monitoring requirements.196 One commenter characterized the role of broker-dealers under the

proposed rule as “gatekeepers,” and asserted that “the proposed rule would impose on broker-

dealers much of the operational monitoring regarding registration of large traders.”197 Two

commenters asked whether the Rule would require broker-dealers to stop doing business with

Unidentified Large Traders.198

191 Id.

One of those commenters asserted that it should not because that

would have the unintended consequence of driving customers to broker-dealers who may be less

192 See id. at 21472-73. 193 See, e.g., Financial Information Forum Letter at 4-5; GETCO Letter at 3; and SIFMA Letter at 9-

13. 194 See SIFMA Letter at 11. 195 See, e.g., Financial Information Forum Letter; SIFMA Letter; and GETCO Letter. 196 One commenter described the proposed safe harbor as “anything but safe” and, as discussed

above, asserted that the proposal exceeds the Commission’s statutory authority because, among other reasons, the safe harbor provided that a registered broker-dealer would have reason to know that a customer is an Unidentified Large Trader based on other readily available information, as well as transactions effected through the broker-dealer. See SIFMA Letter at 11.

197 Id. at 9. 198 See id. at 11 and Financial Information Forum Letter at 5.

71

diligent in monitoring for large traders.199 These two commenters also requested guidance about

whether the monitoring provisions required any specific policies and procedures.200 Another

commenter asked whether a broker-dealer has a duty to proactively determine whether a

customer is an Unidentified Large Trader based on the broker-dealer’s knowledge that its

customer maintains accounts at other broker-dealers.201

Summary of Monitoring Requirements in Final Rule. The Commission addresses these

comments below, but for purposes of clarity we also will briefly summarize the monitoring

requirements in the final Rule. As adopted, the Rule requires that a registered broker-dealer treat

as an Unidentified Large Trader (for purposes of the recordkeeping and reporting provisions in

paragraphs (d) and (e) of the Rule) any person that the broker-dealer “knows or has reason to

know” is a large trader where such person has not complied with the identification requirement

applicable to large traders (i.e., identified itself as a large trader to the broker-dealer and

disclosed the accounts to which its LTID applies). As noted in Rule 13h-1(a)(9), in considering

whether the broker-dealer has “reason to know” that a person is a large trader, however, the

broker-dealer need take into account only transactions in NMS securities effected by or through

such broker-dealer (i.e., it need not seek out information on transactions effected by that person

through another broker-dealer). Moreover, a broker-dealer may determine that it has no “reason

to know” that a person is a large trader through two methods. First, the broker-dealer may

simply conclude, based on its knowledge of the nature of its customers and their trading activity

with the broker-dealer, that it has no reason to expect that any of these customers’ transactions

199 See SIFMA Letter at 11. 200 See id. at 10 and Financial Information Forum Letter at 5. 201 See SIFMA Letter at 10.

72

approach the identifying activity level.202 Second, the broker-dealer may rely on the safe harbor

provision in paragraph (f) of the Rule. Under the safe harbor, a registered broker-dealer would

be deemed not to know or have reason to know that a person is a large trader if it does not have

actual knowledge that a person is a large trader and it establishes policies and procedures

reasonably designed to identify customers whose transactions at the broker-dealer equal or

exceed the identifying activity level and, if so, to treat such persons as Unidentified Large

Traders and notify them of their potential reporting obligations under this Rule. Under either

approach, a broker-dealer’s obligation with respect to an Unidentified Large Trader is limited to

compliance with the requirements of paragraphs (d) and (e) of the Rule, and the broker-dealer

would not be required to cease trading or take other action with respect to that Unidentified

Large Trader.203

Response to Comments and Discussion of the Final Rule. The Commission carefully

considered the comments on the proposed rule, and therefore is providing responses and

additional clarifications below regarding the monitoring requirements required under this Rule.

In response to the comment asserting that the Commission lacks authority to impose monitoring

requirements, we note that the explicit authority under Section 13(h) of the Exchange Act to

The Commission notes that, pursuant to the reporting requirements of the Rule,

it may periodically request reports from broker-dealers regarding all customers they may be

treating as Unidentified Large Traders.

202 For example, the broker-dealer may know, or learn from its customer, that the transactions over

the identifying activity level were effected in connection with a tender offer, which are excluded under the Rule for purposes of determining whether a person is a Large Trader. Alternatively, the broker-dealer may know, or learn from its customer, that the account in question is an omnibus account and that the individual subaccounts do not exceed the identifying activity level.

203 The Commission reiterates that the monitoring requirements are intended to be a “limited” duty that serves as “a necessary backstop to encourage compliance and fulfill the objectives of Section 13(h) of the Exchange Act.” Proposing Release, supra note 3, 75 FR at 21470. The Commission believes that requiring limited monitoring by broker-dealers will help assure that the objectives of the Rule are met and is consistent with the statutory intent of Section 13(h) of the Exchange Act.

73

adopt this Rule is supplemented by Section 23(a) of the Exchange Act, which allows the

Commission to “make such rules and regulations as may be necessary or appropriate to

implement the provisions of this title for which they are responsible or for the execution of the

functions vested in them by this title....”204 Further, Section 13(h)(2) of the Exchange Act

specifically authorizes the Commission to require registered broker-dealers to report transactions

that “equal or exceed the reporting activity level effected directly or indirectly by or through

[them]…for any person that such broker or dealer has reason to know is a large trader on the

basis of transactions in securities effected by or through such broker or dealer” (emphasis

added).205

The Commission is, however, making several modifications to the proposed rule in

response to commenters’ requests for additional clarification. First, in response to questions

regarding the scope of the information that a broker-dealer must consider in determining whether

a person may be a large trader, the Commission is adopting a definition of Unidentified Large

Trader to clarify what was intended in the proposed Rule – that a broker-dealer does not have

“reason to know” that a person is a large trader other than by reference to transactions in

accounts of the broker-dealer. In particular, proposed paragraph (a)(9) of the Rule would have

defined an Unidentified Large Trader as a “person who has not complied with the identification

requirements of paragraphs (b)(1) and (b)(2) of this rule that a registered broker-dealer knows or

has reason to know is a large trader.” It further provided that “[a] registered broker-dealer has

That section, then, contemplates that registered broker-dealers would take into

account their own customers’ trading (which they have reason to know). The Commission

believes, therefore, that it is reasonable to require broker-dealers to take into account a

customer’s trading activity through the broker-dealer’s accounts to implement Section 13(h).

204 15 U.S.C. 78w(a). 205 15 U.S.C. 78m(h)(2).

74

reason to know whether a person is a large trader based on the transactions in NMS securities

effected by or through such broker-dealer.” To clarify the Commission’s intent for determining

whether a registered broker-dealer has reason to know, the Commission is adopting a revised

second sentence of paragraph (a)(9) of the Rule to provide: “For purposes of determining under

this rule whether a registered broker-dealer has reason to know that a person is a large trader, a

registered broker-dealer need take into account only transactions in NMS securities effected by

or through such broker-dealer.” In other words, when considering whether a customer’s trading

activity has exceeded the “identifying activity level,” the broker-dealer need only consider the

customer’s activity effected through an account or a group of accounts at that broker-dealer. If

that activity rose to the “identifying activity level”, the broker-dealer would be required to treat

the customer as an Unidentified Large Trader. Beyond considering the transactions effected

through an account or a group of accounts at the broker-dealer, however, the broker-dealer is not

required to proactively make further inquiries for the purpose of determining its customer’s

status (e.g.

Further, in response to questions regarding the scope of a broker-dealer’s obligations with

respect to an Unidentified Large Trader, the Commission notes that the Rule does not require a

broker-dealer to stop doing business with Unidentified Large Traders. Rather, paragraph (d)(3)

of the Rule requires broker-dealers to maintain information on Unidentified Large Traders, and

, by seeking to determine the customer’s trading activity at other broker-dealers).

However, if a registered broker-dealer nevertheless has actual knowledge that a person is a large

trader and the person has not provided the broker-dealer with a LTID, then the broker-dealer

must treat the person as an Unidentified Large Trader under the recordkeeping and reporting

requirements of the Rule.

75

paragraph (e) requires broker-dealers to report that information to the Commission on request.206

The Commission also is making several modifications to paragraph (f) from the proposal

to clarify the requirements of the safe harbor provision contained in that paragraph. As noted

above, this safe harbor would provide a broker-dealer with assurance as to whether it has “reason

to know” that a person is a large trader, and therefore whether the broker-dealer must treat such

person as an Unidentified Large Trader. As a practical matter, the Commission expects that

broker-dealers with customers whose trading activities could exceed the identifying activity level

will likely elect to avail themselves of the safe harbor. To qualify under the safe harbor, the

broker-dealer must (i) implement policies and procedures reasonably designed to identify

customers whose trading activity exceeds the identifying activity level, (ii) treat such customers

Moreover, the Rule does not require a broker-dealer to proactively or affirmatively determine

who is in fact a large trader. A potential large trader is required to assess for itself whether it

meets the identifying activity threshold and thus qualifies as a large trader. The Commission

notes that in some cases only the potential large trader would know whether it in fact is a large

trader because certain types of transactions are excluded from the identifying activity level

calculation. For example, a broker-dealer may have a customer that effected $22,000,000 worth

of transactions through that broker-dealer in a given day, in excess of the identifying activity

threshold. If that customer did not previously identify itself as a large trader to the broker-dealer

by providing an LTID and identifying the accounts to which it applies, then the broker-dealer

would treat the customer as an Unidentified Large Trader. However, the customer may not, in

fact, be required to register as a large trader because the customer may not have exercised

investment discretion over those transactions.

206 The Rule does not address any other obligation or potential liability of the broker-dealer under

any other provisions of the federal securities laws.

76

as Unidentified Large Traders for purposes of the Rule, and (iii) notify such customers of their

potential obligation to comply with the rule as a large trader.

Certain technical changes to paragraph (f) have been made to clarify these requirements.

For example, paragraphs (f)(1) and (2) now make clear that if a customer’s trading activity

exceeds the identifying activity level, and the customer has not self-identified as a large trader,

the broker-dealer must treat that customer as an Unidentified Large Trader for purposes of the

Rule. In addition, paragraph (f)(1) has been revised to clarify that – consistent with the

definition of Unidentified Large Trader – the broker-dealer’s policies and procedures for

measuring a customer’s trading activity need only consider transactions effected in accounts

carried by the broker-dealer or through which the broker-dealer executes transactions.207

ATSs. One commenter,

208

207 In addition, as proposed, paragraph (f) applied to broker-dealers that are large traders, exercise

investment discretion over an account together with a large trader or Unidentified Large Trader, carry an account for a large trader or Unidentified Large Trader, or effect transactions directly or indirectly for a large trader where a non-broker-dealer carries the account. Because the Commission is not adopting the proposed requirement to disclose account numbers or the corresponding requirements on large traders to disclose their LTIDs to other large traders, the Commission believes it is appropriate to streamline the introduction to paragraph (f) to refer to broker-dealers generally, and to modify sub-paragraph (1) to refer to transactions effected through an account or a group of accounts carried by such broker-dealer or through which such broker-dealer executes transactions, as applicable.

a broker-dealer that operates an ATS, argued that an ATS

should not have a duty to monitor its subscribers’ compliance with the large trader identification

requirements. The commenter argued that, just as an exchange would not have an obligation to

monitor its broker-dealer members’ compliance with proposed Rule 13h-l, a broker-dealer that

operates an ATS should not be required to monitor whether its subscribers are complying with

the requirements of the rule. The Commission notes that the monitoring requirements are only

applicable to registered broker-dealers that are large traders, carry accounts for large traders or

Unidentified Large Traders, or effect transactions on behalf of large trader customers whose

208 See GETCO Letter at 3.

77

accounts are carried by non-broker-dealers. If an ATS is not operating in those capacities, then it

is not subject to the monitoring requirements.

C.

In the Proposing Release, the Commission requested comment about whether the

proposed treatment of foreign entities is appropriate and the extent to which foreign statutes

might complicate compliance with the proposed rule by foreign large traders.

Foreign Entities

209 In addition, the

Commission solicited comment concerning whether the proposed rule would have any

unintended negative consequences for the U.S. markets.210 The Commission received a number

of comments, both general and specific, on these topics.211 One commenter expressed concern

with the broad definition of “large trader” applying to non-U.S. entities, and suggested that the

Commission modify the proposed rule to impose recordkeeping and reporting requirements

solely on registered broker-dealers.212 The Commission believes that limiting the definition of

“large trader” in the suggested manner would be inconsistent with the legislative intent behind

Section 13(h), as evidenced by the plain language of the statute.213


The statute contemplates that

the Commission would be able to identify all persons who are large traders, not just large traders

who are U.S. entities. Accordingly, the Rule requires a foreign entity that is a large trader to

3, 75 FR at 21473. 210 See id. at 21482. 211 See, e.g., European Banking Federation and Swiss Bankers Association Letter at 2-5 and SIFMA

Letter at 12-13. 212 See European Banking Federation and Swiss Bankers Association Letter at 3. 213 Section 13(h)(1) in pertinent part provides that each large trader shall: (A) provide such

information to the Commission as the Commission may by rule or regulation prescribe as necessary or appropriate, identifying such large trader and all accounts in or through which such large trader effects such transactions; and (B) identify, in accordance with such rules or regulations as the Commission may prescribe as necessary or appropriate, to any registered broker or dealer by or through whom such large trader directly or indirectly effects securities transactions, such large trader and all accounts directly or indirectly maintained with such broker or dealer by such large trader in or through which such transactions are effected.

78

comply with the identification requirements of paragraph (b) of the Rule. With respect to the

recordkeeping and reporting requirements, however, the Commission notes that paragraphs (d)

and (e) of the Rule, concerning recordkeeping and reporting, respectively, explicitly apply only

to U.S.-registered broker-dealers.

One commenter suggested that it would be impractical for a registered broker-dealer to

collect identifying information required by proposed Rule 13h-1(d)(3) when such collections

may be prohibited under foreign laws.214 The commenter further suggested that, because

registered broker-dealers may not be able to comply with this provision, they “may effectively be

forced to cease providing services to non-U.S. intermediaries acting on behalf of unidentified

non-U.S. Traders….”215 Another commenter suggested that it would be impractical for a

registered broker-dealer to monitor for foreign Unidentified Large Traders who trade through

intermediaries.216 The commenter asked for clarification in this context regarding a registered

broker-dealer’s duty to inform its customers about the self-identification requirements of the

Rule.217

214 See European Banking Federation and Swiss Bankers Association Letter at 3.

Specifically, the commenter asked whether it would be sufficient for the broker-dealer

to notify the foreign intermediary of its customer’s possible obligation to comply with the self-

identification requirements of the Rule. As discussed further below, when a U.S. registered

broker-dealer deals directly with a foreign entity that is an intermediary, it would treat that

foreign intermediary like any other customer: it must collect the information specified by Rule

13h-1(d)(2) about the foreign intermediary’s transactions if it is a large trader and, if it is an

215 See id. 216 See SIFMA Letter at 12. 217 See id.

79

Unidentified Large Trader,218 the broker-dealer must also collect the information specified by

Rule 13h-1(d)(3).219 The Rule does not require a registered broker-dealer to collect the

identifying information about the foreign intermediary’s customers.220

As discussed above, Rule 13h-1(f) provides that a registered broker-dealer shall be

deemed not to know or have reason to know that a person is a large trader if it establishes

policies and procedures reasonably designed to assure compliance with the identification

requirements of the Rule and does not have actual knowledge to the contrary. Those policies and

procedures would need to be reasonably designed to identify potential large traders based upon

transactions effected through an account or a group of accounts considering account name, tax

identification number, or other identifying information available on the books and records of the

broker-dealer. The Rule does not require broker-dealers to definitively determine who is, in fact,

a large trader.

Further, in the case of foreign intermediaries, the Commission recognizes that the U.S.

registered broker-dealer may only know as its customer the foreign intermediary, not the persons

trading through the account of the foreign intermediary. In such case, the registered broker-

218 See discussion supra at Section III.B.3 (concerning monitoring for Unidentified Large Traders). 219 Rule 13h-1(d)(3) requires a broker-dealer to maintain the following additional information for an

Unidentified Large Trader: name, address, date the account was opened, and tax identification number(s). If an Unidentified Large Trader is a non-U.S. entity and does not have a U.S.-issued tax identification number, then the broker-dealer would only need to maintain the entity’s name, address, and date the account was opened.

220 The legislative history indicates Congress’s expectation that the Commission, in implementing a large trader reporting system, “would not impose requirements on broker-dealers to report beneficial ownership information that is not recorded in the normal course of business.” Senate Report, supra note 14, at 42. The Committee specifically noted that many broker-dealers did not maintain beneficial ownership records of transactions of foreign persons that are carried out through banks, particularly foreign banks, which serve as the record holder of such securities. See id. The Committee expected that such beneficial owners would not be assigned LTIDs. See id. As discussed above, for all persons (both foreign and domestic), large trader status is triggered by the exercise of investment discretion, not mere beneficial ownership of NMS securities.

80

dealer’s policies and procedures would apply to its contact with the foreign intermediary. If the

intermediary effects transactions through the U.S. broker-dealer that exceed the identifying

activity level, then the safe harbor contemplates, as discussed above, that the broker-dealer

inform the intermediary that the intermediary may be a large trader under Rule 13h-1. The

foreign intermediary, then, bears the principal burden of compliance in determining whether it is

a large trader.

With respect to the requirement on large traders to file Form 13H with the Commission,

the Commission is aware that the laws of certain foreign jurisdictions may hinder a foreign large

trader’s ability to disclose certain personal identifying information. In the event, which the

Commission believes to be unlikely, that the laws of a large trader’s foreign jurisdiction preclude

or prohibit the large trader from waiving such restrictions or otherwise voluntarily filing Form

13H with the Commission, then such foreign large traders or representatives of foreign large

traders may request an exemption from the Commission pursuant to Section 36 of the Exchange

Act221 and paragraph (g) of the Rule.222

Commenters also discussed the practical difficulties associated with requiring large

traders (such as investment advisers) to disclose account numbers. A few commenters stated that

the proposal was unclear as to whether it would have required collection of brokerage account

information or the account numbers assigned by investment advisers that sometimes contain

client-identifying information.

223

221 15 U.S.C. 78mm.

The Commission has addressed this concern by not adopting

222 A registered broker-dealer, however, would remain subject to the recordkeeping, reporting, and monitoring provisions of the Rule with respect to any Unidentified Large Traders independent of whether any such entity had received an exemption from the requirements to file Form 13H with the Commission.

223 See European Banking Federation and Swiss Bankers Association Letter at 3; T. Rowe Price Letter at 2; and Financial Engines Letter at 4.

81

the proposed requirement to report brokerage account numbers, as discussed above.224 Instead,

the Commission is requiring that a large trader provide information about the registered broker-

dealers through which Securities Affiliates have an account. One commenter asserted that many

foreign large traders do not have a direct relationship with any registered broker-dealer because

they utilize intermediaries.225 The commenter stated that the large trader’s ability to provide

information about the “ultimate broker may be incomplete at best and may result in inadvertently

misleading the Commission.”226

D.

The Commission does not believe that it is unduly burdensome

to expect a large trader to be able to identify the foreign intermediary with which it maintains

accounts. The Commission expects all large traders, regardless of their place of domicile, to

identify each broker-dealer at which it or any Securities Affiliate has an account and disclose the

type(s) of services provided.

Three Specific Factors Considered by the Commission Pursuant to Section 13(h) of the Exchange Act

When engaging in rulemaking pursuant to its authority under Section 13(h), the

Commission is required to take into account the following factors: (A) existing reporting

systems; (B) the costs associated with maintaining information with respect to transactions

effected by large traders and reporting such information to the Commission or self-regulatory

organizations; and (C) the relationship between the United States and international securities

markets.227

1.

These considerations have informed this final rule, as discussed below.

224 See supra at Section III.A.3.

Existing Reporting Systems

f. 225 See European Banking Federation and Swiss Bankers Association Letter at 2. 226 See id. at 4 (discussing the challenges associated with foreign large traders providing account

information). 227 See Section 13(h)(5) of the Exchange Act, 15 U.S.C. 78m(h)(5).

82

Currently, the Commission collects transaction data from registered broker-dealers

through the EBS system.228

Rule 13h-1 is focused on collecting information about large traders through modifications

to existing EBS systems. Specifically, the Rule will provide the Commission with background

information about all large traders through Form 13H submissions,

At present, neither the EBS system nor any other source of data

available to the Commission allows it to definitively identify traders that conduct a substantial

amount of trading activity or assess the impact of their activities on the securities markets.

229 and will allow the

Commission to obtain information on their transactions through the requirement on registered

broker-dealers to track large trader trades according to the trader’s LTID. Moreover, by

requiring registered broker-dealers to collect and report (upon request) the execution time of all

large trader transactions, the Commission is significantly enhancing its ability to investigate

trading. Accordingly, the Commission believes that this new rule, which will be implemented

through modifications to existing EBS systems, is narrowly tailored to address specific

regulatory interests by requiring the disclosure of information that is not otherwise collected.230

2.

Costs Associated With Maintaining and Reporting Large Trader Transaction Data

As discussed in detail below,231

228 See 17 CFR 240.17a-25 (Electronic Submission of Securities Transaction Information by

Exchange Members, Brokers, and Dealers). See also Rule 17a-25 Release, supra note

the Commission considered the costs associated with

maintaining and reporting the large trader transaction data required under the Rule by registered

broker-dealers. In particular, as discussed below, the Commission has designed the proposed

19. 229 See supra Section II.B. 230 The Commission notes that Form 13H requires a large trader to identify other forms it and its

Securities Affiliates file with the Commission. As discussed above, this disclosure is designed to facilitate and expedite investigations connected to large traders.

