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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
Release No. 34-35124; File No. S7-3-94
RIN 3235-AG03
Recordkeeping and Reporting Requirements For Trading Systems
Operated by Brokers and Dealers
AGENCY: Securities and Exchange Commission.
ACTION: Final Rule.
SUMMARY: The Securities and Exchange Commission is adopting Rule
17a-23 ("Rule") and Form 17A-23 under the Securities Exchange Act
of 1934 to establish recordkeeping and reporting requirements for
brokers and dealers that operate automated trading systems.
Under the Rule, registered broker-dealers that sponsor these
systems would be required to maintain participant, volume, and
transaction records, and to report system activity to the
Commission and, in certain circumstances, to an appropriate self-
regulatory organization.
EFFECTIVE DATE: June 1, 1995.
FOR FURTHER INFORMATION CONTACT: Kristen N. Geyer, Senior
Counsel, 202/942-0799, Office of Automation and International
Markets, Division of Market Regulation, Securities and Exchange
Commission (Mail Stop 5-1), 450 Fifth Street, N.W., Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction and Summary
On February 9, 1994, the Securities and Exchange Commission
("Commission") proposed for comment Rule 17a-23 ("Proposed
Rule")-[1]- and Form 17A-23 ("Proposed Form")-[2]- under the
Securities Exchange Act of 1934 ("Act").-[3]- The Proposed Rule
would have required specific recordkeeping and reporting by
registered broker-dealer sponsors of certain automated trading
systems (as defined in the Rule, "Broker-Dealer Trading System,"
or "BDTS"). The Proposed Form specified the information to be
included in each filing required by the Proposed Rule.
The Commission received ten comment letters in response to
the Proposing Release. Commenters generally supported the
Proposed Rule's goal of standardizing recordkeeping and reporting
for BDTSs.-[4]- The majority of commenters recommended specific
-[1]- 17 CFR 240.17a-23.
-[2]- 17 CFR 249.636.
-[3]- 15 U.S.C. 78a et seq. See Securities Exchange Act
Release No. 33605 (Feb. 9, 1994), 59 FR 8368
("Proposing Release").
-[4]- The comment letters and a summary of comments prepared
by the Division of Market Regulation have been placed
in Public File No. S7-3-94, which is available for
inspection in the Commission's Public Reference Room.
Commenters consisted of two industry associations, two
self-regulatory organizations, four sponsors of
automated proprietary trading systems, and two
automated broker-dealers. See letters from: John F.
Olson, Chair, Committee on Federal Regulation of
Securities, and Roger D. Blanc, Chair, Subcommittee on
Market Regulation, the Business Law Section of the
American Bar Association, dated May 10, 1994 ("ABA");
Robert A. McTamaney, Attorney, Carter, Ledyard &
Milburn (representing RMJ Securities Corporation, RMJ
Options Trading Corporation, and RMJ Special Brokerage,
(continued...)
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modifications to the Proposed Rule. Two commenters, the National
Association of Securities Dealers ("NASD") and the New York Stock
Exchange ("NYSE"), objected to the Commission's overall
regulatory treatment of certain BDTSs and the competitive
implications of such regulatory treatment.-[5]-
After considering the comments, the Commission is adopting
the Rule and Form, with certain modifications. The Commission
does not believe that these modifications materially alter the
scope of the Proposed Rule or the entities to which it applies.
The recordkeeping and reporting approach adopted in the Rule will
provide the Commission with information necessary to effectively
monitor, evaluate, and examine such systems.
II. Basis and Purpose of the Rule
In January 1994, the Commission's Division of Market
Regulation ("Division") published its Market 2000 Study,-[6]-
which reviewed, among other things, the Commission's existing
oversight of automated trading systems. The Study recognized
that the activities of such systems differ from the activities of
traditional broker-dealers, and recommended that the Commission
closely monitor the effects of proliferation of such
systems.-[7]- The Commission proposed Rule 17a-23 immediately
following publication of the Market 2000 Study.-[8]-
-[4]-(...continued)
Inc.), dated April 15, 1994 ("CLM/RMJ"); John E.
Herzog, Chairman & CEO, Herzog, Heine, Geduld, dated
April 12, 1994 ("HHG"); Charles R. Hood, Senior Vice
President & General Counsel, Instinet Corporation,
dated April 25, 1994 ("Instinet"); Alan D. Rudolph,
Vice President, Intervest Financial Services, Inc. and
President, CrossCom Trading Network, Inc., dated March
15, 1994 ("Intervest"); Raymond L. Killian, Jr.,
President & CEO, Investment Technology Group, Inc.
(sponsor of Portfolio System for Institutional Trading
("POSIT")), dated May 18, 1994 ("ITG"); Leonard Mayer,
Vice President, Mayer & Schweitzer, Inc., dated July
11, 1994 ("M&S"); Joseph R. Hardiman, President,
National Association of Securities Dealers, Inc., dated
May 27, 1994 ("NASD"); John E. Buck, Senior Vice
President & Secretary, New York Stock Exchange, dated
June 30, 1994 ("NYSE"); and Mark T. Commander, Chairman
of Self-Regulation & Supervisory Practices Committee,
Securities Industry Association, dated June 17, 1994
("SIA").
-[5]- See letters from NASD and NYSE. The NASD expressly
opposed adoption of the Proposed Rule.
-[6]- Division of Market Regulation, Market 2000: An
Examination of Current Equity Market Developments
(January 1994) ("Market 2000 Study").
-[7]- Id. at 26-27.