231 See infra Section V.B.2.

83

rule to minimize the burdens of the large trader reporting requirements on both large traders and

registered broker-dealers.

3.

In adopting Rule 13h-1 and Form 13H, the Commission is mindful of the danger of

disadvantaging U.S. securities markets vis-à-vis foreign securities markets. In the Proposing

Release, the Commission expressed concern that excluding foreign large traders from the

proposed rule’s requirements could create a competitive disparity between domestic markets and

persons and foreign markets and persons.

Relationship Between U.S. and International Securities Markets

232 Commenters raised issues about the application of

the Rule to foreign entities, which are addressed above.233

The Commission solicited comment specifically about: whether the proposed rule might

incentivize trading through certain market centers; whether large traders would effect their trades

through entities other than registered broker-dealers (

e.g., foreign brokers); whether large traders

might trade increasingly in foreign jurisdictions to evade the proposed reporting requirements;

whether the proposed treatment of foreign entities is appropriate; the extent to which foreign

statutes complicate foreign large traders’ ability to comply with the proposed rule; and whether

the proposal would have any unintended negative consequences for the U.S. markets.234

One commenter warned that, to the extent that registered broker-dealers incur higher

costs as a result of the complying with the Rule, the Rule may result in some brokerage business

being driven offshore to foreign brokers who will not bear the same compliance burden.

The

Commission received few comments that specifically addressed these topics.

235


As

3, 75 FR at 21471. 233 See supra Section III.C. 234 See Proposing Release, supra note 3, 75 FR at 21473, 21482. 235 See Prudential Letter at 2, n.4.

84

discussed above, the Commission clarified the extent and nature of the monitoring

responsibilities applicable to registered broker-dealers and does not believe that the limited,

high-level monitoring requirements would impose a cost so high as to drive business offshore.

Further, as discussed in the Proposing Release and further below, the Commission believes that

the Rule has been narrowly tailored to produce a core set of information necessary for the

Commission to effectuate its authority under Section 13(h) of the Exchange Act in a manner that

only results in minimal increased costs and burdens.

Another commenter suggested that the Rule may shift business away from trading in

NMS securities and to other financial products that are not subject to the large trader reporting

requirements but that allow market participants to undertake economically equivalent

positions.236 Specifically, the commenter asserted that market participants may gain the

equivalent exposure through European Depositary Receipts, Global Depositary Receipts,

European exchange-traded funds, futures, and swaps and that, if the Rule is adopted, it may cost

less to use these alternatives than to invest directly in NMS securities.237 The commenter

provided no data to support its position and did not take into account the liquidity profiles or

transaction cost differences among those alternatives. The Rule is designed to be minimally

burdensome both to large traders and the registered broker-dealers who must record and report

trading information. The Commission also notes that the costs associated with some of the

alternatives identified by the commenter may soon change. For example, Title VII of the Dodd-

Frank Wall Street Reform and Consumer Protection Act238

236 See European Banking Federation and Swiss Bankers Association Letter at 4-5.

directs the Commission and the

CFTC to regulate over-the-counter derivatives. Thus, these investments will be subject to

237 See id. 238 Pub. L. No. 111-203 (July 21, 2010).

85

regulation and oversight that have not applied in the past. In addition, the CFTC has a large

trader reporting regime that currently applies to traders and transactions that are subject to the

CFTC’s regulatory authority. The Senate Report that accompanied the Market Reform Act

observed that the U.S. futures markets, where reporting of large futures positions is required,

have not been competitively disadvantaged by the CFTC’s large trader reporting system, and that

participants in those U.S. markets have generally not left for foreign markets.239 On balance, as

discussed further below, the Commission believes that the costs associated with Rule 13h-1 will

not negatively impact the attractiveness of U.S. securities markets, capital formation in the

U.S.,240

E.

or the competitive position of U.S. market participants.

The Commission proposed that the broker-dealer recordkeeping requirements contained

in Rule 13h-1(d) and the reporting requirements contained in Rule 13h-1(e) would become

effective six months after adoption of a final rule.

Implementation and Compliance Dates, Exemptive Authority

241 In the Proposing Release, the Commission

solicited comment regarding the proposed implementation period.242 The few commenters who

specifically responded to this inquiry expected that it would take longer than six months to

implement the necessary system changes.243 One commenter suggested that 18 months would be

a more appropriate implementation period to accommodate the system changes and testing

required to implement the proposed T+1 reporting requirement.244

239 See Senate Report, supra note

14, at 42. 240 The Senate Committee on Banking, Housing and Urban Affairs expected the Commission, in

adopting any direct reporting rules, to consider carefully the total impact of such rules on capital formation in the U.S. See id.

241 See Proposing Release, supra note 3, 75 FR at 21471. 242 See id. at 21473. 243 See Financial Information Forum Letter at 7 and SIFMA Letter at 6. 244 See SIFMA Letter at 19.

86

After considering the comments, the Commission continues to believe that, because the

Rule utilizes the existing EBS system infrastructure, broker-dealers should be able to enhance

their existing recordkeeping and reporting systems to meet the requirements of the proposed

large trader rule within a relatively short time period. Nevertheless, to accommodate

commenters’ requests for more time to test and implement their systems, the Commission is

adopting an implementation date for the requirements applicable to registered broker-dealers

three months later than proposed. The Commission believes that this additional time should

allow registered broker-dealers to plan, design, implement, and test the small number of

enhancements to their existing transaction reporting systems required by the Rule. Accordingly,

the deadline for implementing the recordkeeping and reporting requirements applicable to

registered broker-dealers is seven months after the Effective Date of the Rule.245

The Commission also proposed that the self-identification requirements for large traders

under Rule 13h-1(b) would become effective three months after adoption of a final rule.

246 In

the Proposing Release, the Commission requested comments about whether that implementation

period was sufficient.247 A number of commenters suggested lengthening the three-month

implementation period, recommending either 12 months248 or 18 months.249 Two commenters250

245 The Effective Date of the Rule, as noted above, is 60 days after publication in the Federal

Register.

246 See Proposing Release, supra note 3, 75 FR at 21471. 247 See id. at 21473. 248 See Prudential Letter at 5; Investment Adviser Association Letter at 9; and Investment Company

Institute Letter at 12. 249 See SIFMA Letter at 19. 250 See T. Rowe Price Letter at 3 and Investment Adviser Association Letter at 9-10.

87

suggested that the self-identification requirements should be delayed until the Commission is

prepared to receive electronic Forms 13H.251

As discussed above, the Commission has streamlined the Form 13H from the proposed

version to minimize the reporting burdens. For example, the Commission did not adopt the most

detailed question in the proposed Form that would have required large traders to identify all of

the brokerage account numbers through which they trade. With these changes from the proposal,

the Commission believes that the three-month time frame provides large traders adequate time to

gather together the information required by the Form. Further, the Commission expects that its

electronic filing system will be operational and capable of receiving fully-electronic Form 13H

filings by the proposed compliance date. Nevertheless, to accommodate commenters’ requests

for more time, the Commission is adopting a longer compliance date for large traders.

Accordingly, the self-identification requirement for large traders will commence two months

after the Effective Date of the Rule.

252

Section 13(h)(6) of the Exchange Act

253

251 In the Proposing Release, the Commission mentioned the possibility that large traders might be

required to file Forms 13H in paper form in the event that the agency’s electronic filing system is not operational as of the implementation deadline. See Proposing Release, supra note

authorizes the Commission “by rule, regulation,

or order, consistent with the purposes of this title, [to] exempt any person or class of persons or

any transaction or class of transactions, either conditionally or upon specified terms and

conditions or for stated periods, from the operation of [Section 13(h)], and the rules and

regulations thereunder.” Rule 13h-1(g) implements this authority, providing that: “[u]pon

written application or upon its own motion, the Commission may by order exempt, upon

3, 75 FR at 21465.

252 The Effective Date of the Rule, as noted above, is 60 days after publication in the Federal Register.

253 15 U.S.C. 78m(h)(6).

88

specified terms and conditions or for stated periods, any person or class of persons or any

transaction or class of transactions from the provisions of this rule to the extent that such

exemption is consistent with the purposes of the Securities Exchange Act.”

The Commission requested comment about whether certain categories of persons (such

as floor brokers, specialists, and market makers) should be exempted from the proposed rule.254

One commenter suggested exempting persons whose trading activities are an ancillary activity in

support of a core charitable purpose.255 The commenter asserted that such non-profit entities

generally are infrequent traders, and that the Rule is designed to capture the activities of frequent

traders.256

As discussed above, frequency of trading alone does not affect whether a person is a large

trader.

257

The Commission notes, as discussed above, that any entity that merely beneficially owns

NMS securities would not qualify as a large trader; only an entity that exercises investment

discretion, directly or indirectly, on behalf of itself or others (

Non-profit organizations may engage in arm’s-length purchases and sales of NMS

securities in the secondary market, and their transactions may involve the exercise of investment

discretion. Therefore, at this time, the Commission does not believe that a blanket exemption for

such entities is appropriate.

e.g.

IV.

, a registered investment adviser

or a pension fund manager), and effects transactions equal to or greater than the identifying

activity level, can qualify as a large trader.


Paperwork Reduction Act

3, 75 FR at 21473. 255 See Howard Hughes Medical Institute Letter at 2. 256 See id. at 1. 257 See supra text following note 60.

89

The Rule contains “collection of information” requirements within the meaning of the

Paperwork Reduction Act of 1995 (“PRA”).258

In the Proposing Release, the Commission solicited comment on the collection of

information requirements. The Commission noted that the estimates of the effect that the Rule

would have on the collection of information were based on the Commission’s experience with

similar reporting requirements. As discussed above, the Commission received 87 comment

letters on the proposed rulemaking. Various commenters addressed the collection of information

aspects of the proposal.

In accordance with 44 U.S.C. 3507 and 5 CFR

1320.11, the Commission submitted the provisions to the Office of Management and Budget

(“OMB”) for review. The title for the proposed collection of information requirement, including

proposed Rule 13h-1 and proposed Form 13H, is “Information Required Regarding Large

Traders Pursuant to Section 13(h) of the Securities Exchange Act of 1934 and Rules

Thereunder.” An agency may not conduct or sponsor, and a person is not required to respond to,

a collection of information unless it displays a currently valid control number.

259

A.

Under Rule 13h-1, a “large trader” is any person that directly or indirectly, including

through other persons controlled by such person, exercises investment discretion over one or

more accounts and effects transactions for the purchase or sale of any NMS security for or on

behalf of such accounts, with or through one or more registered broker-dealers, in an aggregate

amount equal to or greater than the identifying activity level.

Summary of Collection of Information

258 44 U.S.C. 3501 et seq. 259 See, e.g., Managed Funds Association Letter, Prudential Letter, Investment Adviser Association

Letter, Wellington Management Letter, Investment Company Institute Letter.

90

All large traders will be required to identify themselves to the Commission by filing

Form 13H and will be required to update their Form 13H from time to time.260 Upon receiving

an initial Form 13H, the Commission will assign to the large trader a unique LTID. Each large

trader will be required to disclose to registered broker-dealers effecting transactions on its behalf

its LTID and each account to which it applies.261 In addition, upon request by the Commission, a

large trader will be required promptly to provide additional information to the Commission that

will allow the Commission to further identify the large trader and all accounts through which the

large trader effects transactions.262

As discussed above, in response to comments, the Commission has adopted Form 13H

without the proposed requirement that large traders report their broker-dealer account numbers

on Form 13H. Instead, large traders will be required to report a list of broker-dealers with whom

they have an account. As a consequence, as discussed above, large traders will not have to report

on Form 13H the LTID of any unaffiliated large trader with whom they share investment

discretion, as that proposed requirement was connected to the identification of accounts.

Rule 13h-1 also imposes recordkeeping, reporting, and monitoring requirements on

registered broker-dealers. Paragraph (d)(1) of the Rule requires every registered broker-dealer to

maintain records of all information required under paragraphs (d)(2) and (d)(3) for all

transactions effected directly or indirectly by or through (i) an account such broker-dealer carries

for a large trader or an Unidentified Large Trader or (ii) if the broker-dealer is a large trader, any

260 See new Rule 13h-1(b). 261 See new Rule 13h-1(b)(2). 262 See new Rule 13h-1(b)(4).

91

proprietary or other account over which such broker-dealer exercises investment discretion.263

Additionally, where a non-broker-dealer (such as a bank) carries an account for a large trader or

an Unidentified Large Trader, the broker-dealer effecting transactions directly or indirectly for

such person must maintain records of all of the information required under paragraphs (d)(2) and

(d)(3) for those transactions. The term “Unidentified Large Trader” is defined to mean each

person who has not complied with the identification requirements of paragraphs (b)(1) and (b)(2)

of the Rule that a registered broker-dealer knows or has reason to know is a large trader. For

purposes of determining under the Rule whether a registered broker-dealer has reason to know

that a person is a large trader, a registered broker-dealer need take into account only transactions

in NMS securities effected by or through such broker-dealer.264 Further, a registered broker-

dealer will be deemed not to know or have reason to know that a person is a large trader if it

establishes policies and procedures reasonably designed to assure compliance with the

identification requirements and does not have actual knowledge that a person is a large trader.265

263 A broker-dealer that exercises discretion over an account with someone else would know that that

person is an Unidentified Large Trader based on the transactions effected through that jointly managed account.

In response to comments, the Commission clarified that a broker-dealer need only look to

aggregate transactions it effected for its customer in assessing whether a person may be an

Unidentified Large Trader. The Commission also clarified that even if a person’s transactions at

a broker-dealer meet the applicable identifying activity threshold, the customer might or might

264 See new Rule 13h-1(a)(9) (defining “Unidentified Large Trader”). 265 See new Rule 13h-1(f) (the monitoring safe harbor). The policies and procedures contemplated

by the safe harbor contemplate systems that are reasonably designed to detect and identify a large trader based upon transactions effected through an account or groups of accounts considering the identity of the trader by using information readily available to the broker-dealer, such as name or tax identification number.

92

not be a large trader under Rule 13h-1, and the person itself is responsible for determining

whether it is a large trader.266

Complementing the recordkeeping requirements on broker-dealers, Rule 13h-1(e)

requires registered broker-dealers that are required to keep records pursuant to paragraph (d)(1)

to report that information to the Commission upon request.

267 Specifically, upon the request of

the Commission, a registered broker-dealer must report electronically, in machine-readable form

and in accordance with instructions issued by the Commission, all information required under

paragraphs (d)(2) and (d)(3) for all transactions effected directly or indirectly by or through

accounts carried by such broker-dealer for large traders and other persons for whom records must

be maintained, equal to or greater than the reporting activity level.268

Broker-dealers will need to report a particular day’s trading activity only if it equals or

exceeds the “reporting activity level.” While a registered broker-dealer is required to report data

for a given day only if it is equal to or greater than the reporting activity level, the Rule

specifically allows a broker-dealer to voluntarily report a day’s trading activity that falls short of

the applicable threshold. Registered broker-dealers may wish to take this approach if they prefer

to avoid implementing systems to filter the transaction activity and would rather utilize a “data

dump” approach to reporting large trader transaction information to the Commission. Further, as

266 For example, the customer might have effected transactions that, for purposes of determining

whether a person is a large trader, are excluded from consideration under new Rule 13h-1(a)(6), in which case the customer would not qualify as a “large trader” based solely on those transactions.

267 See new Rule 13h-1(e). 268 In addition to reporting transaction data on large traders, the Rule requires broker-dealers to

report transaction data for Unidentified Large Traders, along with additional information to help the Commission identify the Unidentified Large Trader. Specifically, paragraph (e) of the Rule requires broker-dealers to maintain and report for Unidentified Large Traders such person’s name, address, date the account was opened, and tax identification number(s). See also new Rule 13h-1(d)(3).

93

discussed above, the Commission clarified in response to comments that while a person need not

count trading activity that falls within one of the listed categories of excluded transactions when

it determines whether it meets the applicable identifying activity threshold, a broker-dealer must

report all transactions that it effected through the accounts of a large trader without reference to

or exclusion of any transactions listed in Rule 13h-1(a)(6).

In recognition of the value of utilizing existing reporting systems,269 the Rule requires

broker-dealers to transmit the transaction records to the Commission utilizing the infrastructure

of the existing EBS system. With respect to timing, Section 13(h)(2) of the Exchange Act

provides that records of a large trader’s transactions must be made available on the morning after

the day the transactions were effected.270 Rule 13h-1 incorporates this requirement in paragraph

(d)(5). Therefore, transaction reports, including data on transactions up to and including the day

immediately preceding the request, will need to be submitted to the Commission no later than the

day and time specified in the request for transaction information, which shall be no earlier than

the opening of business of the day following such request, unless in unusual circumstances the

same-day submission of information is requested. Paragraph (d)(4) of the Rule requires that

such records be kept for a period of three years, the first two in an accessible place, in

accordance with Rule 17a-4 under the Exchange Act.271

B.

The Commission will use the information collected pursuant to Rule 13h-1 to identify

significant market participants and collect data on their trading activity. The large trader

Use of Information

269 As noted above, in connection with exercising rulemaking authority under Exchange Act Section

13(h), the Commission must consider existing reporting systems. See supra Section III.D.1. 270 See 15 U.S.C. 78m(h)(2). See also discussion supra at Section III.B.2 (concerning reporting

requirements). 271 17 CFR 240.17a-4.

94

reporting requirements will provide the Commission with access to a new data source that will

contribute to its ability to conduct investigations and enforcement matters, as well as analyze

market activity, and should enhance its ability to assess the impact of large traders on the

securities markets. It also will facilitate the Commission’s trading reconstruction efforts, as

transaction data that will be reported to the Commission pursuant to Rule 13h-1 will include the

time of execution of the order as well as the identity of the large trader that effected the trade.

Registered broker-dealers will use the information they collect pursuant to Rule 13h-1,

including LTID numbers, to comply with the requirement of the Rule to report to the

Commission upon request all transactions they effect for large traders. In addition, registered

broker-dealers that take advantage of the monitoring safe harbor will use the information they

collect pursuant to Rule 13h-1 in connection with their policies and procedures under the Rule to

monitor for Unidentified Large Traders and inform them of their potential obligations under Rule

13h-1. Registered broker-dealers also will be required to disclose the additional information they

collect on Unidentified Large Traders pursuant to Rule 13h-1(d)(3) to the Commission upon

request.

C.

In the Proposing Release, the Commission estimated that the “collection of information”

associated with the Rule would apply to approximately 400 large traders and 300 registered

broker-dealers. In the Proposing Release, the Commission solicited comment on the estimated

number of respondents. Several commenters believed that the Commission’s estimated number

of respondents appeared to be too low, though few provided data or analysis to support their

Respondents

95

conclusions.272

1.

For the reasons discussed below, the Commission continues to believe that the

Rule will affect approximately 400 large traders and 300 registered broker-dealers.

The estimated number of large traders was based on Commission experience in reviewing

EBS data and overseeing market participants. Notably, the estimate reflects Rule 13h-1(b)(3)

filing requirement provisions, which focus, in more complex organizations, on the parent

company of the entities that employ or otherwise control the individuals that exercise investment

discretion. One commenter believed that the estimate of 400 large traders was underestimated

and that the proposed thresholds may capture more than 400 large traders, including especially

infrequent large traders, based on the proposed identifying activity level.

Number of Large Traders

273 In particular, the

commenter argued that the rule should not impose a self-identification requirement on traders

that only infrequently trade in substantial volume.274

272 See, e.g., Investment Adviser Association Letter at 10; Managed Funds Association Letter at 2;

SIFMA Letter at 7; and Financial Information Forum Letter at 5-6.

The Commission agrees with this view,

which reflects some of the considerations that informed the Commission’s proposed provision

for inactive status, which it is adopting. As discussed above, inactive status is designed to reduce

the burden on infrequent traders who may trip the large trader threshold on a particular occasion

but who do not regularly trade at sufficient levels to otherwise warrant the regulatory

requirements under the Rule. Inactive status relieves the large trader from the requirement to file

amended Forms 13H. However, as discussed above, even where a market participant trades in

an amount that reaches the identifying activity threshold only infrequently – which at those times

nonetheless would represent a substantial amount of trading activity relative to overall market

273 See Managed Funds Association Letter at 2. 274 See id.

96

volume - the Commission seeks to identify that participant as a large trader at those times so as

to be able to obtain information about the participant. In light of the proposed provision for

inactive status, which the Commission is adopting as proposed, the Commission’s original

estimate of 400 large traders accounted for traders that only infrequently trade in excess of the

proposed identifying activity threshold, which the Commission also is adopting as proposed.

The Commission continues to believe that the estimate of 400 large traders is appropriate

for other reasons. The estimate reflects the Rule’s focus on identification and registration of

large traders at the parent company level. As noted in the Proposing Release, the purpose of this

focus is to narrow the number of persons that will need to self-identify and register on Form 13H

as “large traders,” thereby allowing the Commission to identify the primary institutions that

conduct a large trading business. One commenter believed that the number was underestimated

and that 400 option traders alone would qualify as large traders.275


However, this concern does

not reflect the fact that the Rule contemplates registration as a large trader at the parent company

level. Most, if not all, large trader control groups, as a natural consequence of their substantial

trading and hedging activities, would involve persons that are active across a broad array of

financial products trading in multiple venues, including cash equities and derivatives. The

Commission’s estimate, which was based on its experience with EBS data, takes into account

this fact. Accordingly, the estimate does not separately count the number of subsidiary traders

that conduct an options business (or any other securities business) as separate from the number

of large trader complexes since the estimated number of large traders considers that large traders

will identify at the parent company level, which is generally less burdensome than registering at

the subsidiary level, as discussed above.

97

In addition, as discussed above, in response to comments the Rule as adopted allows a

large trader to voluntarily register with the Commission, even before it meets the applicable

trading activity threshold, in order to eliminate its need to actively monitor its trading levels.276

2.

The Commission is not adjusting its estimate of the number of large traders to account for such

voluntary registrations because it expects that only persons whose trading activity would

eventually equal or exceed the identifying activity level will take advantage of this new

provision. In other words, the Commission expects that the only persons who would take

advantage of the voluntary registration provision are persons that wish to avoid the burdens of

monitoring their trading activity where such trading generally meets or exceeds the identifying

activity threshold – that is, who in fact will be large traders. Accordingly, the Commission’s

original estimate of 400 large traders already includes persons who might consider voluntary

registration because such persons were effectively deemed to be large traders for purposes of that

estimate.

Number of Broker-Dealers Affected

In the Proposing Release, the Commission estimated that 300 registered broker-dealers

would be subject to the recordkeeping, reporting, and monitoring requirements of the rule. This

estimate was based on broker-dealer responses to FOCUS report filings with the Commission

made in 2009. This estimate reflected the number of broker-dealer carrying firms that the

Commission believes would carry accounts for large traders or that would effect transactions

directly or indirectly for a large trader or an Unidentified Large Trader where a non-broker-

dealer carries the account.

276 See supra text accompanying note 115 (for a discussion of voluntary filing).

98

One commenter thought that the Commission’s broker-dealer estimate of 300 broker-

dealers was underestimated and believed that the number of broker-dealers affected by the

monitoring requirements might be closer to 1,500.277 This commenter, whose analysis was

based on the monitoring safe harbor provisions of the proposed rule, expressed concern with the

reference to “other readily available information” contained in the proposed safe harbor. The

commenter explained that “other readily available information might only be available at the

introducing broker-dealer, and therefore clearing firms might reasonably require the broker-

dealers that introduce customer accounts to them to implement their own policies and

procedures….”278 Thus, the commenter’s assertion was based on a belief that, though the Rule

itself would not specifically require it, carrying broker-dealers might, in turn, require their

introducing broker correspondents to establish policies and procedures to collect information on

Unidentified Large Traders required by the Rule to assist the clearing firms in complying with

the requirements of the Rule that are applicable to them.279 The commenter’s estimate of 1,500

entities was based on the fact that approximately 1,657 FINRA members have been assigned

MPIDs as of June 2010.280

The Commission is mindful of this commenter’s concern and has clarified in the adopted

monitoring safe harbor provision of Rule 13h-1(f) the more limited scope intended of “other

identifying information” that a broker-dealer would need to consider. Specifically, as adopted,

the safe harbor policies and procedures would need to be reasonably designed to identify

Unidentified Large Traders based only on accounts at the broker-dealer. In assessing which

277 See Financial Information Forum Letter at 6. The commenter focused its comment on the

proposed monitoring requirement. 278 See id. 279 See id. 280 See id.

99

accounts to consider, the Rule, as adopted, clarifies that the broker-dealer’s policies and

procedures should consider account name, tax identification number, or other identifying

information “available on the books and records of such broker-dealer.” The broker-dealer’s

safe harbor policies and procedures would not need to take into account identifying information

on the books and records of another broker-dealer. The Commission believes it has addressed

the commenter’s concerns by clarifying in the adopted Rule that the approximately 300 brokers

affected by this Rule would not be required to consider information that would otherwise have

required, as estimated by the commenter, as many as 1,500 broker-dealers that introduce

customer accounts to implement their own policies and procedures.

In addition, the Commission believes that large traders, whose aggregate NMS securities

transactions equal or exceed the identifying activity level, require sophisticated trade-processing

capacities. Accordingly, it is unlikely that 1,500 broker-dealers that have been assigned an

MPID either carry accounts for or will effect a transaction on behalf of a large trader because not

all such entities will have, or will be in the business of, effecting trades for large traders. For

example, one commenter, a large investment management firm and likely large trader, reported

that it currently has “approximately 250 broker-dealers on our approved list for executing equity

transactions.”281

Further, as discussed above, in considering whether a broker-dealer has “reason to know”

that a person is a large trader, the broker-dealer need take into account only transactions in NMS

securities effected by or through such broker-dealer.

This number is lower than the Commission’s estimate of 300 affected broker-

dealers.

282

281 See Wellington Management Letter at 3.

Moreover, a broker-dealer may

determine that it has no “reason to know” that a person is a large trader through two methods.

282 Section III.B.3 (discussing the monitoring requirements).

100

First, the broker-dealer may rely on the safe harbor of Rule 13h-1(f). Alternatively, however, a

broker-dealer may simply conclude, based on its knowledge of the nature of its customers and

their trading activity with the broker-dealer, that it has no reason to expect that any of these

customers’ transactions approach the identifying activity level. Accordingly, an introducing

broker-dealer whose customers do not effect transactions in NMS securities by or through it at

levels close to the identifying activity level could simply draw such conclusion and would not

need to implement any new policies and procedures.

Therefore, for the reasons described above, all 1,500 entities are not expected to be

impacted by the monitoring provisions of Rule 13h-1(f) and the Commission continues to

believe that its initial estimate of 300 affected broker-dealers is appropriate consistent with the

additional guidance provided in Rule 13h-1(f), as adopted.283

Further, as discussed above, the Commission received a comment letter from a broker-

dealer that operates an ATS inquiring whether the requirement to monitor for Unidentified Large

Traders would extend to other registered broker-dealers, including a broker-dealer that operates

an ATS.

As discussed above, the

Commission’s estimate of 300 broker-dealers was based on broker-dealer responses to FOCUS

report filings with the Commission, and reflected the number of broker-dealers that the

Commission believes would be reasonably likely to carry accounts for large traders or that would

be reasonably likely to effect transactions directly or indirectly for a large trader where a non-

broker-dealer carries the account.

284

283 To the extent that a broker-dealer that is subject to the monitoring requirements requires, by

contract or otherwise, an entity that is not otherwise subject to the Rule’s monitoring requirements to nevertheless perform a monitoring function, the Commission’s estimate does not account for that situation.

The monitoring requirements are applicable to registered broker-dealers that are

284 See GETCO Letter at 3.

101

large traders, carry accounts for large traders or Unidentified Large Traders, or effect

transactions on behalf of large trader customers whose accounts are carried by non-broker-

dealers. If an ATS is not operating in those capacities, then it is not subject to the monitoring

requirements. The Commission does not expect ATSs to act in these capacities, and so the

Commission is not amending its estimate of the number of affected registered broker-dealers to

include ATSs.

D.

Total Initial and Annual Burdens

1.

a.

Burden on Large Traders

Rule 13h-1 will present new burdens to persons that meet the definition of large trader.

In particular, persons, including those that might not presently be registered with the

Commission in some capacity, that meet the definition of “large trader” will become subject to a

new reporting duty, as the Rule will require each large trader to identify itself to the Commission

by filing a Form 13H and submitting annual updates, as well as updates on as frequently as a

quarterly basis when necessary to correct information previously disclosed that has become

inaccurate. Additionally, each large trader will be required to identify itself to each registered

broker-dealer through which it effects transactions. As discussed above, however, the

Commission did not adopt the proposed requirement that large traders disclose their LTIDs to

others with whom they collectively exercise investment discretion.

Duties of Large Traders

285

Paragraph (b)(1) of the Rule requires large traders to file Form 13H with the Commission

promptly after first effecting transactions that reach the identifying activity level.

286

285 See supra text following note

Thereafter,

large traders are required to file an amended Form 13H promptly following the end of a calendar

106 (for a discussion of the change). 286 See new Rule 13h-1(b)(1)(i).

102

quarter in the event that any of the information contained therein becomes inaccurate for any

reason (e.g., change of contact information, type of organization, trading strategy, regulatory

status, list of broker-dealers at which the large trader has an account, or description of

affiliates).287 Regardless of whether any amended Forms 13H are filed, large traders also are

required to file Form 13H annually, within 45 days after the calendar year-end, in order to ensure

the accuracy of all of the information reported to the Commission.288

b.

Additionally, Rule 13h-

1(b)(4) provides that the Commission may require large traders to provide, upon request,

additional information to identify the large trader and all accounts through which the large trader

effects transactions. Such requests for additional information may include, for example, a

disaggregation request to assist the Commission in identifying accounts through which a large

trader effects specific transactions.

In the Proposing Release, the Commission estimated that it would take a large trader

approximately 20 hours to calculate whether its trading activity qualifies it as a large trader,

complete the initial Form 13H with all required information, obtain a LTID from the

Commission, and inform its registered broker-dealers and other entities of its LTID and the

accounts to which it applies. The Commission based this estimate on its understanding that large

traders currently maintain systems that capture their trading activity and that these existing

systems would be sufficient without further modification to enable a large trader to determine

whether it effects transactions for the purchase or sale of any NMS security for or on behalf of

accounts over which it exercises investment discretion in an aggregate amount equal to or greater

Initial and Annual Burdens

287 See new Rule 13h-1(b)(1)(iii). 288 See new Rule 13h-1(b)(1)(ii).

103

than the identifying activity level. Accordingly, the Commission estimated that the one-time

burden for large traders would be approximately 8,000 burden hours.289

The Commission also estimated that the ongoing annualized burden for complying with

proposed Rule 13h-1 would be approximately 6,800 burden hours for all large trader

respondents.

290 This figure was based on the estimated number of hours it would take to file any

amendments as well as the required annual update to Form 13H. The Commission estimated that

the average large trader would be required to file one annual update and three amended updates

annually.291

Several commenters believed that the Commission underestimated the burden hour

estimates for large traders.

292

289 The Commission derived the total estimated burdens from the following estimates, which were

based on the Commission’s experience with, and burden estimates for, other existing reporting systems including those required by Rule 13f-1: (Compliance Manager at 3 hours) + (Compliance Attorney at 7 hours) + (Compliance Clerk at 10 hours) x (400 potential respondents) = 8,000 burden hours. Rule 13f-1, like new Rule 13h-1, requires monitoring of a certain threshold and, upon reaching that threshold, disclosure of information.

Some commenters suggested that large trader organizations may

need to develop integrated systems in order to accomplish parent company-level reporting, and

290 The Commission derived the total estimated burdens from the following estimates, which were based on the Commission’s experience with, and burden estimates for, other existing reporting systems including Rule 13f-1 and Rule 17a-25: (Compliance Manager at 2 hours) + (Compliance Attorney at 5 hours) + (Compliance Clerk at 10 hours) x (400 potential respondents) = 6,800 burden hours. Rule 13f-1, like new Rule 13h-1, requires monitoring of a certain threshold and, upon reaching that threshold, disclosure of information. As discussed above, Rule 17a-25 requires broker-dealers to disclose information that is very similar in scope and character to the information required under new Rule 13h-1. The Commission believed that determining whether a firm reaches the identifying activity level was a compliance function and that no software reprogramming would be required.

291 This estimate was based on the varied characteristics of large traders and the nature and scope of the items that would be disclosed on proposed Form 13H that would require updating and considered that large traders would file one required annual update and three quarterly updates when information contained in the Form 13H became inaccurate.

292 See, e.g., Prudential Letter; Investment Adviser Association Letter; and Investment Company Institute Letter.

104

correspondingly asserted that the estimate should account for this.293

Several commenters indicated that the proposed requirement to report account numbers

and names could be unduly burdensome.

As described below,

however, a parent company need only add together the aggregate gross trading activity of its

subsidiaries when it calculates whether it has reached the identifying activity level and need not

integrate trading or other systems. In addition, importantly, with respect to the information that

must be assembled and reported on the Form that would require the development of an integrated

system, as discussed directly below, the Commission has not adopted what commenters

identified as the single most burdensome item – the reporting of brokerage account numbers.

Instead, the Form, as adopted, requires large traders to disclose only basic identifying

information, such as a list of affiliates and a list of broker-dealers at which it has accounts, and

would not require the development of integrated systems to track brokerage account numbers

across subsidiaries.

294 These commenters, notably the investment advisers,

expressed concern over potential burden on large traders associated with reporting brokerage

account numbers. One commenter noted that it has more than 400,000 separate broker-dealer

account numbers associated with its clients that reside on the systems of the broker-dealers with

whom it transacts.295

293 See Prudential Letter at 5; Investment Adviser Association Letter at 7-8; and Investment

Company Institute Letter at 4-5, 9.

This commenter stated that it does not track or maintain a list of these

294 See, e.g., Wellington Management Letter and American Bankers Association Letter. 295 See Wellington Management Letter at 3. See also American Bankers Association Letter at 2

(stating that it believes reporting account numbers and names is unduly burdensome because it may require the reporting of potentially thousands of brokerage accounts).

105

internal broker-dealer account numbers and does not utilize these account numbers when

communicating with broker-dealers about trades.296

Another commenter suggested that account information may not be on the premises of

the large trader and that, even if it were, this data would not be in automated form that is

amenable to reporting on Form 13H.

297 One commenter explained that many investment

advisers do not know the account numbers assigned to them by their broker-dealers because that

information is not required by the software they use to communicate order allocation and

settlement instructions to broker-dealers.298 Another commenter stated that many investment

advisers have a large number of discretionary advisory clients and effect transactions on behalf

of such clients through a substantial number of different broker-dealers, through multiple prime

brokers, and, in the case of multi-managed accounts, in concert with other advisers.299 This

commenter stated that the proposal assumes that for each advisory client, the investment adviser

can easily identify brokerage accounts by name and number.300

296 See Wellington Management Letter at 3. See also Financial Engines Letter at 4-5 (stating that

although investment advisers may execute trades with broker-dealers indirectly, the adviser does not technically maintain brokerage accounts with those broker-dealers and is therefore not privy to information about brokerage accounts).

This commenter stated that in

practice, however, each transaction can be executed on behalf of many clients and that with

respect to each such transaction, although a particular broker-dealer may have assigned an

297 See Investment Company Institute Letter at 11. 298 See Wellington Management Letter at 3-4. As an alternative to reporting the account number, the

commenter suggested that an investment adviser report the codes utilized by its software solution to communicate with its broker-dealers.

299 See Investment Company Institute Letter at 7-8. 300 See id.

106

account number for its own internal recordkeeping purposes, the adviser does not have this

information.301

Based on these comments, the Commission agrees that its proposal underestimated the

burden hour estimates for large traders to report account numbers on Form 13H. In particular,

the Commission based its initial burden estimate for reporting account numbers on its

understanding that large traders have systems in place to readily track and manage their

brokerage account numbers. According to certain commenters, particularly investment advisers,

this may not be the case for some large traders, as some advisers rely on software to intermediate

the process of communicating with their broker.

302 For these entities, the information may not

be in a form that is amenable to reporting on the Form without the use of third-party software.303

As discussed above, the Commission is addressing these comments by not adopting the

proposed requirement to report account numbers.

304 Instead, the Commission is requiring the

large trader to disclose: (1) the names of broker-dealers with whom it has an account and (2) the

types of brokerage services provided by those brokers. One commenter noted that many traders

already maintain a list of approved broker-dealers in a readily accessible format, as they maintain

approved broker-dealer lists in the ordinary course of business and have processes for adding and

deleting broker-dealers as well as reviewing trades with a broker-dealer not on the approved

list.305

301 See id.

Requiring the reporting on the Form of a list of broker-dealers used, rather than all

accounts held by each broker-dealer, will bring the compliance burden for many large traders

that are investment advisers in line with the Commission’s original estimate of burdens on large

302 See id. at 8. 303 See, e.g., Investment Company Institute Letter and Wellington Management Letter. 304 See supra Section III.A.3.f (discussing account numbers). 305 See Investment Company Institute Letter at 9.

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traders generally. Consequently, the estimated burdens on large traders under the Form are now

in line with the requirements of the adopted Rule and Form.

With respect to the Commission’s assumption that large traders will be able to utilize

existing systems when considering their trading levels, one commenter stated that, in cases

where a large trader is a parent company, the parent may not itself be carrying on any trading

activity and, thus, will neither have the detailed knowledge about its subsidiaries’ trading

activities or the systems to capture the information required on Form 13H.306 Another

commenter stated that the burden of potentially needing to develop new systems would be

increased for firms with complicated corporate structures.307 This commenter noted that

“[m]any corporate groups maintain operational independence from their subsidiaries and that

each affiliate may employ its own individual system, which may not communicate with other

affiliates.”308 This commenter asserted that, as a result, the process for gathering information

would have to be done on a manual basis until a system could be developed and that gathering

information across multiple affiliates (both U.S. and non-U.S. entities) manually will place a

tremendous burden on investment managers.309 In addition, this commenter noted that

compliance with the Rule would be more difficult for investment advisers in that they are

required to maintain information barriers between different affiliates in their organizations.310

As discussed above, with respect to determining whether the identifying activity level is

met, the Commission notes that parent companies need only collect and aggregate the total

trading activity of those entities they control when determining whether they meet the applicable

306 See Prudential Letter at 5. 307 See Investment Adviser Association Letter at 2, 7-8. 308 See id. at 8. 309 See id. 310 See id.

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identifying activity level. To accomplish this, only summary statistics need to be produced to the

parent company, which would be added together at the parent company level to determine

whether the parent company complex meets the applicable identifying activity level threshold.

In other words, each subsidiary will use existing systems to calculate its trading, and then will

provide that information directly to the parent company. The trading systems themselves need

not be integrated to accomplish this task. This limited activity should not undermine existing

firewalls, because information would not be shared among entities under common control but

would only be shared with the parent company. In addition, general information such as

“Subsidiary XYZ executed $10,000,000 worth of transactions on Monday representing 750,000

shares” that is communicated directly from the subsidiary to the parent company would be highly

unlikely to undermine firewalls. Further, the calculation of trading volume only needs to be

done until the entity meets the applicable identification activity level. Once the entity meets this

level, it becomes a large trader and no longer needs to calculate its trading in this manner. To the

extent a parent company complex wishes to avoid this process altogether, it may elect to register

voluntarily as a large trader.

A few commenters believed that the proposed requirement to list affiliates that

beneficially own, as well as exercise investment discretion over, NMS securities would be overly

burdensome.311 One commenter recommended that the requirement should apply to a smaller set

of affiliates, namely only those affiliates that actually conduct trading in NMS securities.312

311 See SIFMA Letter at 17; Wellington Management Letter at 5; Financial Information Forum

Letter at 4; and Prudential Letter at 4.

Another commenter stated that large traders should only be obligated to identify other


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unaffiliated large traders if investment discretion is exercised collectively.313 Two commenters

asked the Commission to not require large traders to list bank and insurance regulators.314 One

commenter stated that listing all applicable regulators is likely to lead to the creation of an

extensive list in the case of a diversified financial services company.315 This commenter stated

that it would be required to list approximately fifty insurance regulators for one subsidiary and

more than 25 foreign regulators for its non-U.S. affiliates.316 Another commenter stated that

bank regulator information is unnecessary to meet the Rule’s underlying purpose and that the

Commission could seek this information from the federal banking regulators.317 As discussed

above, in adopting the Rule, the Commission limited the scope of affiliates about which it will

collect information pursuant to Form 13H.318

The Commission does not expect that the revisions to the Form, including eliminating the

requirement to disclose certain affiliates and applicable bank and insurance regulators, discussed

Specifically, the Commission did not adopt the

requirement to disclose affiliates that merely beneficially own NMS securities and it did not

adopt proposed Items 3(b) and (c) of the Form, which would have required the large trader to

disclose whether it or any of its affiliates is a bank or an insurance company and identify each

such entity and its respective regulators. The Commission anticipates that focusing the Rule’s

scope in this regard will reduce burdens on large traders to be in line with the Commission’s

original understanding, while enabling the Commission to focus on gathering the most relevant

and useful information about large traders.

313 See Wellington Management Letter at 5-6. 314 See Prudential Letter at 4 and American Bankers Association Letter at 2. 315 See Prudential Letter at 4. 316 See id. 317 See American Bankers Association Letter at 2. 318 See supra Section III.A.3.d (discussing Item 4 of the Form).

110

above, will materially affect the Commission’s initial burden estimates. In particular, a full

analysis of which affiliates need to be reported and disclosed would still need to be conducted,

even though the scope of information that needs to be disclosed on Form 13H has been reduced

from the proposal. The disclosure on the Form of bank and insurance regulators as proposed

would have represented only a minimal additional burden, and such information would likely

have been static and infrequently changed. Similarly, the Commission’s decision to not adopt

the requirement to disclose affiliates that merely beneficially own NMS securities likewise

should not materially affect the estimated reporting burden because the Form, as adopted, now

includes additional items such as the requirement to provide an organizational chart and to

identify any affiliates that file separately and any affiliates that have been assigned an LTID

suffix. The Commission carefully considered the changes to the Form in light of the comments

received on the Form and the initial cost estimates, and believes that the removal of certain

required information balances the addition of new required information of a similar scope so as

to not affect the overall reporting burdens.

2.

Burden on Registered Broker-Dealers

a.

As part of the Commission’s existing EBS system, pursuant to Rule 17a-25 under the

Exchange Act, the Commission currently requires registered broker-dealers to keep records of

most of the information for their customers that will be captured by Rule 13h-1.