-[8]- See Proposing Release, supra note 3. Concurrently with
the publication of the Proposed Rule, the Commission
withdrew a previous rule proposal (Rule 15c2-10) which
would have required certain BDTSs to seek Commission
approval prior to operation of a proprietary trading
system and imposed additional conditions on the
operation of such systems. The Commission concluded
that, based on its experience since 1989 in overseeing
(continued...)
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The majority of commenters supported the concept of a
recordkeeping and reporting rule and recognized the importance of
ongoing monitoring and evaluation of technological advances in
the securities industry.-[9]- Several commenters, however,
questioned the necessity for applying the Proposed Rule to
specific types of systems. In particular, two commenters
suggested that the Proposed Rule should not apply to systems that
allow a dealer's customers and other dealers to execute orders
against the sponsoring dealer's bid or offer (i.e., "hit" the
sponsor's quotations) through automated means ("automated dealer
systems").-[10]- Another commenter objected to application of
the Proposed Rule to non-equity systems.-[11]-
In the Proposing Release, the Commission noted that,
although automated systems have proliferated in the securities
industry, the Commission receives little information about such
systems.-[12]- The Commission concluded that its efforts to
gauge the effect of automation on the U.S. markets and to
regulate broker-dealers that operate such systems appropriately
are being hindered by a lack of critical information regarding
the activity of BDTSs.
The Commission identified three ways in which additional
information about BDTSs would assist in evaluating, monitoring,
and examining such systems. First, the Rule will allow the
Commission to evaluate BDTSs with regard to national market
-[8]-(...continued)
BDTSs, including the proposal of Rule 17a-23, a
separate regulatory structure governing proprietary
trading systems was not necessary at this time. See
Securities Exchange Act Release No. 33621 (Feb. 14,
1994), 59 FR 8379.
-[9]- See, e.g., Letter of ABA, at 1; Letter of HHG, at 1;
Letter of ITG, at 1; and Letter of M&S, at 2.
-[10]- See Letter of ABA, at 3; Letter of NASD, at 6.
-[11]- See Letter of CLM/RMJ, at 3.
-[12]- The extent of information currently accessible to the
Commission, the history of the Commission's oversight
of such systems, and other background information can
be found in the Proposing Release. See Proposing
Release, supra note 3, 59 FR at 8369-71. Currently,
BDTSs are subject to Commission oversight through
broker-dealer registration, recordkeeping, and
reporting requirements in the Act. In addition,
sponsors of a number of BDTSs have obtained no-action
assurances from the Division that it will not recommend
enforcement action if the systems operate without
registering as exchanges. These staff no-action
letters require supplemental recordkeeping and
reporting by the sponsor as a condition of the no-
action position. See Proposing Release, supra note 3,
59 FR at 8369. The Rule does not address the issue of
whether a particular trading system may be required to
register as a national securities exchange, clearing
agency, or other self-regulatory organization.
Sponsors of BDTSs seeking relief from exchange,
clearing agency, and other registration requirements
may continue to request no-action positions from the
Division.
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system goals.-[13]- The Commission noted in the Proposing
Release that BDTSs have the potential to significantly affect
trading patterns, market transparency, and the distribution of
trading activity among different markets; consequently, access to
uniform, reliable information about BDTSs is critical to the
Commission's evaluation of these issues.-[14]- This is true
regardless of whether such systems automate the market-making
function, automate an order-interaction function, or automate
trading of illiquid or non-equity securities.
Second, the information will help the Commission to monitor
the competitive effects of these systems and to ascertain whether
broker-dealer regulation remains appropriate for the operation of
BDTSs.-[15]- As is clear from the comments, the ongoing debate
regarding the competitive consequences of the Commission's
regulation of BDTSs remains vigorous.-[16]- Finally, the Rule
will help the Commission identify areas where monitoring of such
systems may be improved and where self-regulatory organization
("SRO") surveillance may be more appropriately tailored to the
detection of fraudulent, deceptive, and manipulative practices in
an automated environment.-[17]-
-[13]- See Proposing Release, supra note 3, 59 FR at 8369-70.
-[14]- For example, in its Market 2000 Study, the Division
advocated improving transparency for limit orders and
after-hours trading, order-exposure rules, disclosure
of broker-dealer order-handling practices, assessment
of market quality by users of automated routing
systems, and surveillance of third market trading.
Market 2000 Study, supra, note 6, at 16-32. The
Commission's consideration of each of these issues is
directly affected by its understanding of different
trading mechanisms, including BDTSs. In particular,
the Commission must examine how, and the extent to
which, order flow is directed to different trading
mechanisms, the extent to which orders entered into
different trading mechanisms are integrated into
national quotation and trade reporting systems, the
extent to which various trading mechanisms offer price
improvement, and the order handling and execution
practices of different trading mechanisms. Information
reported pursuant to the Rule will assist the
Commission in understanding how BDTSs operate and how
they interact, and are integrated, with other market
participants and mechanisms, and consequently will
assist the Commission in evaluating these issues.
-[15]- See Proposing Release, supra note 3, 59 FR at 8370.
-[16]- Three commenters discussed the competitive implications
of the Commission's adoption of a recordkeeping and
reporting rule applicable to BDTSs. See Letter of ABA,
at 2; Letter of NASD, at 5; and Letter of NYSE, at 2-
4. Two of these commenters, the NASD and NYSE, opposed
the Commission's determination not to adopt previously
proposed Rule 15c2-10, which would have subjected
sponsors to a number of procedural and substantive
requirements. Cf. Securities Exchange Act Release No.