Recordkeeping

319

319 See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-dealers are required to maintain the

following information that will be captured by new Rule 13h-1: date on which the transaction was executed; account number; identifying symbol assigned to the security; transaction price; the number of shares or option contracts traded and whether such transaction was a purchase, sale, or short sale, and if an option transaction, whether such was a call or put option, an opening purchase or sale, a closing purchase or sale, or an exercise or assignment; the clearing house number of such broker or dealer and the clearing house numbers of the brokers or dealers on the opposite side of the transaction; a designation of whether the transaction was effected or caused

The

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additional items of information that the Rule will capture are: (1) LTID(s) and (2) transaction

execution time. Some registered broker-dealers will need to re-program their systems to capture

execution time to the extent their systems do not already capture that information in a manner

that is reportable pursuant to an EBS request for data. The Commission believes that the burdens

of the Rule on registered broker-dealers will likely vary due to differences in their recordkeeping

systems.

In the Proposing Release, the Commission estimated that all registered broker-dealers

that either are large traders or have a customer base that includes large traders and Unidentified

Large Traders would be required to make modifications to their existing systems to capture the

additional data elements that were not currently captured by systems that comply with Rule 17a-

25, including, for example, LTID numbers. The Commission estimated that the one-time, initial

burden for registered broker-dealers for system development, including re-programming and

testing of the systems to comply with the proposed rule, would be approximately 133,500 burden

hours.320

to be effected for the account of a customer of such broker or dealer, or was a proprietary transaction effected or caused to be effected for the account of such broker or dealer; market center where the transaction was executed; prime broker identifier; average price account identifier; and the identifier assigned to the account by a depository institution. For customer transactions, the broker-dealer is required to also include the customer’s name, customer’s address, the customer’s tax identification number, and other related account information.

This figure was based on the estimated number of hours for initial internal

320 The Commission derived the total estimated burdens from the following estimates, which were based on the Commission’s experience with, and burden estimates for, other existing reporting systems including Rule 13f-1 and Rule 17a-25: (Computer Ops Dept. Mgr. at 30 hours) + (Sr. Database Administrator at 25 hours) + (Sr. Programmer at 150 hours) + (Programmer Analyst at 100 hours) + (Compliance Manager at 20 hours) + (Compliance Attorney at 10 hours) + (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 50 hours) + (Director of Compliance at 5 hours) + (Sr. Computer Operator at 35 hours) x (300 potential respondents) = 133,500 burden hours. As noted above, the Commission acknowledged that, in some instances, multiple LTIDs may be disclosed to a registered broker-dealer for a single account. Therefore, the hourly burden estimate factored in the cost that registered broker-dealers would need to develop systems capable of tracking multiple LTIDs. Rule 13f-1, like the Rule, requires monitoring of a certain threshold and, upon reaching that threshold, disclosure of information. As discussed supra, Rule 17a-25

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development and implementation, including software development, taking into account the fact

that new data elements were required to be captured and would need to be available for reporting

to the Commission as of the morning following the day on which the transactions were effected.

The Commission noted that because broker-dealers already capture, pursuant to Rule 17a-25,

most of the data that proposed Rule 13h-1 would capture, it did not expect broker-dealers to

incur any hardware costs as existing hardware should be able to accommodate the additional two

fields of information that would need to be captured.

In the Proposing Release, the Commission stated that the ongoing annualized expense for

the recordkeeping requirement for registered broker-dealers would not result in a separate burden

for purposes of the PRA, as registered broker-dealers already were required to provide to the

Commission almost all of the proposed information for all of their customers pursuant to Rule

17a-25 under the Exchange Act. Moreover, the Commission stated that once a registered broker-

dealer’s system was updated to capture the additional two fields of information required by Rule

13h-1, the Commission did not believe that the additional fields would result in any ongoing

annualized expense beyond what broker-dealers currently incur to maintain the existing EBS

data that is required to be kept pursuant to Rule 17a-25.

In response to the Commission’s recordkeeping burden estimates, one commenter

believed that the Commission significantly underestimated the time and resources for broker-

dealers to comply with the Rule.321

requires broker-dealers to disclose information that is very similar in scope and character to the information required under the Rule.

In particular, the commenter stated that the build-out costs to

update the EBS system to accommodate the two new items (LTID and execution time) would


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exceed the Commission’s estimate of 133,500 burden hours.322 Though the commenter did not

provide a methodology for its estimate or provide a specific estimate of burden hours, it noted

the following: “Assuming that just the generation process alone would require three months of

effort for each firm with an electronic blue sheets reporting responsibility and that conforming

related systems would require additional time, and then multiplied across the approximately 300

broker-dealers that the SEC estimates would be subject to the proposed rule, the total build-out

for the industry would require 75 years of effort on a cumulative basis.”323 The commenter

noted that one potential major cost of implementing the recordkeeping requirement is that some

broker-dealers do not have access to execution times in a manner that is readily reportable under

the EBS infrastructure.324 These broker-dealers, the commenter stated, would need to devote

considerable resources to updating EBS to gather, process, and transmit such information.325

The Commenter recommended using the OATS system maintained by FINRA instead of the

EBS system for the large trader reporting rule and argued that using the OATS infrastructure

would not be as “onerous” as modifying the existing EBS system.326 However, the same

commenter mentioned one firm it talked to that estimated that it would cost less and take 50% less

time to build out the EBS system compared to expanding OATS.327

322 See id.

The Commission believes the

323 See id. at 5. 324 See id. at 13. 325 See id. 326 See id. at 5. 327 See id. at 6. The commenter states that one firm has estimated it would costs $4 to $5 million and

take 18 to 24 months to expand OATS, whereas it would cost an estimated $3 to $4 million and take 12 to 18 months to build out the EBS system as proposed. The commenter did not provide any basis for these estimates nor what assumptions this firm made with regards to collection, reporting, and monitoring requirements, or other any other aspects of the Rule. The Commission’s response to this comment in light of its estimate of the costs applicable to broker-dealers under the recordkeeping requirements of the Rule is discussed below in detail.

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firm cited by the commenter supports the Commission’s position that an expansion of the EBS

system is a more cost effective option to leverage an existing reporting system for purposes of the

large trader rule.

A separate commenter that represents a group that focuses on technological aspects of

securities regulation expressed concern with the proposed monitoring requirements but did not

address the costs associated with modifications to the EBS system. Rather, the commenter believed

that broker-dealers could reasonably modify their systems to capture execution time within the

proposed six-month implementation period.328 However, this same commenter noted that EBS

requests using LTID as a query mechanism would take longer to implement than the proposed six

month compliance date.329 As discussed above, the Commission expects that it would, on

occasion, request EBS data according to LTID.330

The Commission understands that many broker-dealers will face different challenges in

capturing and reporting execution time information, depending on the sophistication of and

resources they have previously devoted to their recordkeeping systems. The Commission’s

estimate, however, is an average calculation that accommodates a broad spectrum of broker-

dealer EBS systems, including the possibility that some firms might face larger burdens than the

average since different firms would be affected to different degrees. Not all broker-dealers will

In addition, the Commission notes that it is

adopting a longer compliance date than it proposed - seven months after the Effective Date of the

Rule. Because the Rule will be effective 60 days after publication in the Federal Register, this

effectively results in a compliance date nine months after publication in the Federal Register.

See supra Section V.B.2.a (costs applicable to broker-dealers under the recordkeeping requirements of the Rule).

328 See Financial Information Forum Letter at 7. 329 See id. 330 See supra Section III.B.2 (discussing reporting requirements).

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face complexities involved with modifying non-integrated legacy systems to capture execution

time, and some broker-dealers will not need to devote as many resources to those efforts as will

others. The Commission’s estimate is based on an aggregated figure that recognizes that

different broker-dealers will need to invest different levels of resources based on the needs of

their particular technology. Accordingly, the Commission believes that its initial 133,500 hour

burden/year estimate for the one-time burden on registered broker-dealers to modify their

existing EBS systems is reasonable and appropriate.331 This figure assumes that, on average,

each broker-dealer would have to devote 445 burden hours in order to develop, program, and test

the enhancements to their existing systems to capture and report the additional fields of

information (LTIDs and execution time).332

b.

In addition to requiring registered broker-dealers to maintain records of account

transactions, the Rule also requires registered broker-dealers to report transaction data to the

Commission upon request. In the Proposing Release, the Commission stated that this collection

of information would not involve any substantive or material change in the burden that already

exists as part of registered broker-dealers providing transaction information to the Commission

in the normal course of business under the existing EBS system.

Reporting

333

331 The Commission notes that its estimate is in line with the burden estimates from Rule 17a-25.

See Rule 17a-25 Release, supra note

However, the Commission

19, 66 FR at 35840-41. 332 The Commission derived the total estimated burdens from the following estimates, which are

based on the Commission’s experience with, and burden estimates for, other existing reporting systems including Rule 13f-1 and Rule 17a-25: (Computer Ops Dept. Mgr. at 30 hours) + (Sr. Database Administrator at 25 hours) + (Sr. Programmer at 150 hours) + (Programmer Analyst at 100 hours) + (Compliance Manager at 20 hours) + (Compliance Attorney at 10 hours) + (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 50 hours) + (Director of Compliance at 5 hours) + (Sr. Computer Operator at 35 hours) x (300 potential respondents) = 133,500 burden hours.

333 See 17 CFR 240.17a-25.

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noted that the information would need to be available for reporting to the Commission on a next-

day basis, versus the 10 business day period that typically is associated with an EBS request for

data.334

Although it is difficult to predict with certainty the Commission’s future needs to obtain

large trader data, the Commission estimated in the Proposing Release that, taking into account

the Commission’s likely need for data to be used for market reconstruction purposes and

investigative matters, it would send 100 requests for large trader data per year to each affected

registered broker-dealer.

Nevertheless, the Commission believes that once the electronic recordkeeping system is

in place to capture the information, and the system is designed and built to furnish the

information within the time period specified in the Rule, the collection of information would

result in minimal additional burden.

335 The Commission estimated that it will take a registered broker-

dealer 2 hours to comply with each request, considering that a broker-dealer would need to run

the database query of its records, download the data file, and transmit it to the Commission.336

334 See Rule 17a-25 Release, supra note

The Commission received no comments on its reporting burden estimate and continues to

19. 335 Compared to the EBS system, where the Commission sent 5,168 electronic blue sheets requests

between January 2007 and June 2009, the Commission expects to send fewer requests for large trader data, in particular because the Commission expects that a request for large trader data will be broader and encompass a larger universe of securities and a longer time period than would be the case for the typically more targeted EBS requests it currently sends.

336 The Commission notes that the adopting release for Rule 17a-25 estimated that electronic response firms spend approximately 8 minutes and manual response firms spend 1.5 hours responding to an average blue sheet request. See Rule 17a-25 Release, supra note 19, at 35841. The Commission’s 2-hour estimate for new Rule 13h-1 is intended to account for the collection and reporting of additional information on Unidentified Large Traders. This estimate also accommodates broker-dealers that might want to perform quality checks over the information before it is reported to the Commission.

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believe that its initial estimate was reasonable. Accordingly, the Commission estimates the

ongoing annual aggregate hour burden for broker-dealers to be 60,000 burden hours.337

c.

In the Proposing Release, the Commission estimated that the one-time, initial burden for

registered broker-dealers to comply with the monitoring requirements would be approximately

21,000 burden hours to establish a compliance system to detect and identify Unidentified Large

Traders.

Monitoring

338 This figure was based on the estimated number of hours to establish policies and

procedures reasonably designed to assure compliance with the identification requirements of the

Rule. The Commission estimated that the ongoing annualized burden to broker-dealers for the

monitoring requirements of the Rule, including the requirement on broker-dealers to inform

Unidentified Large Traders of their potential obligations under Rule 13h-1, would be

approximately 4,500 burden hours.339

337 100 x 300 x 2 = 60,000 burden hours. The Commission derived the total estimated burdens based

on the Commission’s experience with, and burden estimates for, other existing reporting systems, including Rule 17a-25. The Commission estimated that each broker-dealer who electronically responds to a request for data in connection with Rule 17a-25 and the EBS system spends 8 minutes per request. See Rule 17a-25 Release, supra note

19, 66 FR at 35841. Unlike EBS, under new Rule 13h-1, a broker-dealer will also be required to report data on Unidentified Large Traders. The Commission therefore believes that the time to comply with a request for data under the Rule could take longer than would a similar request for data under the EBS system, as a broker-dealer likely would take additional time to review and report information on any Unidentified Large Traders, including the additional fields of information specified in paragraph (d)(3) of the Rule, that they would be required to report to the Commission under the Rule.

338 The Commission derived the total estimated burdens from the following estimates, which were based on the Commission’s experience with, and burden estimates for, other existing reporting systems including Rule 13f-1: (Sr. Programmer at 10 hours) + (Compliance Manager at 10 hours) + (Compliance Attorney at 10 hours) + (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 10 hours) + (Director of Compliance at 2 hours) + (Sr. Computer Operator at 8 hours) x (300 potential respondents) = 21,000 burden hours. Rule 13f-1, like new Rule 13h-1, requires monitoring of a certain trading threshold.

339 The Commission derived the total estimated burdens from the following estimates, which were based on the Commission’s experience with, and burden estimates for, other existing reporting systems including Rule 13f-1 and Rule 17a-25: (Compliance Attorney at 15 hours) x (300 potential respondents) = 4,500 burden hours. Rule 13f-1, like new Rule 13h-1, requires monitoring of a certain threshold and, upon reaching that threshold, disclosure of information.

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As discussed above, one commenter believed that the Commission’s estimate of 300

broker-dealers was underestimated and believed that the number of broker-dealers affected by

the monitoring requirements might be closer to 1,500 because of steps the commenter believed

clearing brokers would likely impose on others in order for them to comply with the monitoring

safe harbor provision of Rule 13h-1(f), as proposed.340 This commenter based its estimate on a

belief that, though the Rule itself would not specifically require it, carrying broker-dealers might,

in turn, require their introducing broker correspondents to establish policies and procedures to

collect “other reasonably available information” on Unidentified Large Traders required by the

proposed safe harbor to assist the clearing firms in complying with the requirements of the Rule

that are applicable to them.341 The commenter based its estimate on the fact that approximately

1,657 FINRA members have been assigned MPIDs as of June 2010. As such, this commenter

believes that the Commission’s ongoing burden estimate of 4,500 burden hours/year342

(equivalent to $1,215,000/year343) should instead be something between 111,000 burden

hours/year and 3,000,000 burden hours/year344 (equivalent to $30,000,000-

$750,000,000/year).345 The commenter noted that its estimate included a full-time compliance

professional.346

As discussed above, the safe harbor provision of Rule 13h-1(f), as adopted, makes clear

the intended scope of “other identifying information” that a broker-dealer would need to

340 See Financial Information Forum Letter at 6. 341 See id. 342 Compliance Attorney at 15 hours x 300 potential respondents = 4,500 burden hours 343 Compliance Attorney at 15 hours x $270 per hour x 300 potential respondents = $1,215,000 344 Compliance Attorney at 370 hours x 300 potential respondents = 111,000 burden hours;

Compliance Attorney at 2,000 hours x 1,500 potential respondents = 3,000,000 burden hours. 345 See Financial Information Forum Letter at 7. 346 See id.

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consider, which is narrower in scope than what the commenter assumed. As adopted, the safe

harbor policies and procedures would need to be reasonably designed to identify Unidentified

Large Traders based on accounts at the broker-dealer. In assessing which accounts to consider,

the Rule, as adopted, clarifies that the broker-dealer’s policies and procedures should consider

account name, tax identification number, or other identifying information “available on the

books and records of such broker-dealer.” The policies and procedures would not need to

consider information on the books and records of another broker-dealer. Accordingly, the Rule

has been clarified to exclude a possible expansive interpretation of “other readily available

information” that formed the basis for the commenter’s concern.

Further, the Commission believes that large traders, whose aggregate NMS securities

transactions by definition equal or exceed the identifying activity level, require sophisticated

trade-processing capacities on the part of broker-dealers that service them. Consequently, the

Commission believes it is unlikely that nearly all broker-dealers that have been assigned an

MPID either carry accounts for or will effect a transaction on behalf of a large trader. Therefore,

it does not expect all such entities to be impacted by the monitoring provisions of Rule 13h-

1(f).347

d.

By providing additional guidance in the Rule, as adopted, the Commission believes it

has clarified the intended monitoring responsibilities of broker-dealers and has shown that the

burden estimates for these more limited requirements are in line with the Commission’s original

estimates.

347 To the extent that a broker-dealer that is subject to the monitoring requirements requires, by

contract or otherwise, an entity that is not otherwise subject to the Rule’s monitoring requirements to nevertheless perform a monitoring function, the Commission’s estimate does not account for that situation.

Total Burden

120

Under the Rule, the total burden on these respondents will be 214,500 hours for the first

year348 and 64,500 hours for each subsequent year.349

E.

All collections of information pursuant to Rule 13h-1 will be mandatory.

Collection of Information is Mandatory

F.

Section 13(h)(7) of the Exchange Act provides that Section 13(h) “shall be considered a

statute described in subsection (b)(3)(B) of [5 U.S.C. 552]”, which is part of the Freedom of

Information Act (“FOIA”).

Confidentiality

350 As such, “the Commission shall not be compelled to disclose any

information required to be kept or reported under [Section 13(h)].”351 Accordingly, the

information that a large trader will be required to disclose on Form 13H or provide in response to

a Commission request will be exempt from disclosure under FOIA. In addition, any transaction

information that a registered broker-dealer reports to the Commission under the Rule also will be

exempt from disclosure under FOIA. The circumstances under which the Commission will

provide information collected pursuant to Rule 13h-1 and Form 13H are discussed above.352

G.

348 This figure was derived from the estimated one-time burdens from the recordkeeping requirement

(133,500 burden hours) + the reporting requirement (60,000 burden hours) + the monitoring requirement (21,000 burden hours) = 214,500 total burden hours.

Record Retention Period

349 This figure was derived from the estimated ongoing burdens from the reporting requirement (60,000 burden hours) + the monitoring requirement (4,500 burden hours) = 64,500 total burden hours.

350 5 U.S.C. 552(b)(3)(B) is now 5 U.S.C. 552(b)(3)(A)(ii). 351 See Section 13(h)(7) of the Exchange Act, 15 U.S.C. 78m(h)(7). 352 See supra Section III.A.3.g.

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Registered broker-dealers will be required to retain records and information under Rule

13h-1 for a period of three years, the first two in an accessible place, in accordance with Rule

17a-4 under the Exchange Act.353

V. Consideration of Costs and Benefits

The Commission is sensitive to the costs and benefits that result from its rules. In the

Proposing Release, the Commission identified certain costs and benefits of the Rule as proposed

and requested comment on all aspects of the cost-benefit analysis, including the identification

and assessment of any costs and benefits that were not discussed in the analysis. The

Commission received several comments relating to the cost-benefit analysis, which are discussed

below. For the reasons discussed below, the Commission continues to believe that its estimates

of the benefits and costs of Rule 13h-1, as set forth in the Proposing Release, are appropriate.

A. Benefits

U.S. securities markets have experienced a dynamic transformation in recent years. In

large part, the changes reflect the culmination of a decades-long trend from a market structure

with primarily manual trading to a market structure with primarily automated trading. Rapid

technological advances have produced fundamental changes in the structure of the securities

markets, the types of market participants, the trading strategies employed, and the array of

products traded. The markets also have become even more competitive, with exchanges and

other trading centers offering innovative order types, data products and other services, and

aggressively competing for order flow by reducing transaction fees and increasing rebates.

These changes have facilitated the ability of large institutional and other professional market

participants to employ sophisticated trading methods to trade electronically in huge volumes with

353 17 CFR 240.17a-4.

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great speed. In addition, large traders have become increasingly prominent at a time when the

markets are experiencing an increase in overall volume.354

Currently, to support its regulatory, investigative, and enforcement activities, the

Commission collects transaction data through the EBS system.

355

The EBS system has performed effectively as an enforcement tool for analyzing trading

in a small sample of securities over a limited period of time. However, because the EBS system

is designed for use in narrowly-focused enforcement investigations that generally involve trading

in particular securities, it has proven to be insufficient for large-scale market reconstructions and

analyses involving numerous stocks during peak trading volume periods. Importantly, EBS does

not address the Commission’s need to identify market participants in a uniform manner that

would allow the Commission to readily aggregate their trading activity across broker-dealers, nor

does it include time of execution information necessary to properly sequence and reconstruct

trading activity.

The Commission uses the

EBS system to obtain securities transaction information for two primary purposes: (1) to assist

in the investigation of possible federal securities law violations, primarily involving insider

trading or market manipulation; and (2) to conduct market reconstructions.

Following declines in the U.S. securities markets in October 1987 and October 1989,

Congress noted that the Commission’s ability to analyze the causes of a market crisis was

impeded by its lack of authority to gather trading information.356

354 See supra note

To address this concern,

Congress passed the Market Reform Act, which, among other things, amended Section 13 of the

8 (discussing analyst estimates of high frequency trader activity). 355 See 17 CFR 240.17a-25 (Electronic Submission of Securities Transaction Information by

Exchange Members, Brokers, and Dealers). 356 The legislative history accompanying the Market Reform Act also noted the Commission’s

limited ability to analyze the causes of the market declines of October 1987 and 1989. See generally Senate Report, supra note 14 and House Report, supra note 14.

123

Exchange Act to add new subsection (h), authorizing the Commission to establish a large trader

reporting system under such rules and regulations as the Commission may prescribe.357

The large trader reporting authority in Section 13(h) of the Exchange Act was intended to

facilitate the Commission’s ability to monitor the impact on the securities markets of securities

transactions involving a substantial volume or large fair market value, as well as to assist the

Commission’s enforcement of the federal securities laws.

358 In particular, the Market Reform

Act provided the Commission with the authority to collect broad-based information on large

traders, including their trading activity, reconstructed in time sequence, in order to provide

empirical data necessary for the Commission to perform investigations and conduct analysis of

data.359

The large trader reporting system envisioned by the Market Reform Act authorizes the

Commission to require large traders

360 to self-identify to the Commission and provide

information to the Commission that identifies the trader.361

357 PL 101-432 (HR 3657), October 16, 1990.

The Market Reform Act also

authorized the Commission to require large traders to identify their status as large traders to any

358 See 15 U.S.C. 78m(h)(1). See also Senate Report, supra note 14, at 42. 359 See Senate Report, supra note 14 at 4, 44, and 71. In this respect, though SRO audit trails provide

a time-sequenced report of broker-dealer transactions, those audit trails generally do not identify the broker-dealer’s customers. Accordingly, the Commission is not presently able to utilize existing SRO audit trail data to accomplish the objectives of the Market Reform Act.

360 Section 13(h) of the Exchange Act defines a “large trader” as “every person who, for his own or an account for which he exercises investment discretion, effects transactions for the purchase or sale of any publicly traded security or securities by use of any means or instrumentality of interstate commerce or of the mails, or of any facility of a national securities exchange, directly or indirectly by or through a registered broker or dealer in an aggregate amount equal to or in excess of the identifying activity level.” See 15 U.S.C. 78m(h)(8)(A).

361 See 15 U.S.C. 78m(h)(1)(A).

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registered broker-dealer through whom they directly or indirectly effect securities

transactions.362

In addition to facilitating the ability of the Commission to identify large traders, the

Market Reform Act also authorizes the Commission to collect information on the trading activity

of large traders from broker-dealers. In particular, the Commission is authorized to require every

registered broker-dealer to make and keep records with respect to securities transactions of large

traders that equal or exceed a certain “reporting activity level” and report such transactions upon

request of the Commission.

363

To implement its authority under Section 13(h) of the Exchange Act, the Commission is

adopting new Rule 13h-1 and Form 13H to establish large trader reporting requirements. The

Rule is intended to assist the Commission in identifying traders that conduct a substantial volume

or large fair market value of trading activity in the U.S. securities markets and obtain certain

baseline information on their trading activity. Specifically, a “large trader” is defined as a person

who effects transactions in NMS securities of at least, during any calendar day, two million

shares or shares with a fair market value of $20 million or, during any calendar month, either 20

million shares or shares with a fair market value of $200 million.

364

362 See 15 U.S.C. 78m(h)(1)(B).

The large trader reporting

rule is designed to facilitate the Commission’s ability to assess the impact on the securities

363 See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the Commission with authority to determine the manner in which transactions and accounts should be aggregated, including aggregation on the basis of common ownership or control. See 15 U.S.C. 78m(h)(3). The term “reporting activity level” is defined in Section 13(h)(8)(D) of the Exchange Act to mean “transactions in publicly traded securities at or above a level of volume, fair market value, or exercise value as shall be fixed from time to time by the Commission by rule, regulation, or order, specifying the time interval during which such transactions shall be aggregated.” See 15 U.S.C. 78m(h)(8)(D).

364 This test is defined in the Rule as the “identifying activity level.” See new Rule 13h-1(a)(7). Section 13(h)(8)(c) of the Exchange Act, 15 U.S.C. 78m(h)(8)(c), authorizes the Commission to determine, by rule or regulation, the applicable identifying activity level.

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markets of large trader activity and allow it to conduct trading reconstructions following periods

of unusual market volatility and analyze significant market events for regulatory purposes.

The identification, recordkeeping, and reporting requirements will provide the

Commission with a mechanism to identify large traders, as well as their affiliates, the broker-

dealers they use, and their transactions. Specifically, Rule 13h-1 will require large traders to

identify themselves to the Commission and make certain disclosures to the Commission on Form

13H. Upon receipt of Form 13H, the Commission will issue a unique identification number to

the large trader, which the large trader will then provide to its registered broker-dealers.

Registered broker-dealers will be required to maintain transaction records for each large trader

customer and will be required to report that information to the Commission upon request. In

addition, certain registered broker-dealers will need to adopt procedures to monitor their

customers’ activity for volume that triggers the identification requirements of the Rule.

In light of recent turbulent markets and the increasing sophistication and trading capacity

of large traders, the Commission believes it needs to implement a large trader reporting rule to

further enhance its ability to collect and analyze trading information, especially with respect to

the most active market participants. In particular, the Commission believes it needs to

implement a large trader reporting rule to reliably and efficiently identify large traders and

promptly obtain information on their trading on a market-wide basis.

The Commission believes that the large trader reporting rule is necessary because, as

noted above, large traders appear to be playing an increasingly prominent role in the securities

markets.365

365 See 15 U.S.C. 78m(h)(1) and (h)(2) (reflecting the purpose of Section 13(h) of the Exchange Act

to allow the Commission to monitor the impact of large traders).

Market observers have offered a wide range of estimates for the percent of overall

volume attributable to one potential subcategory of large trader – high frequency traders – which

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is typically estimated at 50% of total volume or higher.366

Among other things, the Commission believes that the large trader reporting rule will

enhance its ability to: (1) reliably identify large traders and their affiliates, (2) obtain more

promptly trading data on the activity of large traders, including execution time, and (3) aggregate

and analyze trading data among affiliated large traders. In addition to those benefits that the

Commission believes will result from the large trader reporting rule, the Commission also

expects that investors should likewise benefit as a consequence of the Commission’s enhanced

access to information to identify large traders and obtain prompt data on their activity that the

Commission would be able to employ in carrying out its regulatory mission.

The large trader reporting rule is

intended to provide a basic set of tools for the Commission to monitor more readily and

efficiently the impact on the securities markets of large traders.

The Commission sought comment on the benefits associated with the proposed Rule.

Many of the 87 comment letters, including those from retail investors, expressed support for the

Rule’s stated intent to obtain certain baseline trading information about traders that conduct a

substantial volume or large fair market value of trading activity in the U.S. securities markets.367

One commenter, a large pension fund, stated that it believes that its beneficiaries will

benefit from a greater understanding of today’s hyper-electronic trading, which encompasses

speed and volumes that were previously unknown to most participants.

368

366 See supra note

Another commenter, a

large mutual fund adviser, stated that the large trader reporting requirements are a pragmatic

8 (discussing analyst estimates of high frequency trader activity). 367 See, e.g. GETCO Letter; CalSTRS Letter; David L. Goret Letter; Prudential Letter; Investment

Adviser Association Letter; American Benefits Council Letter; Howard Hughes Medical Institute Letter; T. Rowe Price Letter; Financial Engines Letter; Investment Company Institute Letter; Wellington Management Letter; SIFMA Letter; and Foothill Securities Letter.

368 See CalSTRS Letter at 1. The commenter noted that it would be “pleased to be subject to the rule.” Id.

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approach to obtain relevant data on trading activity in the U.S. securities markets and that recent

volatility in the marketplace, as exemplified by the unprecedented events of May 6, 2010, has

emphasized the need to provide improved regulatory access to trade data in order to detect

manipulative trading activities and to analyze significant market events that negatively impact

investor trust in the stock market.369 In addition, a large broker-dealer commented that the EBS

system is insufficient in today’s trading environment for large scale investigations and market

reconstructions across numerous securities during peak trading volume periods and agreed that

regulators need additional levels of transparency into the trading practices of all firms with

significant activity.370

B. Costs

1. Large Traders

In the Proposing Release, the Commission identified the primary costs to large traders

from the proposal as the requirement to self-identify to the Commission, including using existing

systems to detect when they meet the identifying activity level, filing Form 13H when large

trader status is achieved, and informing its broker-dealers of its LTID and all accounts to which

it applies. The Commission is adopting the identification requirements substantially as proposed.

However, the Commission has not adopted Form 13H as proposed. Specifically, the

Commission did not adopt the proposed requirement that large traders report brokerage account

numbers. Instead, the Rule as adopted requires that large traders report a list of broker-dealers

with whom they have an account. As a consequence, large traders will not have to report on

Form 13H the LTID of any other large traders with whom they collectively exercise investment

369 See T. Rowe Price Letter at 1. 370 See GETCO Letter at 2.

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discretion, and so will not have to disclose their LTID to other traders or collect from other large

traders the LTID of such traders.

The Rule will require large traders to file Form 13H with the Commission promptly after

first effecting transactions that reach the identifying activity level.371

To limit the impact of the Rule on entities whose trading is not characterized by the

exercise of investment discretion that the Commission intends to capture under the definition of

“large trader,” the Rule provides several exceptions from the definition of “transaction” that are

considered when determining large trader status. These exceptions are intended to balance the

Commission’s desire to capture significant trading activity with the cost imposed on market

participants to register and report as large traders. These exceptions include any transaction that

constitutes a gift, any transaction effected by a court-appointed executor, administrator, or

fiduciary pursuant to the distribution of a decedent’s estate, any transaction effected pursuant to a

court order or judgment, and any transaction effected pursuant to a rollover of qualified plan or

Further, when determining

who should register with the Commission as a “large trader” by filing Form 13H, the Rule is

intended to focus, in more complex organizations, on the parent company of the entities that

exercise investment discretion. The purpose of this focus is to narrow the number of persons that

will self-identify as “large traders” and file Form 13H, while allowing the Commission to

identify the primary institutions that conduct a large trading business. Focusing the identification

requirements in this manner is intended to enable the Commission to easily identify and readily

contact the principal groups that control large traders, while minimizing the costs associated with

filing and self-identification that will be imposed on large traders. Large traders will, however,

be able to assign and attach a suffix to the LTID that is assigned to them by the Commission.

371 See new Rule 13h-1(b)(1)(i).

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trust assets subject to Section 402(c)(1) of the Internal Revenue Code.372

372 See new Rule 13h-1(a)(6).

As discussed above, in

response to comments, the Commission is adopting as exceptions, in addition to those proposed,

several types of transactions that focus on corporate actions that are not characteristic of an

arm’s-length purchase or sale of securities in the secondary market that would normally be

characteristic of a “trader” in securities, such as business combinations, issuer tender offers, and

buybacks, as well as stock loans and equity repurchases. The Commission believes that these

additional categories of transactions are effected for materially different reasons than those

commonly associated with the arm’s-length trading of securities in the secondary market and the

associated exercise of investment discretion. For example, transactions involving business

combinations, as well as issuer stock buybacks and issuer tender offers, reflect fundamental

corporate decision-making. They are not effected with an intent or expectation to profit from the

trade itself, but are transactions conducted by or with issuers of securities in furtherance of

corporate objectives involving publicly-traded securities. Further, stock loan and equity repos

typically are entered into as part of a larger financing transaction or for purposes of generating

corporate income and, as such, are effected with general corporate intent rather than for purposes

of buying or selling positions in securities. Accordingly, the Commission believes it appropriate

to not count these transactions for the purpose of determining whether a person meets the

identifying activity threshold contained in the definition of large trader. The Commission

believes that adding these additional exclusions will further reduce the potential cost of the Rule

on affected entities, as well as registered broker-dealers, while at the same time allowing the

Commission to focus the Rule on those entities and activities that the Commission seeks to

identify under the Rule.

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In addition, the Rule provides for an Inactive Status to further reduce the potential costs

of the Rule for infrequent traders who may trip the threshold on a particular occasion but do not

otherwise trade at sufficient levels to merit continued status as a large trader or that warrant

imposing the regulatory burdens of the Rule. In particular, large traders that have not effected

aggregate transactions at any time during the previous full calendar year that are equal to or

greater than the identifying activity level will be eligible for Inactive Status upon checking a box

on the cover page of their next annual Form 13H filing.373

Form 13H also allows a large trader to report the termination of its operations (i.e.,

Inactive Status where the entity, because it has discontinued operations, has no potential to

requalify for large trader status in the future). This designation is intended to allow large traders

to inform the Commission of their status and to signal to the Commission not to expect future

Form 13H filings from the large trader. For example, termination status will be relevant in the

case of a merger or acquisition where the large trader does not survive the corporate transaction.

In addition, with respect to registered broker-dealers, the Termination Filing is intended to

reduce the potential costs to registered broker-dealers who will no longer have to track the

entity’s LTID.

Specifically, Inactive Status will

relieve a person from the requirement to file amended Forms 13H.

In the Proposing Release, the Commission noted that from time to time, information

provided by large traders through their Forms 13H may become inaccurate. Rather than

requiring prompt updates whenever this occurs, the Rule instead will require “Amended Filings”

on a quarterly basis (and only when the prior submission becomes inaccurate). Specifically,

large traders will be required to amend their latest Form 13H by submitting an “Amended Filing”

373 See new Rule 13h-1(b)(3)(iii).

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promptly following the end of a calendar quarter in the event that any of the information

contained in a Form 13H filing becomes inaccurate for any reason (e.g., change of name or

address, type of organization, regulatory status, broker-dealers used, or affiliates).374 Regardless

of whether any quarterly amended Form 13Hs are filed, large traders are required to file Form

13H annually (an “Annual Filing”), within 45 days after the calendar year-end, in order to ensure

the accuracy of all of the information reported to the Commission.375

In the Proposing Release, the Commission estimated that the aggregate costs for the

estimated 400 respondents that would register on Form 13H and obtain from the Commission an

LTID and inform its broker-dealers of its LTID and the accounts to which it applies would be

$1,317,600.

The quarterly filing

requirement for amendments is designed to mitigate the filing burden on large traders, as large

traders will not be required to file a large number of amendments on a more prompt basis every

time something in their latest Form 13H needs to be corrected or updated. A large trader could

elect to file more promptly or frequently at its discretion, but would not be required to do so.

376

374 See new Rule 13h-1(b)(1)(iii).

The Commission stated its belief that potential large trader respondents would

not need to modify their existing systems to comply with proposed Rule 13h-1. Rather, the

Commission believed that large traders already maintain systems that are capable of computing

their level of trading, and the Commission expected that firms would be able to use their existing

375 See new Rule 13h-1(b)(1)(ii). 376 The Commission derived the total estimated cost from the following estimates, which were based

on the Commission’s experience with, and cost estimates for, other existing reporting systems including Rule 13f-1: ((Compliance Manager (3 hours) at $258 per hour) + (Compliance Attorney (7 hours) at $270 per hour) + (Compliance Clerk (10 hours) at $63 per hour)) x (400 potential respondents) = $1,317,600. Rule 13f-1, like new Rule 13h-1, requires the filing of a form (Form 13F) upon exceeding a certain trading threshold. Hourly figures were from SIFMA’s Management & Professional Earnings in the Securities Industry 2008 and SIFMA’s Office Salaries in the Securities Industry 2008, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 or 2.93, as appropriate, to account for bonuses, firm size, employee benefits, and overhead.

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systems to assess whether they have reached the identifying activity level. Further, as discussed

above, the Rule as adopted allows a large trader to voluntarily register with the Commission,

even before it meets the applicable trading activity threshold, in order to eliminate the need for a

person to actively monitor its trading levels for purposes of Rule 13h-1. To the extent a large

trader does not want to track its trading levels for the identifying activity level thresholds, it can

avail itself of the option to voluntarily register and forego the burden of such tracking. Any

person that elects to voluntarily file would be treated as a large trader for purposes of the Rule,

and would be subject to all of the obligations of a large trader under the Rule, notwithstanding

the fact that the person had not effected the requisite level of transactions at the time it registered

as a large trader.

In addition, the Commission estimated in the Proposing Release that the aggregate cost to

file amendments as well as an annual updated Form 13H would be $998,400.377

377 The Commission derived the total estimated burdens from the following estimates, which were

based on the Commission’s experience with, and burden estimates for, other existing reporting systems including Rule 6a-2: ((Compliance Manager (2 hours) at $258 per hour) + (Compliance Attorney (5 hours) at $270 per hour) + (Compliance Clerk (10 hours) at $63 per hour)) x (400 potential respondents) = $998,400. Rule 6a-2, like new Rule 13h-1, requires: (1) Form amendments when there are any material changes to the information provided in the previous submission; and (2) submission of periodic updates of certain information provided in the initial Form 1, whether or not such information has changed.

The

Commission did not expect these costs per large trader of self-identification and reporting to the

Commission to have any significant effect on how large traders conduct business because such

costs would be marginal when compared to level of activity at which a large trader would be

trading, and should not change how such traders conduct business, create a barrier to entry, or

otherwise alter the competitive landscape among large traders. Further, the Commission is

designing an electronic filing system for Form 13H that is intended to minimize the costs

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associated with filing Form 13H, for example, by allowing filers to access and amend their most

recently filed Form 13H when filing an amended or annual update.

As noted in the PRA section above, several commenters believed that the Commission

underestimated the costs of the proposed rule on large traders.378 These commenters principally

noted that the proposal’s requirements to gather and report information related to account

numbers and names, affiliates, and bank and insurance regulators would be burdensome.379

Commenters noted that the Commission assumed that this information was readily available for

all large traders.380

As discussed above, the Commission, in adopting the Rule, modified Form 13H from the

proposed version to reduce the potential costs associated with filing Form 13H for affected

entities. Most significantly, the Commission did not adopt the proposed requirement that large

traders report their broker-dealer account numbers on Form 13H. Instead, large traders will be

required to report a list of broker-dealers with whom they or their Securities Affiliates have an

account. In light of these modifications from the proposal, the Commission continues to believe

that its estimate of initial and ongoing costs is appropriate. The initial cost estimate was based

on the understanding that large traders know and can readily identify their brokerage account

numbers. As noted by commenters, particularly investment advisers, this may not be the case for

all large traders, at least not in a form that would be conducive to reporting on Form 13H. One

commenter recommended an alternative approach to requiring large traders to disclose a list of

the broker-dealers that the large trader is authorized to use.

381

378 See, e.g., Prudential Letter; Investment Adviser Association Letter; and Investment Company

Institute Letter.

This commenter noted that many

379 See, e.g., American Bankers Association Letter. 380 See, e.g., Investment Company Institute Letter. 381 See Wellington Management Letter at 4 and Investment Company Institute Letter at 8-9.

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investment advisers maintain an approved list of broker-dealers and have processes for adding

and deleting broker-dealers as well as reviewing trades with a broker-dealer not on the approved

list.382

The adopted Rule also limits the scope of information that must be reported on bank and

insurance regulators and focuses the identification requirement on affiliates that trade, rather than

merely beneficially own, NMS securities. However, the Commission does not anticipate that

these changes from the proposal will materially affect the Commission’s initial cost estimates.

In particular, the prominence and scope of those items on the Form, relative to the other

disclosure requirements, were minor and the fact that they were not adopted should not

materially affect the cost estimates. Further, the Form, as adopted, now includes additional items

such as the requirement to provide an organizational chart and to identify any affiliates that file

separately and any affiliates that have been assigned an LTID suffix. The Commission carefully

considered the changes to the Form in light of the comments received on the Form and the initial

cost estimates, and believes that the removal of certain required information balances the

addition of new requirement information of a similar scope so as to not affect the overall

reporting burdens. Accordingly, the balanced modifications to the Rule and additional guidance

on the intended scope of the Rule result in changes that are in line with the Commission’s

original estimates.

The Commission has considered this alternative, and believes it is appropriate to focus

the reporting burden on a list of broker-dealers at which the large trader maintains an account,

rather than a list of accounts held at those broker-dealers. The Commission believes, based on

the comments it received from investment advisers on this topic, that this new requirement will

reduce the potential costs for certain large traders, particularly investment advisers.

382 See Investment Company Institute Letter at 9.

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2. Registered Broker-Dealers

The Commission anticipated that the three primary costs to registered broker-dealers

from the proposal were: (1) recordkeeping requirements; (2) reporting requirements; and (3)

monitoring requirements.

a. Recordkeeping

The Rule will require registered broker-dealers to keep records of transactions for large

traders and Unidentified Large Traders.383 The Rule also will require brokers and dealers to

furnish transaction records of large traders and Unidentified Large Traders to the Commission

upon request. While most of the data required to be kept pursuant to Rule 13h-1 is already

required under Rule 17a-25 and reported via the EBS system, the large trader reporting rule will

contain two additional fields of information, notably the LTID number(s) and execution time of

the transaction. The Rule will require records to be kept for a period of three years, the first two

in an accessible place, in accordance with Rule 17a-4(b) under the Exchange Act.384

In the Proposing Release, the Commission estimated that the one-time, initial costs for

each registered broker-dealer for development of enhancements to its EBS infrastructure,

including re-programming and testing of the systems, would be approximately $106,060.

385

383 See new Rule 13h-1(a)(9) (defining “Unidentified Large Trader”).

The

Commission also believed that there would be minimal additional costs associated with the

384 17 CFR 240.17a-4. 385 The Commission derived the total estimated one-time cost from the following: (Computer Ops

Dept. Mgr. (30 hours) at $335 per hour) + (Sr. Database Administrator (25 hours) at $281 per hour) + (Sr. Programmer (150 hours) at $292 per hour) + (Programmer Analyst (100 hours) at $193 per hour) + (Compliance Manager (20 hours) at $258 per hour) + (Compliance Attorney (10 hours) at $270 per hour) + (Compliance Clerk (20 hours) at $63 per hour) + (Sr. Systems Analyst (50 hours) at $244 per hour) + (Director of Compliance (5 hours) at $388 per hour) + (Sr. Computer Operator (35 hours) at $75 per hour) = $106,060. As noted above, the Commission acknowledged that, in some instances, multiple LTIDs may be disclosed to a registered broker-dealer for a single account. Therefore, the cost estimate factored in the cost that registered broker-dealers would need to develop systems capable of tracking multiple LTIDs.