26708 (April 13, 1989), 54 FR 15429; Proposing Release,
supra note 3, 59 FR at 8369.
-[17]- See Proposing Release, supra note 3, 59 FR at 8370-71.
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Notwithstanding the views of commenters that the risks posed
by automated market-maker systems are sufficiently addressed by
existing broker-dealer regulations-[18]- or that automated
systems are less susceptible to manipulation than traditional
broker-dealers,-[19]- the Commission believes that the evolution
of both automated broker systems and automated dealer systems
present new challenges in maintaining market quality and customer
protection. BDTSs contribute to the concentration of order flow
among a few, large, automated broker-dealers, execute trades at a
more rapid rate than traditional services, and make execution of
the customers' orders dependent on the reliability of the
automated system rather than individual traders.
The Commission believes that the Rule as adopted will
provide important information to assist it in accomplishing these
goals, without imposing unnecessary or overly burdensome
requirements that do not relate to the purposes of the Rule.
III. Discussion
As adopted, the Rule requires a registered broker-dealer who
acts as the sponsor-[20]- of a "broker-dealer trading system" to
make and keep current specified records, and file reports with
the Commission (and, in certain circumstances, with the
appropriate SRO) on Form 17A-23.
A. Scope of the Rule and Application to Specific Types of
Systems
The Rule as proposed and adopted would apply to registered
brokers or dealers-[21]- that sponsor a "broker-dealer trading
-[18]- See Letter of ABA, at 2; Letter of NASD, at 5.
-[19]- See Letter of Instinet, at 2-4.
-[20]- The Rule defines a sponsor as "any entity that
organizes, operates, administers, or otherwise directly
controls a broker-dealer trading system." In addition,
the Rule includes within this term any registered
broker-dealer that regularly executes transactions on
behalf of participants of a system operated by a non-
registered entity. See Proposing Release, supra note
3, 59 FR at 8371.
-[21]- As noted in the Proposing Release, absent an exemption
from or exception to the broker-dealer registration
provisions of the Act, the types of activities
conducted by BDTSs can be lawfully conducted only by a
broker-dealer registered with the Commission pursuant
to the Act. See Proposing Release, supra note 3, 59 FR
at 8371. The Commission notes that the term
"registered broker or dealer" is defined in Section
3(a)(48) of the Act, and includes the majority of
broker-dealers. The term does not include government
securities brokers or government securities dealers
registered under Section 15C of the Act, which are
required to comply with the recordkeeping and reporting
requirements promulgated by the Department of the
Treasury, 17 CFR 400 et seq., under the Government
Securities Act of 1986, 15 U.S.C. 78o-5. Accordingly,
the Rule would not apply to systems sponsored by
broker-dealers registered solely under Section 15C of
the Act. In addition, the Rule would not apply to
operators of systems that do not involve activities
requiring broker-dealer registration. See Letters
regarding Farmland Industries, Inc. (Aug. 26, 1991);
(continued...)
-------------------- BEGINNING OF PAGE #6 -------------------
system." Commenters requested clarification of which automated
systems would be considered "broker-dealer trading systems" as
defined in the Proposed Rule.-[22]- Several commenters suggested
narrowing the definition of BDTS to exempt certain systems. In
particular, two commenters questioned the inclusion of automated
dealer systems that allow a dealer's customers and other dealers
to execute against the sponsoring dealer's bids and offers.-[23]-
One commenter also recommended that the Commission exempt non-
equity trading systems from application of the Proposed
Rule.-[24]- In view of the comments, the Commission has
simplified the definition of BDTS and clarified the Rule's
application to various systems, as discussed below, but has not
materially altered the scope of the Rule.
The definition of "broker-dealer trading system" has been
modified in the Rule to mean any system that meets the following
criteria: the system must provide a mechanism, automated in full
or in part, for (1) collecting or disseminating system orders and
(2) matching, crossing, or executing system orders, or otherwise
facilitating agreement to the basic terms of a purchase or sale
of a security between system participants, or between a system
participant and the system sponsor, through use of the system.
As made clear in the Rule, the term "broker-dealer trading
system" does not include any system that does not meet both of
these requirements.
The modified definition of BDTS captures the essential
features of the types of systems that the Proposed Rule was
intended to encompass. The Proposed Rule also described several
-[21]-(...continued)
Troy Capital Services, Inc. (May 1, 1990); Real Estate
Financing Partnership (May 1, 1990); Ivestex Investment
Exchange, Inc. (April 9, 1990); and Petroleum
Information Corporation (Nov. 28, 1989). Cf.
Securities Exchange Act Release No. 27017 (July 11,
1989), 54 FR 30013, text accompanying n.66.
-[22]- See, e.g., Letter of NASD, at 7. The Proposed Rule
defined "broker-dealer trading system" as:
(i) any system that automates the execution of orders to buy
or sell securities based on quotations of the system sponsor
or its affiliates (whether such quotations are disseminated
through the system, a quotation consolidation system
operated pursuant to a plan approved by the Commission under
Section 11A of the Act, an electronic interdealer quotation
system operated by a registered national securities
association, or otherwise); or
(ii) any system that both automates the dissemination or
collection of quotations, orders to buy or sell securities,
or indications by any person announcing a general interest
in buying or selling a security, submitted by entities other
than the system sponsor and its affiliates, and provides a
mechanism for matching or crossing, or for otherwise
facilitating agreement between participants to the basic
terms of a purchase or sale of a security through use of the
system.
See Proposing Release, supra note 3, 59 FR at 8374.