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operation and maintenance of the large trader reporting rule because it would utilize the existing

EBS system. Accordingly, the Commission estimated the total start-up, operating, and

maintenance cost burden for registered broker-dealers to be $31,818,000.386

In response to the Commission’s recordkeeping burden estimates, as previously discussed

in the PRA section above, one commenter stated that one of its member firms estimated it would

cost $3,000,000-$4,000,000 to build out its EBS system in a manner required by the proposed

rule, though the commenter did not provide any basis for the estimate or assumptions that were

made with regards to the collection, reporting, and monitoring requirements of the Rule.

As previously

noted, this figure was based on the estimated number of hours for development and

implementation of enhancements to the firm’s EBS systems, including software development,

taking into account the fact that two new data elements were required to be captured and that

data would be required to be available for reporting to the Commission on the morning following

the day on which the transactions were effected. Because broker-dealers already capture most of

the data required to be captured under Rule 13h-1 pursuant to Rule 17a-25, the Commission did

not expect broker-dealers to have to incur any additional hardware costs.

387

386 300 affected broker-dealers x $106,060 = $31,818,000.

This

figure, which is an estimate of one effected entity that represents a single data point, is

significantly higher than the Commission’s estimate of $106,060 for the initial one-time costs of

implementing the system changes required by the Rule as adopted. The commenter noted that

one potential major cost of implementing the recordkeeping requirement is that some broker-

dealers do not have access to execution times in a manner that is readily reportable under the


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EBS infrastructure.388 These broker-dealers, the commenter stated, would need to devote

considerable resources to updating EBS to gather, process, and transmit such information.389

The Commission notes that commenters did not express particular concern with the

proposed requirement to record and report LTIDs, but rather focused on the transmission of

execution time from the execution-facing systems to the clearing-facing systems which

traditionally are utilized in the EBS process. The Commission understands that broker-dealers

will face different challenges in capturing and reporting execution time information, depending

on the sophistication of and resources they have previously devoted to their recordkeeping

systems. Relevant factors might include, for example, the size of the entity, the nature,

flexibility, and extent of their existing systems, and the business and other regulatory drivers for

their technological strategies. As such, the Commission’s estimate involves an average

calculation that accommodates a broad spectrum of broker-dealer EBS systems and considers

that different firms would be affected to different degrees, including the possibility that some

firms might spend more than the average. However, not all broker-dealers will face complexities

involved with modifying non-integrated legacy systems to capture execution time, and some

broker-dealers will not need to devote as many resources to those efforts as will others. For

example, one commenter that represents a group that focuses on technological aspects of securities

regulation expressed concern with the proposed monitoring requirements but did not address the

costs associated with modifications to the EBS system. Rather, the commenter believed that broker-

dealers could reasonably modify their systems to capture execution time within the proposed six-

month implementation period.

390

388 See id. at 13.

The Commission’s estimate is based on an aggregated figure

389 See id. 390 See Financial Information Forum Letter at 7.

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that recognizes that different broker-dealers will need to invest different levels of resources

based on the needs of their particular technology.

b. Reporting

The Rule will require registered broker-dealers to report transactions that equal or exceed

the reporting activity level effected by or through such broker-dealer for both identified and

Unidentified Large Traders. More specifically, upon the request of the Commission, registered

broker-dealers will be required to report electronically, in machine-readable form and in

accordance with instructions issued by the Commission, all information required under

paragraphs (d)(2) and (d)(3) of the Rule for all transactions effected directly or indirectly by or

through accounts carried by such broker-dealer for large traders and other persons for whom

records must be maintained, which equal or exceed the reporting activity level. These broker-

dealers will need to report a particular day’s trading activity only if it equals or exceeds the

“reporting activity level” but will be permitted to report all data without regard to that threshold.

In the Proposing Release, the Commission estimated that the costs of the proposed

reporting requirements would be $16,200,000.391

c. Monitoring

The Commission’s estimate took into account

the design and intent of the proposed rule to utilize the recordkeeping and reporting

infrastructure of the existing EBS system. The Commission received no comments on its

reporting cost estimate and continues to believe that its initial estimate is appropriate.

391 The Commission derived the total estimated ongoing cost from the following: (Compliance

Attorney (2 hours) at $270 per hour) x (100 requests per year) x (300 potential respondents) = $16,200,000.

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As proposed, paragraph (f) of Rule 13h-1 would establish a “safe harbor” for the duty to

monitor for Unidentified Large Traders.392 Specifically, for purposes of determining under the

Rule whether a registered broker-dealer has reason to know that a person is a large trader, a

registered broker-dealer generally need take into account only transactions in NMS securities

effected by or through such broker-dealer.393 A registered broker-dealer would be deemed not to

know or to have reason to know that a person is a large trader if: (1) it does not have actual

knowledge that a person is a large trader;394

As discussed above, a few commenters asked for clarification of the monitoring

requirements and offered alternatives.

and (2) it established and maintained policies and

procedures reasonably designed to assure compliance with the identification requirements.

Proposed paragraphs (f)(1) and (2) of the rule provided the specific elements that will be

required for the safe harbor, including policies and procedures reasonably designed to inform

persons of their obligations to file Form 13H and disclose their large trader status.

395 Of those commenters that addressed the issue, most

were critical of the proposed monitoring requirements.396

392 See new Rule 13h-1(a)(9) (defining an Unidentified Large Trader as “each person who has not

complied with the identification requirements of paragraphs (b)(1) and (b)(2) of this rule that a registered broker-dealer knows or has reason to know is a large trader.”)

The Commission believes the

concerns expressed by commenters are a result of confusion as to the nature of the contemplated

monitoring requirements. As noted in the Proposing Release, the Rule places “the principal

393 See new Rule 13h-1(a)(9). 394 As discussed above, if a registered broker-dealer has actual knowledge that a person is a large

trader, then the broker-dealer would treat such person as an Unidentified Large Trader under the Rule.

395 See, e.g., Financial Information Forum Letter; SIFMA Letter; and GETCO Letter. 396 One commenter described the proposed safe harbor as “anything but safe” and, as discussed

above, asserted that the proposal exceeds the Commission’s statutory authority because, among other reasons, the safe harbor provided that a registered broker-dealer would have reason to know that a customer is an Unidentified Large Trader based on other readily available information, as well as transactions effected through the broker-dealer. See SIFMA Letter at 11.

140

burden of compliance with the identification requirements on large traders themselves.”397

Further, the Commission characterized broker-dealers’ monitoring requirements as “limited” and

“a necessary backstop to encourage compliance and fulfill the objectives of Section 13(h) of the

Exchange Act.”398

The Commission notes that a large trader is required to assess for itself whether it meets

the identifying activity threshold and thus qualifies as a large trader. To this extent, the

Commission notes that there are certain exclusions, for example from the types of transactions

that are counted towards the identifying activity threshold, that may have excused a customer

from having to register as a large trader even though its aggregate transactions exceed the

applicable identifying activity threshold. Unless a broker-dealer has actual knowledge to the

contrary that a customer is a large trader (e.g., the customer voluntarily informs the broker-dealer

that it is a large trader under Rule 13h-1), the monitoring requirements contemplate an inquiry by

the broker-dealer into whether a customer meets the identifying activity threshold based upon

transactions effected through an account or a group of accounts at that broker-dealer.

The safe harbor in Rule 13h-1(f) references reasonably designed systems to

detect and identify persons that may be large traders – based upon transactions effected through

an account or group of accounts or other information readily available to the broker-dealer.

Further, the safe harbor references reasonably designed systems to inform such persons of their

potential obligations under Rule 13h-1. The broker-dealer monitoring requirements are intended

to promote awareness of and foster compliance with Rule 13h-1.

397 Proposing Release, supra note 3, 75 FR at 21470. 398 Id.

141

In the Proposing Release, the Commission estimated the initial, one-time cost to establish

policies and procedures pursuant to the proposed safe harbor provision would be $3,982,800.399

The Commission estimated that the ongoing cost would be $1,215,000.400

As noted above in the PRA section, one commenter stated that the Commission’s broker-

dealer estimate of 300 broker-dealers was underestimated. This commenter believed that the

number of broker-dealers affected by the monitoring requirements might be closer to 1,500 to the

extent that carrying broker-dealers require their introducing broker correspondents to establish

policies and procedures under the safe harbor to collect the information on Unidentified Large

Traders required by the Rule to help the clearing firm comply with the requirements of the Rule

that are applicable to them.

The Commission

believed that the proposed safe harbor would reduce the costs associated with the monitoring

requirements of the proposed rule on registered broker-dealers. Among other things, it would

limit the broker-dealer’s obligations to only those Unidentified Large Traders that should be

readily identifiable and apparent to the broker-dealer and would require the broker-dealer to

inform such persons of their obligations to file proposed Form 13H and disclose their large trader

status to the Commission.

401 The commenter based its estimate on the fact that approximately

1,657 FINRA members have been assigned MPIDs as of June 2010.402

399 The Commission derived the total estimated one-time cost from the following: ((Sr. Programmer

(10 hours) at $292 per hour) + (Compliance Manager (10 hours) at $258 per hour) + (Compliance Attorney (10 hours) at $270 per hour) + (Compliance Clerk (20 hours) at $63 per hour) + (Sr. Systems Analyst (10 hours) at $244 per hour) + (Director of Compliance (2 hours) at $388 per hour) + (Sr. Computer Operator (8 hours) at $75 per hour)) x (300 potential respondents) = $3,982,800.

As such, this commenter

400 The Commission derived the total estimated ongoing cost from the following: (Compliance Attorney at (15 hours) x $270 per hour) x (300 potential respondents) = $1,215,000.

401 See Financial Information Forum Letter at 6. 402 See id.

142

argued that the Commission’s ongoing burden estimate of 4,500 burden hours/year403 (equivalent

to $1,215,000/year404) should really be 111,000 burden hours/year–3,000,000 burden

hours/year405

As discussed above, the commenter based its analysis on the safe harbor provisions of the

proposed rule and was concerned with the reference to “other readily available information”

contained in the proposed safe harbor. The commenter’s estimate was based on a belief that,

though the Rule itself would not specifically require it, carrying broker-dealers might, in turn,

require their introducing broker correspondents to establish policies and procedures to collect

information on Unidentified Large Traders required by the Rule to assist the clearing firms in

complying with the requirements of the Rule that are applicable to them.

(equivalent to about $30,000,000-$750,000,000/year).

406

403 Compliance Attorney at 15 hours x 300 potential respondents = 4,500 burden hours.

As adopted,

however, the safe harbor provision of the Rule makes clear the intended scope of “other

identifying information” that a broker-dealer would need to consider, which is narrower than

what the commenter assumed. As adopted, the safe harbor policies and procedures would need

to be reasonably designed to identify Unidentified Large Traders based on accounts at the

broker-dealer. In assessing which accounts to consider, the Rule, as adopted, clarifies that the

broker-dealer’s policies and procedures should consider account name, tax identification number,

or other identifying information “available on the books and records of such broker-dealer.” As

discussed above, the safe harbor policies and procedures would not need to take into account

information on the books and records of another broker-dealer. Accordingly, the scope of the

404 Compliance Attorney at 15 hours at $270 per hour x 300 potential respondents = $1,215,000. 405 Compliance Attorney at 370 hours x 300 potential respondents = 111,000 burden hours;

Compliance Attorney at 2,000 hours x 1,500 potential respondents = 3,000,000 burden hours. 406 See Financial Information Forum Letter at 6.

143

provision cited by the commenter is not as extensive as the commenter thought might be

intended, and the revised Rule text has now clarified the intended scope.

Further, also as described with respect to the PRA, the Commission believes that large

traders, whose aggregate NMS securities transactions equal or exceed the identifying activity

level, require sophisticated trade-processing capacities.407 The Commission believes it is

unlikely that all broker-dealers that have been assigned an MPID would likely either carry

accounts for or effect transactions on behalf of a large trader. Accordingly, all such entities are

not expected to be impacted by the monitoring provisions of Rule 13h-1(f), and the Commission

continues to believe that its initial estimate of 300 affected broker-dealers is appropriate.408

VI. Consideration of Burden on Competition, and Promotion of Efficiency, Competition, and Capital Formation

Section 3(f) of the Exchange Act requires the Commission, whenever it engages in

rulemaking and is required to consider or determine whether an action is necessary or

appropriate in the public interest, to consider, in addition to the protection of investors, whether

the action would promote efficiency, competition, and capital formation.409 In addition, Section

23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange

Act, to consider the impact such rules would have on competition.410

407 See supra text accompanying note

Exchange Act Section

23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on

competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.

281 (noting one commenter, a large investment management firm and likely large trader, that reported that it currently has approximately 250 broker-dealers on its approved list for executing equity transactions).

408 To the extent that a broker-dealer that is subject to the monitoring requirements requires, by contract or otherwise, an entity that is not otherwise subject to the Rule’s monitoring requirements to nevertheless perform a monitoring function, the Commission’s estimate does not account for that situation.

409 15 U.S.C. 78c(f). 410 15 U.S.C. 78w(a)(2).

144

The Commission is adopting Rule 13h-1 pursuant to its authority under Sections 13(h)

and 23(a) of the Exchange Act. Section 13(h)(2) requires the Commission, when engaging in

rulemaking pursuant to that authority that would require every registered broker-dealer to make

and keep for prescribed periods such records as the Commission by rule or regulation prescribes,

to consider whether such rule is “necessary or appropriate in the public interest, for the

protection of investors, or otherwise in furtherance of the purposes of [the Exchange Act].”411

In the Proposing Release, the Commission requested comment on whether proposed Rule

13h-1 would place a burden on competition, as well as the effect of the proposal on efficiency,

competition, and capital formation. While the Commission did receive comment letters that

discussed the overall number of respondents that would be affected by the proposed rule,

412 as

well as the Commission’s cost and burden estimates,413 the Commission only received one

comment that specifically addressed whether Rule 13h-1 would burden competition or impact

efficiency, competition, and capital formation.414

A. Competition

The comment is addressed as part of the

discussion below.

In the Proposing Release, the Commission considered the impact of proposed new Rule

13h-1 on the securities markets and market participants. Information provided by market

participants and broker-dealers in their registrations and filings with us informs our views on the

411 The Commission is adopting new Rule 13h-1(b) relating to identification requirements for large

traders pursuant to Section 13(h)(1) of the Exchange Act, which does not require the Commission to consider the factors identified in Section 3(f), 15 U.S.C. 78c(f). Analysis of the effects, including the considerations under Section 23(a), of new Rule 13h-1(b) is discussed above in Sections IV and V.

412 See supra Section IV.C. 413 See supra Sections IV.D and V.B. 414 See European Banking Federation and Swiss Bankers Association Letter.

145

structure of the markets in which they participate. We begin our consideration of potential

competitive impacts with observations of the current structure of these markets.

The securities trading industry is a competitive one with reasonably low barriers to entry.

The intensity of competition across trading platforms in this industry has increased in the past

decade as a result of a number of factors, including market reforms and technological advances.

This increase in competition has resulted in decreases in market concentration, more competition

among trading centers, a proliferation of trading platforms competing for order flow, and

decreases in trading fees.

The reasonably low barriers to entry for trading centers are evidenced, in part, by the fact

that new entities, primarily ATSs, continue to enter the market.415 For example, there are

approximately 40 registered ATSs that trade NMS securities. In addition, the Commission

within the past few years has approved applications by two entities – BATS Exchange, Inc. and

NASDAQ Stock Market LLC – to become registered as national securities exchanges for trading

equities, and approved proposed rule changes by two existing exchanges – International

Securities Exchange, LLC (“ISE”) and Chicago Board Options Exchange, Incorporated – to add

equity trading facilities to their existing options business.416 Moreover, on March 12, 2010,

Direct Edge received approval from the Commission for its trading platforms to operate as

facilities of two newly created national securities exchanges.417

415 See Securities Exchange Act Release No. 60997 (Nov. 13, 2009), 74 FR 61208, 61234 (Nov. 23,

2009) (discussing the reasonably low barriers to entry for ATSs and that these reasonably low barriers to entry have generally helped to promote competition and efficiency).

We believe that competition

416 The ISE discontinued its equities platform in 2010. See Press Release, Direct Edge, available at http://www.directedge.com/DE_ISE_Partner.aspx.

417 See Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010).

http://www.directedge.com/DE_ISE_Partner.aspx�

146

among trading centers has been facilitated by Rule 611 of Regulation NMS,418 which encourages

quote-based competition between trading centers; Rule 605 of Regulation NMS,419 which

empowers investors and broker-dealers to compare execution quality statistics across trading

centers; and Rule 606 of Regulation NMS,420

Broker-dealers are required to register with the Commission and at least one SRO. The

broker-dealer industry, including market makers, is a competitive industry with most trading

activity concentrated among several larger participants and thousands of smaller participants

competing for niche or regional segments of the market. There are approximately 5,035

registered broker-dealers, of which approximately 862 are small broker-dealers.

which enables customers to monitor their broker-

dealers’ order routing practices.

421

Larger broker-dealers often enjoy economies of scale over smaller broker-dealers and

compete with each other to service the smaller broker-dealers, who are both their competitors

and their customers.

As discussed above, the Commission acknowledges that the Rule will entail costs. In

particular, requiring registered broker-dealers to establish recordkeeping systems to capture the

required information, in particular the new fields that are not currently captured under the

existing EBS system, will require one-time initial expenses, as discussed above. In addition,

registered broker-dealers will need to implement policies and procedures to monitor their

customers’ trading in order to determine whether customers’ trades would trigger the threshold

418 17 CFR 242.611. 419 17 CFR 242.605. 420 17 CFR 242.606. 421 These numbers are based on a review of 2009 FOCUS Report filings reflecting registered broker-

dealers, and discussions with SRO staff. These numbers do not include broker-dealers that are delinquent on FOCUS Report filings.

147

for large trader status. The Commission does not believe that these expenses would adversely

affect competition.

In our judgment, the costs of complying with Rule 13h-1 would not be so large as to

significantly raise barriers to entry, or otherwise alter the competitive landscape of the industries

involved because the incremental costs of Rule 13h-1 that would be incurred by broker-dealers

would be marginal relative to the costs of complying with the existing EBS system.422

The Commission does not expect that the costs associated with new Rule 13h-1, which

are marginal relative to the costs of complying with the existing EBS system, would be a

determining factor in a broker-dealer’s entry or exit decision or decision to accept large trader

customers because the volume of trading associated with large traders and resultant revenue that

could be gained by servicing a large trader would justify the costs associated with the Rule.

In

industries characterized by reasonably low barriers to entry and competition, the viability of

some of the less successful competitors may be sensitive to regulatory costs. Nonetheless, we

believe that the broker-dealer industry would remain competitive, despite the costs associated

with implementing new Rule 13h-1, even if those costs influence the entry or exit decisions of

individual broker-dealer firms at the margin.

Further, the Commission would not be compelled to disclose publicly any information

required to be kept or reported under Section 13(h) of the Exchange Act, including information

kept or reported pursuant to Rule 13h-1.423

422 See supra Sections IV (Paperwork Reduction Act) and V (Consideration of Costs and Benefits)

for a detailed description of the expected costs.

Information and trading data that the Commission

would obtain pursuant to the Rule would not be shared with others and would not be available to

other large traders or broker-dealers. Accordingly, because the large trader transaction data will

423 See supra Section III.A.3.g.

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be reported only to the Commission, and not made publicly available for use by a large trader’s

customers or competitors, the Commission expects the Rule to have little to no impact on

competition.

The approach of new Rule 13h-1 will advance the purposes of the Exchange Act in a

number of significant ways. The Commission believes that the large trader reporting rule will

enhance its ability to identify large traders and collect trading data on their activity at a time

when, for example, many such traders employ rapid algorithmic systems that quote and trade in

huge volumes. The large trader reporting rule will provide a useful source of data to facilitate

the ability of the Commission to monitor and analyze more readily and efficiently the impact of

large traders, including high-frequency traders, on the securities markets. Although, as noted

above, several commenters stated that the Commission underestimated the costs of the proposed

rule,424

While one commenter raised the possibility that a U.S. large trader reporting rule may

incentivize non-U.S. traders to shift their trading in NMS securities to transactions that provide

an economically equivalent long position but would not impose any reporting requirement,

the Commission has made several modifications to the Rule to reduce reporting burdens.

The Commission believes that establishing the large trader reporting rule would not impose any

burden on competition not necessary or appropriate in furtherance of the purposes of the

Exchange Act. In particular, the Commission believes that the Rule will implement the

Commission’s authority under Section 13(h) of the Exchange Act at a crucial time when large

traders play an increasingly prominent role in the securities markets.

425

424 See supra Section V.B.

the

Commission believes that the Rule, as adopted, has minimized this possibility. In particular, this

release addresses the concerns raised by the commenter by clarifying the obligations on U.S.

425 See European Banking Federation and Swiss Bankers Association Letter at 4.

149

broker-dealers to collect information on customers in light of applicable foreign laws. In

summary, a registered broker-dealer must collect the information specified by Rule 13h-1(d)(2)

about the foreign intermediary’s transactions if it is a large trader or an Unidentified Large

Trader.426 The broker-dealer also must collect the information specified by Rule 13h-1(d)(3)

relating to Unidentified Large Traders. The Rule does not require a registered broker-dealer to

collect the identifying information about the foreign intermediary’s client(s).427

Finally, the Commission believes that, because the reporting requirements applied to all

large traders (both U.S. and foreign) will be minimal, they will not negatively impact the

competitiveness of U.S. markets.