-[23]- See Letter of ABA, at 3; Letter of NASD, at 6.
-[24]- See Letter of CLM/RMJ, at 3.
-------------------- BEGINNING OF PAGE #7 -------------------
types of systems that were excluded from the definition of
BDTS.-[25]- As discussed below, the Commission believes that
those systems continue to be excluded from the Rule as adopted,
because they do not meet the required characteristics of a BDTS
as defined.-[26]-
1. System Automation
As adopted, the Rule applies to systems that may be only
partially automated, as well as to fully automated systems. Some
systems may automate the collection and dissemination of orders
through a screen available for viewing by participants, but
require participants to contact the sponsor by telephone in order
to finalize a trade based on such orders. Other systems may
collect orders via telephone contact with customers, and enter
those orders into a system that automates the matching of such
orders. Although neither of these systems are "fully" automated,
both are BDTSs under the Rule as adopted. The lack of complete
automation does not alter the potential market effects of
automated execution systems, nor does it alter the need to tailor
oversight of the sponsor to reflect the distinctive
characteristics of automated systems. The Commission notes in
particular that it is not necessary for participants to have the
ability to enter orders electronically through a system terminal
or screen in order for the system to be subject to the Rule.
Some systems permit customers to participate in the system's
matching, crossing, or other features by communicating orders to
the sponsor by telephone, to be entered into the system by the
sponsor's trading personnel.-[27]- This lack of automated access
-[25]- One commenter noted that the Proposing Release
discussed other systems that the Proposed Rule would
not encompass, but that were not expressly excluded
from the definition of BDTS. The commenter requested
that the Commission reconcile the Rule with the
excluded systems described in the Proposing Release.
See Letter of ABA, at 3-4. Given the ongoing evolution
of automated trading systems, however, the Commission
believes it would be impractical to attempt to
enumerate all types of systems that would not be
considered "broker-dealer trading systems" under the
Rule. In view of this, the Rule as adopted does not
contain express exclusions.
-[26]- The Proposed Rule excluded certain order routing
systems. See Proposing Release, supra note 3, 59 FR at
8372 (Sections (b)(2)(ii)(A) and (B) of the Proposed
Rule). These systems do not meet the requirements of
the Rule as adopted, and therefore are not subject to
the Rule. Specifically, systems that only allow
participants to post trading interest, or only route
orders to the execution facilities of established
markets or other broker-dealers do not effect the
purchase or sale of a security between system
participants or between a system participant and the
system sponsor through the system.
-[27]- The Commission also notes in this context that
transactions resulting from orders entered into the
system through the sponsor's trading personnel would be
considered to be executed through the system to the
same extent as trades entered directly by system
participants. One commenter noted that certain systems
may permit the system sponsor to execute trades
(continued...)
-------------------- BEGINNING OF PAGE #8 -------------------
to a system does not exempt such a system from application of the
Rule.
-[27]-(...continued)
manually and to enter the matched trade into the system
for reporting and other execution related activities.
See Letter of M&S, at 2. The commenter suggested that
system sponsors should not be required to segregate out
such trades for purposes of the recordkeeping and
reporting requirements of the Rule. Neither the Rule
nor Form 17A-23 requires a system sponsor to segregate
transaction records or reports based on the method by
which the order was accepted into the system (i.e.,
telephone, computer terminal, etc.). System sponsors
would not be required, therefore, to segregate out
manually handled trades. The Commission expects,
however, that a system's ability to process manually
handled orders would be described in the system
sponsor's filings pursuant to Part I of Form 17A-23.
-------------------- BEGINNING OF PAGE #9 -------------------
2. System Execution Mechanism
The Rule applies only to those automated trading systems
that offer users the ability to effect securities transactions
through their use of the system, either with other participants
or with the system sponsor. Numerous automated systems have
developed that facilitate securities trading, but do not create
opportunities to effect transactions apart from the facilities of
established markets. These systems range from purely
informational "bulletin board" systems that allow participants to
announce their trading interest (typically by posting quotation
or order information and participant telephone numbers on the
system's screen)-[28]- to "routing" systems that direct order
flow to an exchange or other established market or dealer but do
not otherwise interact with such order flow. Bulletin boards,
routing systems, and other similar systems essentially disperse
information; they do not allow users to effect securities
transactions with other system participants or with the system
sponsor through the system. Accordingly, such systems are not
subject to the Rule. In the Commission's view, these "non-
execution" systems do not create the same potential for market
effects and correspondingly create less need for ongoing
monitoring and evaluation by the Commission than systems that
fall within the definition of broker-dealer trading system.-[29]-
3. Application of the Rule to Automated Dealer Systems
Two commenters argued that the Proposed Rule only should
apply to systems that offer a "locked-in trade" between or among
customers or other dealers as part of an interactive
system.-[30]- These commenters questioned the Commission's
rationale for applying the Proposed Rule to automated dealer
systems, arguing that automated dealer systems "do no more than
what any market-maker has done since the enactment of the 1934
Act," other than providing fuller automation of the market-maker
function.-[31]- One commenter supported inclusion of automated
dealer systems in the Proposed Rule.-[32]-
The Commission has concluded that the Rule should apply to
automated dealer systems as well as other BDTSs. Systems that
automate execution functions make it possible for a broker-
-[28]- The Commission uses the term "bulletin board systems"
in this context to mean only those systems that allow
participants to announce their trading interest, but do
not provide further opportunity to interact with the
system or the system sponsor to execute transactions.
Such systems do not allow participants to agree to the
terms of a transaction "through use of the system";
participants must contact each other outside of system
facilities or the system sponsor to conclude a
transaction. Therefore, such systems do not meet the
definition of a BDTS under the Rule, and the Rule would
not apply to these systems.
-[29]- Although the Commission requested comment on whether
the Proposed Rule should apply to "non-execution"
systems, no commenter suggested that such systems be
subject to the Rule. See Proposing Release, supra note
3, at 8373.
-[30]- See Letter of ABA, at 3; Letter of NASD, at 5-6.
-[31]- See Letter of NASD, at 6.
-[32]- See Letter of NYSE, at 2.
-------------------- BEGINNING OF PAGE #10 -------------------
dealer to concentrate a significant volume of securities
transactions. This is true whether such an "execution" system
allows participants to interact directly with each other, or
whether the system allows participants to interact with a single
dealer. As discussed above and in the Proposing Release, this
potential concentration of volume outside of national market
systems may have significant market effects. The Commission
believes that in today's highly complex, integrated trading
environment, it must fully consider the effect of technological
advances on the broker-dealer's role in both auction market and
dealer market trading.-[33]-
-[33]- The NASD in its comment letter suggested that market-
maker execution systems should be distinguished from
other BDTSs because the executions provided by a
market-maker are based on the market-maker's own
quotes, subject to its best execution obligations and
affect the market-maker's own inventory. According to
the NASD, other BDTSs permit the direct interaction of
customer orders or provide for the quotations of
multiple market-makers and are thus more akin to the
functions performed by traditional markets. See Letter
from NASD, at 6. The Commission is not persuaded that
this difference in operation is a sufficient basis on
which to exclude market-maker systems from the Rule. A
broker-dealer firm sometimes trades for its own account
as dealer and sometimes for the account of its
customers as broker; in either case, the broker-dealer
uses its facilities to bring together buyers and
sellers with the intent of effecting a securities
transaction. See Securities Exchange Act Release No.
27611 (Jan. 12, 1990), 55 FR 1890, 1898.
-------------------- BEGINNING OF PAGE #11 -------------------
4. Application of Rule to Non-Equity Systems
The Rule as adopted applies both to systems trading equity
and systems trading non-equity securities. One commenter
objected to application of the Proposed Rule to systems that deal
exclusively with non-equity instruments.-[34]- That commenter
noted that "[t]he nature of and detail imposed by these
recordkeeping and reporting requirements suggest that the real
intention behind the Proposed Rule is to enable the SEC to gather
and evaluate information on BDTSs dealing in equity instruments
only."-[35]-
The need for uniform, reliable information as discussed
above and in the Proposing Release is equally applicable to
systems trading non-equity securities. It is probable that
sponsors will continue to create BDTSs to facilitate transactions
in products that do not trade in organized markets, including
various debt and derivative products. Systems that trade these
non-equity, and typically less liquid, securities are especially
opaque under existing regulations; they are not integrated into
market quotation and reporting mechanisms to the same degree as
systems that trade equity products. Some of these "niche"
systems may provide the only readily identifiable source of
trading in a particular instrument. The Rule will help alleviate
the difficulty of obtaining accurate information on a regular
basis about trading in these instruments.
The Commission recognizes that information that is relevant
to equity security trading may not be relevant to non-equity
security trading. Accordingly, the Rule and Form direct the
sponsor of a non-equity trading system to provide information
relevant to such non-equity securities (such as number of bonds,
contracts, etc.).-[36]-
-[34]- See Letter of CML/RMJ, at 3-5.
-[35]- Id. In addition to CML/RMJ, one other sponsor of a
system trading non-equity securities commented on the
Proposed Rule. See Letter of Intervest.
-[36]- See 17 CFR 240.17a23(c)(1)(ii)(B) and 249.636, Form
17A-23, Part II, 1.
-------------------- BEGINNING OF PAGE #12 -------------------
B. Regulation of Certain BDTSs
Three commenters urged the Commission to reconsider its
regulatory approach to BDTSs, or in the alternative to reconsider
its regulation of traditional markets.-[37]- Specifically, both
the NYSE and the NASD identified concerns regarding the
competitive implications of the Commission's adoption of a
recordkeeping and reporting rule governing BDTSs in light of the
regulatory structures that apply to registered exchanges and
interdealer quotation systems.-[38]- The Commission does not
believe it is necessary at this time to adopt regulations
governing BDTSs beyond those existing requirements applicable to
the broker-dealer sponsors of such systems and the enhanced
recordkeeping and reporting that will be provided pursuant to the
Rule. The Commission is not precluded from reconsidering the
issues raised by the commenters concerning the Commission's
regulatory approach to BDTSs at a later time, should
circumstances warrant such reconsideration.
These commenters also urged the Commission to reconsider its
regulation of trading services provided by registered exchanges
and securities associations. In particular, commenters
recommended that the Commission streamline its requirements
governing the filing of SRO rule proposals, and that SROs be
allowed to develop trading systems under the same regulatory
requirements applicable to BDTSs.-[39]- In that regard, the
Commission notes that today it has adopted amendments to the
Commission's rules governing the SRO rule filing process.-[40]-
The Commission also notes that the regulation of SRO trading
services is largely dictated by statutory requirements.
Consequently, SRO operation of trading systems outside of
existing SRO regulations would require a careful, case-by-case
analysis under the Act. BDTSs are governed by the regulatory
structure applicable to other registered broker-dealers. The
Commission has not created a separate regulatory structure for
BDTS trading; it has adopted enhanced recordkeeping and reporting
for such systems.