Further, the

Commission clarified that the Rule does not require broker-dealers to definitively determine who

is, in fact, a large trader.

B. Capital Formation

New Rule 13h-1 is intended to facilitate the Commission’s ability to monitor the impact

on the securities markets of securities transactions involving a substantial volume of shares, a

large fair market value or a large exercise value, as well as to assist the Commission’s

enforcement of the federal securities laws. The Rule focuses on the core of the large trader

reporting requirements – the entities that control persons that exercise investment discretion and

are responsible for trading large amounts of securities. As these entities can represent significant 426 See discussion supra at Section III.B.3 (explaining when a registered broker-dealer must treat its

customer as an Unidentified Large Trader). 427 The legislative history indicates that the Commission stated that it “would not impose

requirements on broker-dealers to report beneficial ownership information that is not recorded in the normal course of business.” Senate Report, supra note 14, at 42. The Committee specifically noted that many broker-dealers currently maintain no beneficial ownership records of transactions of foreign persons that are carried out through banks, particularly foreign banks, which serve as the record holder of such securities. See id. The Committee expected that such beneficial owners would not be assigned LTIDs. See id. As discussed above, for all persons (both foreign and domestic), large trader status is triggered by the exercise of investment discretion, not mere beneficial ownership of NMS securities.

150

sources of liquidity and overall trading volume, their trading may have a direct impact on the

cost of capital of securities issuers. As such, the Commission’s ability to promptly obtain

information from registered broker-dealers on large trader activity should better enable the

Commission to understand the impact of large traders on the securities markets. As the

Commission improves its understanding, it should be better positioned to administer and enforce

the federal securities laws, thereby promoting the integrity and efficiency of the markets, as well

as, ultimately, investor trust and capital formation. For example, the information collected from

Rule 13h-1(d) would allow for a more timely reconstruction of trading activity during a market

crisis and thus could better position the Commission to craft any regulatory responses.

However, one commenter expressed concern that a potential consequence of a large

trader reporting rule might be to deprive U.S. markets of capital that will instead flow to

alternative market centers that provide an economically equivalent long position but would not

impose any reporting requirement to the extent that foreign traders seek to avoid trading in

reportable NMS securities.428 The consequence could be to deprive U.S. markets of capital, and

to possibly create pricing disparities between economically equivalent non-reportable

transactions and their analog reportable transactions.429

The commenter based its concerns on certain aspects of the Proposed Rule that it

believed would impact non-U.S. traders. One concern was that potential non-U.S. traders would

have little or no experience in dealing with Commission regulation and may not even realize they

are subject to identifying and reporting requirements.

430

428 See European Banking Federation and Swiss Bankers Association Letter at 4-5.

Another concern involved how a

broker-dealer would be expected to collect information from non-U.S. intermediaries and the

429 See id. 430 See id. at 2.

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impact of privacy laws on the ability to collect information and for large traders to reports such

information.431 A third concern involved the practicality of the proposed requirement for large

traders to list account numbers on Form 13H.432

The Commission is mindful of these comments and believes that the modifications and

clarifications in the adopted Rule and discussed in detail above should mitigate these concerns.

For example, as adopted, the Rule does not require account numbers to be included on Form

13H, alleviating the commenters’ concern about the practicality of non-U.S. traders providing

this information. Also as discussed above, the scope of the monitoring requirements has been

clarified in the adopted Rule such that the obligations of broker-dealers to collect information

from non-U.S. parties is limited to only the non-U.S. entity with whom they transact.

Furthermore, in the event, which the Commission believes to be unlikely, that the laws of a large

trader’s foreign jurisdiction preclude or prohibit the large trader from waiving such restrictions

or otherwise voluntarily filing Form 13H with the Commission, then such foreign large traders or

representatives of foreign large traders may request an exemption from the Commission pursuant

to Section 36 of the Exchange Act

433

Given these mitigating factors, the Commission does not believe that any remaining costs

to a non-U.S. trader that trades in an amount sufficient to require identification with the

Commission via Form 13H outweigh the considerable benefits of directly accessing U.S. markets

for the trading of NMS securities. Moreover, armed with more current and accurate trading

information on large traders, the Commission would be able to identify regulatory and potential

enforcement issues more quickly. Thus, Rule 13h-1 could help maintain investor trust in the

and paragraph (g) of the Rule.

431 See id. at 3. 432 See id. at 3-4. 433 15 U.S.C. 78mm.

152

markets, and in turn could add depth and liquidity to the markets and promote capital formation.

Further, the Commission believes that the requirements imposed on all large traders, whether

U.S. or foreign, are necessary and appropriate, not unduly burdensome, and would be imposed

uniformly on all affected entities (whether U.S. or non-U.S.).

C. Efficiency

New Rule 13h-1 is designed to achieve the appropriate balance between the

Commission’s goals of monitoring the impact on the securities markets of securities transactions

by large traders and assisting the Commission’s enforcement of the federal securities laws, on

the one hand, and the effort to minimize the burdens and costs associated with implementing a

large trader reporting rule.

The Commission believes that the disclosure by registered broker-dealers to regulators

that would be achieved by the large trader reporting rule would promote efficiency by enabling

the Commission to go beyond the EBS system, which permits investigations of small samples of

securities over a limited period of time, and to instead assist with large-scale investigations and

market reconstructions involving numerous stocks during peak trading volume periods. The

Rule also would enable the Commission to receive from registered broker-dealers

contemporaneous information on large traders’ trading activity much more promptly than is

currently the case with the EBS system. With a system designed specifically to help the

Commission reconstruct and analyze time-sequenced trading data, the Commission could more

quickly investigate the nature and causes of unusual market movements and initiate

investigations and regulatory actions where warranted.

The Commission acknowledges that the trading activity of certain large traders also

promotes market liquidity in secondary securities markets. The Commission also acknowledges

153

that participation in primary market offerings may be affected by changes in expectations about

secondary market liquidity and price efficiency. As discussed above, however, the Commission

believes that Rule 13h-1 will enhance the Commission’s efforts to monitor the markets, in

furtherance of promoting efficiency and capital formation and thereby bolstering investor trust.

VII. Regulatory Flexibility Act Certification

The Regulatory Flexibility Act (“RFA”)434 requires Federal agencies, in promulgating

rules, to consider the impact of those rules on small entities. Section 603(a)435 of the

Administrative Procedure Act,436 as amended by the RFA, generally requires the Commission to

undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to

determine the impact of such rulemaking on “small entities.”437 Section 605(b) of the RFA

states that this requirement shall not apply to any proposed rule or proposed rule amendment,

which if adopted, would not “have a significant economic impact on a substantial number of

small entities.”438

Paragraph (a) of Rule 0-10 provides that for purposes of the Regulatory Flexibility Act, a

small entity when used with reference to a “person’” other than an investment company means a

434 5 U.S.C. 601 et seq. 435 5 U.S.C. 603(a). 436 5 U.S.C. 551 et seq. 437 Although Section 601(b) of the RFA defines the term “small entity,” the statute permits agencies

to formulate their own definitions. The Commission has adopted definitions for the term small entity for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).

438 See 5 U.S.C. 605(b).

154

person that, on the last day of its most recent fiscal year, had total assets of $5 million or less.439

In the Proposing Release, the Commission requested comment on whether proposed Rule

13h-1 and Form 13H would have a significant economic impact on a substantial number of small

entities. While the Commission did receive comment letters that discussed the overall number of

respondents that would be affected by the proposed new rule,

In reference to a broker-dealer, small entity means total capital of less than $500,000 and not

affiliated with any person that is not a small business or small organization. Pursuant to Section

605(b), the Commission believes that Rule 13h-1 and Form 13H will not have a significant

economic impact on a substantial number of small entities.

440

Rule 13h-1 and Form 13H will require self-identification by large traders, which is a term

that, as discussed below, would implicate persons and entities with the resources and capital

necessary to transact securities in substantial volumes relative to overall market volume in NMS

securities.

the Commission did not receive

any comments that specifically addressed whether Rule 13h-1 and Form 13H would have a

significant economic impact on small entities.

441

The Commission anticipates that the types of entities that would identify as large traders

would include, for example, broker-dealers, financial holding companies, investment advisers,

Specifically, the Rule defines “large trader” as a person that effects transactions in

an “identifying activity level” of: (1) 2 million shares, or shares with a fair market value of $20

million, effected during a calendar day; or (2) 20 million shares, or shares with a fair market

value of $200 million, effected during a calendar month.

439 17 CFR 240.0-10(a). Investment companies are small entities when the investment company,

together with other investment companies in the same group of related investment companies, has net assets of $50 million or less at the end of its most recent fiscal year. 17 CFR 270.0-10(a).

440 See supra Section IV.C. 441 See supra text accompanying note 61.

155

and firms that trade for their own account. The Commission does not believe that any small

entities would be engaged in the business of trading, over the course of the applicable measuring

period, in a volume that approaches the threshold levels. Because the Rule focuses on parent

companies and is designed to identify the largest market participants by volume or fair market

value of trading, the Commission believes that a large trader that trades in such substantial

volumes would necessarily have considerable assets (beyond the level of a small entity) to be

able to conduct such trading.

In addition, Rule 13h-1 will apply to registered broker-dealers that serve large trader

customers. The Commission believes that, given the considerable volume in which a large trader

as defined in the Rule would effect transactions, particularly in the case of high-frequency

traders, registered broker-dealers servicing large trader customers or broker-dealers that are large

traders themselves likely would be larger entities, with total capital greater than $500,000, and

have systems and capacities capable of handling the trading associated with such accounts.

Further, because the trading capacities of large traders will typically necessitate the services of

sophisticated broker-dealers likely to be well capitalized entities or affiliated with well

capitalized entities, the Commission does not believe that any broker-dealer that maintains large

trader customers would be “not affiliated with any person that is not a small business or small

organization” under Rule 0-10.

For the foregoing reasons, the Commission hereby certifies that, pursuant to 5 U.S.C.

605(b), Rule 13h-1 will not have a significant economic impact on a substantial number of small

entities.

VIII. Statutory Authority

156

Pursuant to the Exchange Act and particularly, Sections 13(h) and 23(a) thereof, 15

U.S.C. 78m(h) and 78w(a), the Commission adopts new Rule 13h-1 under the Exchange Act that

will implement a large trader reporting rule to provide the Commission with a mechanism to

identify large traders, and the affiliates, accounts, and transactions of large traders.

IX. Text of the Amendments

List of Subjects in 17 CFR Parts 240 and 249

Reporting and recordkeeping requirements; Securities.

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


Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss,

77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p,

78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-ll,

and 7201 et seq.; 18 U.S.C. 1350, 12 U.S.C. 5221(e)(3); and 7 U.S.C. 2(c)(2)(E), unless

otherwise noted.

* * * * *

2. Add § 240.13h-1 to read as follows:

§ 240.13h-l Large trader reporting.

(a) Definitions. For purposes of this section:

(1) The term large trader means any person that:

157

(i) Directly or indirectly, including through other persons controlled by such person,

exercises investment discretion over one or more accounts and effects transactions for the

purchase or sale of any NMS security for or on behalf of such accounts, by or through one or

more registered broker-dealers, in an aggregate amount equal to or greater than the identifying

activity level; or

(ii) Voluntarily registers as a large trader by filing electronically with the

Commission Form 13H (§ 249.327 of this chapter).

(2) The term person has the same meaning as in Section 13(h)(8)(E) of the Securities

Exchange Act of 1934 (15 U.S.C. 78m(h)(8)(E)).

(3) The term control (including the terms controlling, controlled by and under

common control with) means the possession, direct or indirect, of the power to direct or cause

the direction of the management and policies of a person, whether through the ownership of

securities, by contract, or otherwise. For purposes of this section only, any person that directly

or indirectly has the right to vote or direct the vote of 25% or more of a class of voting securities

of an entity or has the power to sell or direct the sale of 25% or more of a class of voting

securities of such entity, or in the case of a partnership, has the right to receive, upon dissolution,

or has contributed, 25% or more of the capital, is presumed to control that entity.

(4) The term investment discretion has the same meaning as in Section 3(a)(35) of the

Securities Exchange Act of 1934 (15 U.S.C. 78c(3)(a)(35)). A person’s employees who exercise

investment discretion within the scope of their employment are deemed to do so on behalf of

such person.

(5) The term NMS security has the meaning provided for in Section 242.600(b)(46)

of this chapter.

158

(6) The term transaction or transactions means all transactions in NMS securities,

excluding the purchase or sale of such securities pursuant to exercises or assignments of option

contracts. For the sole purpose of determining whether a person is a large trader, the following

transactions are excluded from this definition:

(i) Any journal or bookkeeping entry made to an account in order to record or

memorialize the receipt or delivery of funds or securities pursuant to the settlement of a

transaction;

(ii) 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 (15 U.S.C. 77a), provided,

however, that this exemption shall not include an offering of securities effected through the

facilities of a national securities exchange;

(iii) Any transaction that constitutes a gift;

(iv) Any transaction effected by a court appointed executor, administrator, or fiduciary

pursuant to the distribution of a decedent’s estate;

(v) Any transaction effected pursuant to a court order or judgment;

(vi) Any transaction effected pursuant to a rollover of qualified plan or trust assets

subject to Section 402(a)(5) of the Internal Revenue Code (26 U.S.C. 1 et seq.);

(vii) Any transaction between an employer and its employees effected pursuant to the

award, allocation, sale, grant, or exercise of a NMS security, option or other right to acquire

securities at a pre-established price pursuant to a plan which is primarily for the purpose of an

issuer benefit plan or compensatory arrangement; or

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(viii) Any transaction to effect a business combination, including a reclassification,

merger, consolidation, or tender offer subject to Section 14(d) of the Securities Exchange Act of

1934 (15 U.S.C. 78n(d)); an issuer tender offer or other stock buyback by an issuer; or a stock

loan or equity repurchase agreement.

(7) The term identifying activity level means: aggregate transactions in NMS

securities that are equal to or greater than:

(i) During a calendar day, either two million shares or shares with a fair market value

of $20 million; or

(ii) During a calendar month, either twenty million shares or shares with a fair market

value of $200 million.

(8) The term reporting activity level means:

(i) Each transaction in NMS securities, effected in a single account during a calendar

day, that is equal to or greater than 100 shares;

(ii) Any transaction in NMS securities for fewer than 100 shares, effected in a single

account during a calendar day, that a registered broker-dealer may deem appropriate; or

(iii) Such other amount that may be established by order of the Commission from time

to time.

(9) The term Unidentified Large Trader means each person who has not complied

with the identification requirements of paragraphs (b)(1) and (b)(2) of this section that a

registered broker-dealer knows or has reason to know is a large trader. For purposes of

determining under this section whether a registered broker-dealer has reason to know that a

person is large trader, a registered broker-dealer need take into account only transactions in NMS

securities effected by or through such broker-dealer.

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(b) Identification requirements for large traders.

(1) Form 13H. Except as provided in paragraph (b)(3) of this section, each large

trader shall file electronically Form 13H (17 CFR 249.327) with the Commission, in accordance

with the instructions contained therein:

(i) Promptly after first effecting aggregate transactions, or after effecting aggregate

transactions subsequent to becoming inactive pursuant to paragraph (b)(3) of this section, equal

to or greater than the identifying activity level;

(ii) Within 45 days after the end of each full calendar year; and

(iii) Promptly following the end of a calendar quarter in the event that any of the

information contained in a Form 13H filing becomes inaccurate for any reason.

(2) Disclosure of large trader status. Each large trader shall disclose to the registered

broker-dealers effecting transactions on its behalf its large trader identification number and each

account to which it applies. A large trader on Inactive Status pursuant to paragraph (b)(3) of this

section must notify broker-dealers promptly after filing for reactivated status with the

Commission.

(3) Filing requirement.

(i) Compliance by controlling person. A large trader shall not be required to

separately comply with the requirements of this paragraph (b) if a person who controls the large

trader complies with all of the requirements under paragraphs (b)(1), (b)(2), and (b)(4) of this

section applicable to such large trader with respect to all of its accounts.

(ii) Compliance by controlled person. A large trader shall not be required to

separately comply with the requirements of this paragraph (b) if one or more persons controlled

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by such large trader collectively comply with all of the requirements under paragraphs (b)(1),

(b)(2), and (b)(4) of this section applicable to such large trader with respect to all of its accounts.

(iii) Inactive status. A large trader that has not effected aggregate transactions at any

time during the previous full calendar year in an amount equal to or greater than the identifying

activity level shall become inactive upon filing a Form 13H (17 CFR 249.327) and thereafter

shall not be required to file Form 13H or disclose its large trader status unless and until its

transactions again are equal to or greater than the identifying activity level. A large trader that

has ceased operations may elect to become inactive by filing an amended Form 13H to indicate

its terminated status.

(4) Other information. Upon request, a large trader must promptly provide additional

descriptive or clarifying information that would allow the Commission to further identify the

large trader and all accounts through which the large trader effects transactions.

(c) Aggregation.

(1) Transactions. For the purpose of determining whether a person is a large trader,

the following shall apply:

(i) The volume or fair market value of transactions in equity securities and the

volume or fair market value of the equity securities underlying transactions in options on equity

securities, purchased and sold, shall be aggregated;

(ii) The fair market value of transactions in options on a group or index of equity

securities (or based on the value thereof), purchased and sold, shall be aggregated; and

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(iii) Under no circumstances shall a person subtract, offset, or net purchase and sale

transactions, in equity securities or option contracts, and among or within accounts, when

aggregating the volume or fair market value of transactions for purposes of this section.

(2) Accounts. Under no circumstances shall a person disaggregate accounts to avoid

the identification requirements of this section.

(d) Recordkeeping requirements for broker and dealers.

(1) Generally. Every registered broker-dealer shall maintain records of all

information required under paragraphs (d)(2) and (d)(3) of this section for all transactions

effected directly or indirectly by or through:

(i) An account such broker-dealer carries for a large trader or an Unidentified Large

Trader, or

(ii) If the broker-dealer is a large trader, any proprietary or other account over which

such broker-dealer exercises investment discretion.

(iii) Additionally, where a non-broker-dealer carries an account for a large trader or an

Unidentified Large Trader, the broker-dealer effecting transactions directly or indirectly for such

large trader or Unidentified Large Trader shall maintain records of all of the information required

under paragraphs (d)(2) and (d)(3) of this section for those transactions.

(2) Information. The information required to be maintained for all transactions shall

include:

(i) The clearing house number or alpha symbol of the broker or dealer submitting the

information and the clearing house numbers or alpha symbols of the entities on the opposite side

of the transaction;

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(ii) Identifying symbol assigned to the security;

(iii) Date transaction was executed;

(iv) The number of shares or option contracts traded in each specific transaction;

whether each transaction was a purchase, sale, or short sale; and, if an option contract, whether

the transaction was a call or put option, an opening purchase or sale, a closing purchase or sale,

or an exercise or assignment;

(v) Transaction price;

(vi) Account number;

(vii) Identity of the exchange or other market center where the transaction was

executed.

(viii) A designation of whether the transaction was effected or caused to be effected for

the account of a customer of such registered broker-dealer, or was a proprietary transaction

effected or caused to be effected for the account of such broker-dealer;

(ix) If part or all of an account’s transactions at the registered broker-dealer have been

transferred or otherwise forwarded to one or more accounts at another registered broker-dealer,

an identifier for this type of transaction; and if part or all of an account’s transactions at the

reporting broker-dealer have been transferred or otherwise received from one or more other

registered broker-dealers, an identifier for this type of transaction;

(x) If part or all of an account’s transactions at the reporting broker-dealer have been

transferred or otherwise received from another account at the reporting broker-dealer, an

identifier for this type of transaction; and if part or all of an account’s transactions at the

reporting broker-dealer have been transferred or otherwise forwarded to one or more other

accounts at the reporting broker-dealer, an identifier for this type of transaction;

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(xi) If a transaction was processed by a depository institution, the identifier assigned

to the account by the depository institution;

(xii) The time that the transaction was executed; and

(xiii) The large trader identification number(s) associated with the account, unless the

account is for an Unidentified Large Trader.

(3) Information relating to Unidentified Large Traders. With respect to transactions

effected directly or indirectly by or through the account of an Unidentified Large Trader, the

information required to be maintained for all transactions also shall include such Unidentified

Large Trader’s name, address, date the account was opened, and tax identification number(s).

(4) Retention. The records and information required to be made and kept pursuant to

the provisions of this section shall be kept for such periods of time as provided in § 240.17a-4(b).

(5) Availability of information. The records and information required to be made and

kept pursuant to the provisions of this rule shall be available on the morning after the day the

transactions were effected (including Saturdays and holidays).

(e) Reporting requirements for brokers and dealers. Upon the request of the Commission,

every registered broker-dealer who is itself a large trader or carries an account for a large trader

or an Unidentified Large Trader shall electronically report to the Commission, using the

infrastructure supporting § 240.17a-25, in machine-readable form and in accordance with

instructions issued by the Commission, all information required under paragraphs (d)(2) and

(d)(3) of this section for all transactions effected directly or indirectly by or through accounts

carried by such broker-dealer for large traders and Unidentified Large Traders, equal to or

greater than the reporting activity level. Additionally, where a non-broker-dealer carries an

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account for a large trader or an Unidentified Large Trader, the broker-dealer effecting such

transactions directly or indirectly for a large trader shall electronically report using the

infrastructure supporting § 240.17a-25, in machine-readable form and in accordance with

instructions issued by the Commission, all information required under paragraphs (d)(2) and

(d)(3) of this section for such transactions equal to or greater than the reporting activity level.

Such reports shall be submitted to the Commission no later than the day and time specified in the

request for transaction information, which shall be no earlier than the opening of business of the

day following such request, unless in unusual circumstances the same-day submission of

information is requested.

(f) Monitoring safe harbor. For the purposes of this rule, a registered broker-dealer shall be

deemed not to know or have reason to know that a person is a large trader if it does not have

actual knowledge that a person is a large trader and it establishes policies and procedures

reasonably designed to:

(1) Identify persons who have not complied with the identification requirements of

paragraphs (b)(1) and (b)(2) of this section but whose transactions effected through an account or

a group of accounts carried by such broker-dealer or through which such broker-dealer executes

transactions, as applicable (and considering account name, tax identification number, or other

identifying information available on the books and records of such broker-dealer) equal or

exceed the identifying activity level;

(2) Treat any persons identified in paragraph (f)(1) of this section as an Unidentified

Large Trader for purposes of this section; and

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(3) Inform any person identified in paragraph (f)(1) of this section of its potential

obligations under this section.

(g) Exemptions. Upon written application or upon its own motion, the Commission may by

order exempt, upon specified terms and conditions or for stated periods, any person or class of

persons or any transaction or class of transactions from the provisions of this section to the extent

that such exemption is consistent with the purposes of the Securities Exchange Act of 1934 (15

U.S.C. 78a).

PART 249 -- FORMS, SECURITIES EXCHANGE ACT OF 1934


Authority: 15 U.S.C. 78a, et seq. and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise

noted.

* * * * *

4. Add § 249.327 to read as follows:

§ 249.327 Form 13H, Information required on large traders pursuant to Section

13(h) of the Securities Exchange Act of 1934 and rules thereunder.

This form shall be used by persons that are large traders required to furnish identifying

information to the Commission pursuant to Section 13(h)(1) of the Securities Exchange Act of

1934 [15 U.S.C. § 78m(h)(1)] and § 240.13h-1(b) of this chapter.

Note: The text of Form 13H does not, and this amendment will not, appear in the Code

of Federal Regulations.

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• OMB Number: 3235-0862 • Estimated average burden hours per response: 18

United States Securities and Exchange Commission

FORM 13H

Large Trader Registration Information Required of Large Traders Pursuant To Section 13(h) of the

Securities Exchange Act of 1934 and Rules Thereunder [ ] INITIAL FILING: Date identifying transactions first effected (mm/dd/yyyy)________________________

Voluntary filing? [ ] no [ ] yes Date of voluntary filing _________________

[ ] ANNUAL FILING: Calendar year ending _________

[ ] AMENDED FILING

[ ] INACTIVE STATUS: Date commencing Inactive Status (mm/dd/yyyy)____________________________ [ ] TERMINATION FILING: Effective date (mm/dd/yyyy)________________________________________ [ ] REACTIVATED STATUS: Date identifying transactions first effected, post-Inactive Status

(mm/dd/yyyy)_______________________________________________________

_________________________________________________________________________________________ Name of Large Trader Filing This Form _____________________________________ LTID ____________________________________ Taxpayer Identification Number ________________________________________________________________________________________ Business Address of the Large Trader (Street, City, State, Zip, Country) ________________________________________________________________________________________ Mailing Address of the Large Trader (Street, City, State, Zip, Country) Telephone No. (___) ___ - ____ Facsimile No. (___) ___ - ____ Email _____________________________ The Form and the schedules thereto must be submitted by a natural person who is authorized to make this submission on behalf of the large trader.

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________________________________________________________________________________________ Name of Authorized Person (First, Middle Initial, Last) ________________________________________________________________________________________ Title of Authorized Person ________________________________________________________________________________________ Relationship to Large Trader ________________________________________________________________________________________ Business Address of Authorized Person (Street, City, State, Zip, Country) Authorized Person’s Telephone No. (___) ___ - ____ Facsimile No. (___) ___ - ____ Authorized Person’s Email _____________________________

ATTENTION Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15

U.S.C. 78ff(a). Intentional misstatements or omissions of facts may result in civil fines and other sanctions pursuant

to the Securities Exchange Act of 1934.

The authorized person signing this form represents that all information contained in the form, schedules, and

continuation sheets is true, correct, and complete. It is understood that all information whether contained in the form,

schedules, or continuation sheets, is considered an integral part of this form and that any amendment represents that

all unamended information remains true, correct, and complete.

___________________________________________ Signature of Person Authorized to Submit this Form

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FORM 13H INFORMATION REQUIRED OF ALL LARGE TRADERS

ITEM 1. BUSINESSES OF THE LARGE TRADER (check as many as applicable)

(a) Businesses engaged in by the large trader and any of the large trader’s affiliates (check as many as applicable)

[ ] Broker or Dealer [ ] Bank Holding Company [ ] Government Securities Broker or Dealer [ ] Non-Bank Holding Company [ ] Municipal Securities Broker or Dealer [ ] Bank [ ] Investment Adviser [ ] Pension Trustee [ ] to Registered Investment Companies [ ] Non-Pension Trustee [ ] to Hedge Funds or other Funds not registered [ ] Insurance Company under the Investment Company Act [ ] Futures Commission Merchant [ ] Other (specify) __________________________ [ ] Commodity Pool Operator

(b) Describe the nature of the business of the large trader including a description for each Securities Affiliate:

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

ITEM 2. SECURITIES AND EXCHANGE COMMISSION FILINGS Does the large trader or any of its Securities Affiliates file any other forms with the Commission?

[ ] Yes [ ] No

If yes, specify the entity and the forms filed: Entity Form(s) Filed CIK Number _________________________________ ______________ ____________ _________________________________ ______________ ____________ _________________________________ ______________ ____________ _________________________________ ______________ ____________ ITEM 3. CFTC REGISTRATION AND FOREIGN REGULATORS

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(a) Is the large trader or any of its affiliates registered with the Commodity Futures Trading Commission in any capacity, including as a “registered trader” pursuant to sections 4i and 9 of the Commodity Exchange Act?

[ ] Yes [ ] No If yes, identify each entity and specify the registration number: Entity Registration Number _________________________________ ______________ _________________________________ ______________ _________________________________ ______________ _________________________________ ______________

(b) Is the large trader or any of its Securities Affiliates regulated by a foreign regulator?

[ ] Yes [ ] No If yes, identify each entity and its primary foreign regulator(s): Entity Primary Foreign Regulator _________________________________ ______________ _________________________________ ______________ _________________________________ ______________ _________________________________ ______________

ITEM 4. ORGANIZATION INFORMATION (a) Attach an Organizational Chart that identifies the large trader, its parent company (if applicable), all Securities

Affiliates, and all entities identified in Item 3(a). (b) Provide the following information on all Securities Affiliates and all entities identified in Item 3(a): Entity MPID(s) Description of Relationship to the

Business Large Trader _______________ ________ ________________ ____________________ _______________ ________ ________________ ____________________ _______________ ________ ________________ ____________________ _______________ ________ ________________ ____________________ (c) If any affiliates file separately, identify each entity:

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Entity LTID Suffix (if any) ________________________ ________________ ________________ ________________________ ________________ ________________ ________________________ ________________ ________________

(d) If any affiliates have been assigned an LTID suffix, identify such entities and their corresponding suffixes:

Entity Suffix ________________________ ________________ ________________________ ________________ ________________________ ________________ ITEM 5. GOVERNANCE OF THE LARGE TRADER

(a) STATUS OF THE LARGE TRADER (check as many as apply)

[ ] Individual [ ] Partnership [ ] Limited Partnership [ ] Trustee [ ] Corporation [ ] Limited Liability Company [ ] Other (specify)________________________

(b) Complete the following for each general partner, and in the case of limited partnerships, each limited partner that is the owner of more than a 10 percent financial interest in the accounts of the large trader:

Name Status (check one for each)

________________________________ [ ] General Partner [ ] Limited Partner ________________________________ [ ] General Partner [ ] Limited Partner ________________________________ [ ] General Partner [ ] Limited Partner ________________________________ [ ] General Partner [ ] Limited Partner ________________________________ [ ] General Partner [ ] Limited Partner ________________________________ [ ] General Partner [ ] Limited Partner ________________________________ [ ] General Partner [ ] Limited Partner

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(c) Complete the following for each executive officer, director, or trustee of a large trader corporation or trustee:

Name Status (check one for each)

___________________________________ [ ] Executive Officer [ ] Director [ ] Trustee ___________________________________ [ ] Executive Officer [ ] Director [ ] Trustee ___________________________________ [ ] Executive Officer [ ] Director [ ] Trustee ___________________________________ [ ] Executive Officer [ ] Director [ ] Trustee ___________________________________ [ ] Executive Officer [ ] Director [ ] Trustee ___________________________________ [ ] Executive Officer [ ] Director [ ] Trustee ___________________________________ [ ] Executive Officer [ ] Director [ ] Trustee

(d) Jurisdiction in which the large trader entity is incorporated or organized: ________________________________________________________________________________

(state and country)

ITEM 6. LIST OF BROKER-DEALERS AT WHICH THE LARGE TRADER OR ITS SECURITIES AFFILIATES HAS AN ACCOUNT

Identify each broker-dealer at which the large trader or any of its Securities Affiliates has an account and the types of services provided. Name of Broker-Dealer

___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker ___________________________________ [ ] Prime Broker [ ] Executing Broker [ ] Clearing Broker

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INSTRUCTIONS FOR FORM 13H

Submission of the Form. All submissions on Form 13H must be filed electronically through the

Commission’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. For

more information on filing through EDGAR, including instructions on how to obtain access to

and file electronically through EDGAR, see the EDGAR Filer Manual (available on the

Commission’s website at: http://www.sec.gov/info/edgar.shtml).

Definitions. The term “Securities Affiliate” means an affiliate of the large trader that exercises

investment discretion over NMS securities.

The term “affiliate” means any person that directly or indirectly controls, is under common

control with, or is controlled by the large trader.

The term “bank” means a national bank, state member bank of the Federal Reserve System, state

non-member bank, savings bank or association, credit union, or foreign bank.

The term “executive officer” means “policy-making officer” and otherwise is interpreted in

accordance with Rule 16a-1(f) under the Exchange Act.

Type of Filing. Indicate the type of Form 13H filing by checking the appropriate box at the top

of the cover page to Form 13H. All filings must include a valid digital signature.

http://www.sec.gov/info/edgar.shtml�

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If the filing is an “Initial Filing,” indicate whether it is a voluntary filing. Voluntary filings are

submitted regardless of whether the aggregate number of transactions effected reached the

identifying activity level. For voluntary filings, the large trader must input the date on which it

submits its voluntary filing. For non-voluntary filings, the large trader must input the first date

on which the aggregate number of transactions effected reached the identifying activity level. A

non-voluntary “Initial Filing” must be submitted promptly after first effecting an aggregate

number of transactions equal to or greater than the identifying activity level.

If the filing is an “Annual Filing,” input the applicable calendar year.

An “Amended Filing” must be filed promptly following the end of the calendar quarter in which

any of the information contained in a Form 13H filing becomes inaccurate for any reason. A

large trader must file an “Amended Filing” when, for example, it changes its name, business

address, organization type (e.g., the large trader partnership reincorporates as a limited liability

company), or regulatory status (e.g., a hedge fund registers under the Investment Company Act),

or when its organizational chart changes in a manner relevant under Item 4(a) (e.g., it adds or

removes a Securities Affiliate).

If the filing is for “Inactive Status,” input the date that the large trader qualified for Inactive

Status. A large trader that has not effected aggregate transactions at any time during the previous

full calendar year in an aggregate amount equal to or greater than the identifying activity level

may file for Inactive Status. A large trader shall become inactive, and exempt from the filing

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and self-identification requirements upon filing for Inactive Status until the identifying activity

level is reached again.

If the filing is for “Reactivated Status,” indicate the date that the aggregate number of

transactions again reached or exceeded the identifying activity level. A filing for “Reactivated

Status” must be submitted promptly after effecting an aggregate number of transactions --

subsequent to filing for “Inactive Status” -- equal to or greater than the identifying activity level.

In addition, a person may voluntarily elect to file for Reactivated Status prior to effecting

aggregate transactions that are equal to or greater than the identifying activity threshold. For

such voluntarily filings for “Reactivated Status,” the date of the voluntarily filing should be

entered rather than the date that the aggregate number of transactions again reached or exceeded


If the filing is a “Termination Filing,” indicate the date on which the large trader ceased

operation. For example, when one large trader merges into another large trader, resulting in only

one surviving entity, the non-surviving large trader should specify the effective date of the

merger in its Termination Filing.

The Form also requires that a large trader input its Taxpayer Identification Number. The Form

further requires a large trader to input its business and mailing addresses. If those addresses are

the same, for the mailing address field, the large trader may either input its address again or input

“same.”

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The Form must be filed by a natural person who is authorized to submit it on behalf of the large

trader. The Commission may require the large trader to provide descriptive or clarifying

information about the information disclosed in the Form 13H, and will contact the Authorized

Person to provide such information.

To amend the name, phone number, and email address of the large trader, the large trader must

modify its EDGAR profile. Thereafter, changes will automatically be reflected in the Form 13H.

Item 1. Businesses of the Large Trader. Item 1 of the Form requires the large trader to specify,

from among the enumerated choices, the types of business engaged in by the large trader, by

checking as many as are applicable. Select “Other” to indicate a financial entity not included in

any of the enumerated categories and enter a short description for each such entity. In addition,

select “Other” if the large trader is an individual and input his or her occupation.

A large trader also is required, for itself and each of its Securities Affiliates, to describe the

nature of its operations, including a general description of its trading strategies. As an example,

the following would be an appropriate description: “Registered market-maker on [SRO],

authorized participant for a number of ETFs based on foreign indices, and proprietary trading

focusing on statistical arbitrage.”

Item 2. Securities and Exchange Commission Filings. The large trader must indicate whether it

or any of its Securities Affiliates files forms with the Commission. If it checks “Yes,” the large

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trader must input the names of the filing entities and, for each of them, input the form(s) they file

and the applicable CIK number.

Item 3. CFTC Registration and Foreign Regulators.

Item 3(a) requires the large trader to indicate whether it or any of its affiliates is registered with

the Commodity Futures Trading Commission in any capacity, including as a “registered trader”

pursuant to Sections 4i and 9 of the Commodity Exchange Act. If it checks “Yes,” the large

trader must input the name of each such entity and the registration number for each such entity.

Item 3(b) requires the large trader to indicate whether it or any of its Securities Affiliates is

regulated by a foreign regulator. Unlike Item 3(a), Item 3(b) applies only to the large trader and

its Securities Affiliates. If it checks “Yes,” the large trader must input the name of each such

regulated entity and its primary foreign regulator.

Item 4. Organization Information.

To comply with Item 4(a), the large trader must attach an organizational chart that depicts the

organization of the large trader. At a minimum, the chart must include the large trader, its parent

company (if applicable), all Securities Affiliates, and all entities identified in Item 3(a) of the

Form (if any) (collectively, “Item 4 Affiliates”).

Item 4(b) requires that a large trader provide information about the Item 4 Affiliates.

Specifically, the large trader must input the names of Item 4 Affiliates and, for each one of them,

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also input the following information: MPID(s); a brief description of its business, and its

relationship to the large trader.

Item 4(c) requires that a large trader identify all affiliates that file a separate Form 13H. Those

affiliates will have a different LTID.

Item 4(d) permits a large trader to assign LTID suffixes to one or more of its Securities

Affiliates. A suffix should have no more than three characters, all of which must be numbers; no

letters or special characters may be used. The same suffix may not be assigned to more than one

affiliate using the same LTID.

Item 5. Governance of the Large Trader.

Item 5 captures basic information about the large trader organization. All terms have the

meanings generally ascribed to them in the United States. If a foreign organization type has no

comparable corporate form, check “Other” and input the organization type. A large trader who

is a natural person must check “Individual.”

Item 6. List of Broker-Dealers at Which the Large Trader or Its Securities Affiliates Has an

Account.

Item 6 requires that a large trader identify each broker-dealer at which the large trader and any

Securities Affiliate has an account. Additionally, for each such broker-dealer, the large trader

must indicate the type(s) of services provided. The large trader must check as many of the

following that apply: Prime Broker; Executing Broker; Clearing Broker.

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Paperwork Reduction Act Disclosures. This collection of information has been reviewed by

OMB in accordance with the clearance requirements of 44 U.S.C. 3507. An agency may not

conduct or sponsor, and a person is not required to respond to, a collection of information unless

it displays a currently valid control number.

Responses to this collection are mandatory, pursuant to Section 13(h) of the Exchange Act and

Rule 13h-1 thereunder. The Commission will treat as confidential the information collected

pursuant to this Form in a manner consistent with Section 13(h)(7) of the Exchange Act, which

sets forth a few limited exceptions.

The Commission will use the information collected pursuant to this Form 13H to identify

significant market participants, i.e., large traders. Form 13H will allow the Commission to

collect background information about large traders, which will contribute to the agency’s ability

to conduct investigations and enforcement matters. The Commission estimates that the average

burden to respond to the Form 13H will be 18 hours. Any member of the public may direct to

the Commission any comments concerning the accuracy of this burden estimate and any

suggestions for reducing this burden.

By the Commission. Elizabeth M. Murphy Secretary

Dated: July 27, 2011

Faculty Biographies

E. David Smith, Esq., is principal of Smith & Associates, and serves as outside general counsel for US and foreign companies and family offices. Guiding his clients in the creation and growth of their wealth, he positions business entities for growth opportunities and for mitigating risk, including asset preservation. Combining his experience in corporate transactions, capital and financing, corporate governance, corporate litigation and intellectual property, he provides strategy, identifies and addresses core issues, and quarterbacks companies’ and family offices’ legal needs. He is a graduate of the University of California, Berkeley, and the Tulane University School of Law, and is admitted to practice in New York, New Jersey and Georgia in addition to numerous federal trial and appellate courts including the Supreme Court of the United States. The team at Smith & Associates includes seasoned practitioners in tax, mergers and acquisitions, contracts, investment agreements, employment, litigation, commercial real estate and intellectual property. Timothy P. Terry, Esq., was appointed Secretary and General Counsel of Hartz Capital, Inc. in January 2014. He first joined Hartz Capital in December 2005 as its Deputy General Counsel. In his current role, Mr. Terry is the chief legal and compliance officer, managing legal operations and transactional and litigation matters for a broadly diversified, multi-billion dollar investment portfolio. Before joining Hartz, Mr. Terry practiced law in Los Angeles and New Jersey with the law firms of LeBoeuf, Lamb, Greene & MacRae, LLP and Sonnenschein, Nath & Rosenthal, LLP. Prior to becoming an attorney, Mr. Terry worked for eight years as a legislative director, press secretary and legislative staff member in the U.S. House of Representatives and for three years as a federal lobbyist representing a number of business organizations and public agencies. He is a Trustee of The Hastings Foundation (associated with his law school alma mater). He is also a founding Director of The Private Investor Coalition, Inc., a non-profit formed by and for single family offices (“SFOs”) to address regulatory and compliance issues impacting the SFO community.

Steven J. Thayer, Esq., is a founding partner of Handler Thayer, LLP, a nationally recognized law firm based in Chicago, Illinois. Handler Thayer has two primary practice areas, namely the Advanced Planning & Family Office Practice and the Commercial Practice Group. Mr. Thayer serves as the Chairman of the firm’s Commercial Practice Group which includes the firm’s Business & Corporate, Entertainment, and Real Estate Practice. Mr. Thayer was recently recognized as a 2010 Leading Lawyer. Mr. Thayer has a diverse background representing entrepreneurs, fund managers, developers, and family offices. He advises fund managers on formation issues, offering documentation, investment advisor registration, and regulatory compliance matters. Mr. Thayer also assists companies with structured finance transactions involving the use of special purpose vehicles for capital market transactions. Mr. Thayer also works closely with the firm’s Advanced Planning and Family Office Group representing family offices with respect to their business, venture capital, and real estate transactions. In 2013, he was one of four finalists for the prestigious Family Office Review Award - Best Private Client Lawyer in North America.

Richard C. Wilson is the founder of the Billionaire Family Office and the Family Office Club, an association for family offices. He is author of “The Single Family Office: Creating, Operating, and Managing Investments of a Single Family Office.” His Wilson Holding Company operates www.FamilyOffices.com. A bestselling author, he is the owner of several portfolio companies, and global thought leader on family office wealth management. Richard has written 10 books and his speeches, articles, and videos have reached an audience of over 20 million professionals. Richard has spoken to audiences over 100 times in 20+ countries including Cayman Islands, Monaco, Singapore, Russia, Switzerland, Belgium, Hong Kong, and Brazil. The professional associations that he operates are in the family office, private equity, and hedge fund industries have a total of 300,000+ members globally make them the largest in each respective industry.

Timothy P. Terry

Hartz Capital, Inc. [email protected]

Steven J. Thayer

HANDLER THAYER, LLP

[email protected]

Richard C. Wilson

WILSON HOLDING COMPANY WilsonHoldingCompany.com

(212) 729-5067 [email protected]

E. David Smith, Esq.

S M I T H & A S S O C I A T E S 570 Lexington Avenue, 23rd Floor

New York, New York 10022 (212) 661-7010 • NJ Office (973) 365-

2770 [email protected]

Family Offices - New York County Lawyers' Association

Documents

Transcript of Family Offices - New York County Lawyers' Association