C. Recordkeeping Requirements
Under the Rule, system sponsors are required to keep and
make available to the Commission, upon request, records of: (1)
daily summaries of trading in the system; (2) the identities of
system participants (including any affiliations between those
participants and the sponsor); and (3) time-sequenced records of
each transaction effected through the system. The sponsor is
required to keep these records, as well as any notices provided
by the sponsor to participants, for three years (the first two
years in an easily accessible place). The Commission has
modified some of the proposed recordkeeping requirements in
response to comments as discussed below.
-[37]- See Letter of ABA, at 5-6; Letter of NASD, at 1-7;
Letter of NYSE, at 1-2, 4.
-[38]- See Letter of NASD, at 1-4; Letter of NYSE, at 1-2, 4.
See also, Letter of ABA, at 5-6.
-[39]- See Letter of ABA, at 5-6; Letter of NASD, at 5; Letter
of NYSE, at 4.
-[40]- See Securities Exchange Act Release No. 35123 (December
20, 1994). The amendments expand the category of
proposed rule changes that may become effective upon
filing under Section 19(b)(3)(A) of the Act to include
certain changes to existing systems and other
noncontroversial filings.
-------------------- BEGINNING OF PAGE #13 -------------------
1. Duplicative Recordkeeping
The Commission requested comment on whether the Proposed
Rule's requirements would be duplicative or burdensome.
Commenters suggested that the recordkeeping requirements appear
to be duplicative of those already required under other rules
promulgated under Section 17, and questioned the justification
for such duplication.-[41]- Two commenters expressed
reservations that the Proposed Rule would penalize broker-dealers
that use automation to become more efficient, and would thus
deter further automation.-[42]- Only one commenter stated that
the Proposed Rule would impose undue financial burden on BDTS
sponsors.-[43]- No commenter provided information sufficient to
quantify the extent to which BDTSs would be financially burdened
by the Proposed Rule.
While existing regulations require registered broker-dealers
to maintain much of the information required under the Rule, they
do not require broker-dealers to keep records that present BDTS
activity separately from other brokerage activity.-[44]-
Consequently, the Commission does not have ready access to
system-specific information. The Commission's ability, and the
ability of SROs,-[45]- to adequately evaluate, monitor, and
examine these systems is correspondingly limited.-[46]- Although
the Rule may result in changes to some existing BDTS sponsors'
recordkeeping practices, the Commission believes that it has made
sufficient provision in the Rule to minimize the need for BDTS
sponsors to keep duplicative records. The Rule does not dictate
a format for maintaining information and does not require BDTS
sponsors to maintain such information separately from its other
records, so long as the sponsor can promptly retrieve such
information upon request in the format, and for the time periods,
specified in the Rule.
2. Records Regarding Applicants Denied Participation
on the System.
Commenters questioned the need to retain information
regarding specific applicants denied participation in the system,
and indicated that quantifying such information would be
difficult.-[47]- In view of the comments, the Commission has
deleted this requirement from the Rule. Sponsors, however, are
-[41]- See Letter of NASD, at 7. Cf. Letter of SIA, at 2.
-[42]- See Letter of ABA, at 3 and Letter of NASD, at 6.
-[43]- See Letter of CLM/RMJ, at 3-4.
-[44]- See Proposing Release, supra note 3, 59 FR at 8368-69.
-[45]- Staff of the Division met with representatives of the
NASD to discuss its use of the information provided by
the records maintained pursuant to the Rule and the
reports filed pursuant to Form 17A-23. The Commission
expects that the NASD and other SROs that have the
responsibility to examine and otherwise oversee BDTSs
will use such information to tailor their oversight of
BDTSs to reflect the distinctive features of automated
broker-dealers.
-[46]- See Proposing Release, supra note 3, 59 FR at 8370-71.
-[47]- See Letter of ABA, at 5; Letter of CLM/RMJ, at 5;
Letter of HHG, at 3-4; Letter of Instinet, at 6-7;
Letter of ITG, at 2; Letter of NASD, at 7-8; and Letter
of SIA, at 3.
-------------------- BEGINNING OF PAGE #14 -------------------
required to describe, in filings under Part I and IA of Form 17A-
23, the factors relied upon by the sponsor in granting
participation in the system.
-------------------- BEGINNING OF PAGE #15 -------------------
3. Daily Trading Summaries
The Proposed Rule required sponsors to retain daily
summaries of, among other things, securities trading in the
system. The Proposed Rule also would have required sponsors to
retain daily summaries identifying the number of "quotations" and
"orders" placed in the system, expressed separately for limit and
market orders and other relevant order specifications. This
requirement was intended to provide the Commission with a basis
for comparing potential system trading interest with trading
volume. Commenters expressed concern that the configuration of
specific systems would make it difficult to determine what would
constitute a single "quotation" or "order."-[48]- Commenters
also noted that, depending upon system configuration, identifying
the number of quotations or orders may not provide the Commission
with useful information regarding system trading interest.-[49]-
The Commission has modified the Rule in view of these
commenter concerns regarding the terms "quotations" and
"orders."-[50]- As adopted, the Rule requires sponsors to
identify the number of "system orders,"-[51]- or any other
identifiable indicator that accurately reflects participant
trading interest, as appropriate in light of system
configuration. If applicable in light of system configuration,
sponsors must express such number separately for priced and
unpriced orders. In modifying this requirement, the Commission
relies on the sponsor's knowledge of its system configuration to
determine which statistics would provide the most accurate
assessment of participant trading interest, and to retain those
statistics accordingly.-[52]-
The Commission also has modified the Rule, in response to
one commenter's concern, to clarify that a sponsor must be able
-[48]- See Letter of ABA, at 4; Letter of HHG, at 3; and
Letter of Instinet, at 8-9.
-[49]- See Letter of ABA, at 4 and Letter of Instinet, at 8-
9. One commenter questioned the use of the term
"quotations" in the Proposed Rule to refer to trading
interest entered into an automated system, noting that
its system users place "orders," not "quotations." See
Letter of Instinet, at 8. The Commission does not
believe that such distinctions between the terms
"order" and "quotation" are relevant for purposes of
this Rule.
-[50]- A corresponding requirement in Form 17A-23, Part II,
has been modified as well, for the reasons discussed
above with regard to modification of the recordkeeping
requirement in the Rule.
-[51]- The Rule defines "system order" as any order or other
communication or indication submitted by any system
participant for entry into the system announcing an
interest in purchasing or selling a security. The Rule
also clarifies that the term "system order" does not
include inquiries or indications of interest that are
not entered into the system. 17 CFR 240.17a23(b)(4).
-[52]- The Commission expects sponsors that intend to fulfill
this requirement by retaining and reporting statistics
other than system orders will contact staff of the
Division to discuss which statistics the sponsor wishes
to retain and report instead.
-------------------- BEGINNING OF PAGE #16 -------------------
to identify on a daily basis only those securities for which
transactions have been executed through the system.-[53]-
4. Participant Notices
Three commenters requested clarification of the extent to
which communications to individual participants or non-written
communications must be preserved as notices to participants under
paragraph (c)(2)(ii) of the Proposed Rule.-[54]- The Rule as
adopted requires sponsors to preserve only those notices that are
disseminated (whether through written or other means) generally
to all participants, or to one or more classes of participants.
The Rule does not require the sponsor to preserve communications
directed solely to an individual participant.
D. Reporting Requirements
Under the Rule as adopted, a BDTS sponsor is required to
file reports with the Commission (and, in certain circumstances,
with the appropriate SRO), in accordance with Form 17A-23. Form
17A-23 contains three parts: (1) operation reports, including
initial operation reports filed at least 20 calendar days prior
to the operation of the system and subsequent operation reports
filed as necessary prior to implementing material system changes;
(2) quarterly reports filed within 30 calendar days after the end
of the calendar quarter;-[55]- and (3) a final report filed
within 10 calendar days after a sponsor ceases to operate the
trading system. The operation reports would describe the system,
its procedures for reviewing capacity, security and contingency
planning, and protecting participant funds and securities (if an
entity other than the sponsor will hold or safeguard participant
funds or securities on a regular basis). It also would identify
an appropriate system contact. The quarterly reports would
contain summary trading information. The report notifying the
Commission of cessation of operations would contain, in addition
to the notification, a final transaction summary.
1. Filing Reports Prior to Operation or
Implementation of a Material Change
The Rule requires initial operation reports to be filed at
least 20 days prior to operation, and subsequent operation
reports regarding material changes to be filed at least 20 days
prior to implementing such material change, or, where it is
commercially impracticable to do so, as soon as possible after
the sponsor determines that it will implement such material
change and in any event no later than 10 days following the
implementation of such change.
The Commission notes that the Rule does not require system
sponsors that alter the operation of their BDTS subsequent to
filing an initial operation report to file additional or amended
operation reports prior to beginning operation. In the
Commission's experience, it is not uncommon for automated systems
to be altered routinely to respond to participant comments or
-[53]- See Letter of ITG, at 2.
-[54]- See Letter of ABA, at 4; Letter of Instinet, at 10; and
Letter of ITG, at 2.
-[55]- In the Proposing Release, the Commission solicited
comments on the appropriate interval at which sponsors
should file reports. See Proposing Release, supra note
3, 59 FR at 8373. No commenter addressed this issue.
One commenter, however, requested that the Commission
extend the time period for filing quarterly reports
from 20 calendar days to 30 calendar days after the
calendar quarter. See Letter of Instinet, at 11. The
Rule has been modified accordingly.
-------------------- BEGINNING OF PAGE #17 -------------------
concerns, incorporate technological advances, or otherwise
upgrade a system's operation. Accordingly, sponsors that file
initial operation reports with the Commission might alter the
operation of their BDTS subsequent to such filing, but prior to
beginning operation. If a sponsor materially changes system
operation subsequent to filing an initial operation report, but
prior to beginning operation, the sponsor should contact the
Division to apprise them of such material change.
The Commission also notes that currently, material changes
to automated systems generally require significant planning and
development prior to implementation. Accordingly, the Commission
believes that most sponsors will be able to notify the Commission
at least 20 days prior to implementing a material change.
Nonetheless, if a sponsor is able to implement a material system
change on a greatly expedited basis, the Commission recognizes
that it may not be commercially feasible to notify the Commission
20 days prior to implementation without delaying implementation.
In such circumstances, the Rule allows a sponsor to notify the
Commission as soon as possible after it determines to implement a
material change, but in any event no later than 10 days following
the implementation of such change.
2. Availability of Reports to SROs
As adopted, the Rule requires sponsors to file Parts I and
III of Form 17A-23 with both the Commission and the SRO that is
its designated examining authority. The quarterly reports
covered by Part II of Form 17A-23 are required to be filed only
with the Commission; however, the sponsor must make such reports
available to the appropriate SRO upon request.-[56]- Two
commenters expressed concern that SRO access to information
contained in reports filed pursuant to the Proposed Rule might
adversely affect a BDTS's competitive position.-[57]- One
commenter recommended that the Commission require SROs to adopt
procedures to restrict access to BDTS reports to the SRO's
surveillance personnel, or, in the alternative, dispense with the
reporting obligation.-[58]-
The Commission recognizes that the activities of SROs as
both market operators and market regulators may create tension
between the SROs and SRO members. For example, documents
obtained in the conduct of an SRO's regulatory duties may contain
competitively sensitive information. Notwithstanding this, SROs
must have access to relevant member information in order to
fulfill their self-regulatory obligations.-[59]- The Commission
believes that information contained in reports filed pursuant to
-[56]- The Commission has determined that summary trading
information filed pursuant to Part II of Form 17A-23
are not critical to the SROs' routine oversight of
BDTSs, although such information is useful for the
Commission for the reasons discussed herein and may be
useful to SROs for non-routine oversight of BDTS
sponsors. Accordingly, the Commission has revised the
Rule to require BDTS sponsors to file reports pursuant
to Part II of Form 17A-23 routinely with the Commission
and to make such reports available to the appropriate
SRO upon request.
-[57]- See Letter of ABA, at 4-5 and Letter of Instinet, at
12-13.
-[58]- See Letter of ABA, at 4-5.
-[59]- See, e.g., Exchange Act Section 15A(b), 15 U.S.C. 78o-
3(b).
-------------------- BEGINNING OF PAGE #18 -------------------
the Rule will be critical to appropriately tailoring SRO
examination and oversight of BDTS sponsors to reflect the
distinctive characteristics and concerns of automated trading
systems. Accordingly, the Rule continues to make such
information available to SROs designated as a BDTS's examining
authority. In order to address potential competitive issues, the
Rule provides for filing of Rule 17a-23 reports directly with
surveillance personnel designated by the examining SRO. The
Commission notes that access to information made available to an
SRO in its regulatory capacity should be rigorously restricted to
those personnel who require it for surveillance and regulatory
oversight purposes only. The Commission strongly urges SROs to
carefully assess, and revise where necessary, their internal
policies and procedures for protecting the confidentiality of
sensitive information obtained in the course of fulfilling SRO
regulatory responsibilities.
3. Confidentiality of Reports
Two commenters requested that the Commission discuss
whether reports filed pursuant to the Proposed Rule may be exempt
from public disclosure under the Freedom of Information
Act.-[60]- The Commission notes that reports filed pursuant to
the Rule will be deemed to be confidential. The Commission
considers such reports to be exempt from disclosure under the
Freedom of Information Act ("FOIA"). -[61]- The Commission will
protect the confidentiality of reports filed pursuant to the Rule
accordingly.-[62]-
E. Form 17A-23
Proposed Form 17A-23 would have required sponsors to report
"lists of securities trading in the system," and to state whether
it offers services that allow system participants to trade with
entities outside of the United States. Commenters requested
clarification that sponsors may comply with the Form by
identifying the categories of securities that have actually
traded in the system during the period covered by the
report.-[63]- After reviewing the comments, the Commission
believes that the information required pursuant to Part I of Form
17A-23 is sufficient to provide summary information regarding the
categories of securities trading, and that submission of lists
identifying individual securities in the quarterly filings under
Part II of Form 17A-23 would not be useful. Accordingly, the
Commission has deleted this requirement from the Form. The
Commission also has modified Parts I and II of Form 17A-23 to
clarify that sponsors must report whether entities located
outside of the United States have access to the system, and
describe the nature of such access and foreign participation in
the system in reports filed pursuant to Part I of the Form.
-[60]- See Letter of ABA, at 4; Letter of M&S, at 3.
-[61]- Such reports constitute examination, operating or
condition reports of a financial institution, and, as
such, are exempt from disclosure under FOIA pursuant to
5 U.S.C. 552(b)(8).
-[62]- In addition, other exemptions from FOIA may be
available, including the exemption provided by Section
552(b)(4) for trade secrets and commercial or financial
information obtained from a person and privileged or
confidential. The availability of this exemption
depends upon a factual analysis which may require
substantiation by the sponsor of the reporting BDTS.
-[63]- See Letter of Instinet, at 11 and Letter of ITG, at 2.
-------------------- BEGINNING OF PAGE #19 -------------------
Finally, the Commission has modified Part I of the Form and
paragraph (d)(1) of the Rule to require system sponsors to update
the information filed in Part I of the Form at least 20 days
prior to implementing a material change to system operation, or,
where it is commercially impracticable to do so, as soon as
possible thereafter when the sponsor determines that it will
implement such material change (and in any event no later than 10
calendar days following the implementation of such change).
IV. Implementation Date
The Rule will become effective on June 1, 1995. The
Commission has modified the Rule to allow sponsors of systems
currently operating to submit the information required by Part I
of Form 17A-23 no later than July 1, 1995 (one month following
the effective date), to provide sponsors of existing systems
adequate time to prepare this filing.-[64]-
As discussed above, certain BDTS sponsors are subject to
staff no-action letters that require those sponsors to provide
operation and trading information to the Division that is
comparable to that required in Form 17A-23.-[65]- These staff
no-action letters do not affect the obligation of any BDTS
sponsor to comply with the Rule. Prior to effectiveness of the
Rule, the Division will revise the conditions of no-action in
each letter granted to a sponsor of an operating system that
would be subject to the Rule, to eliminate duplicative reporting
requirements. Sponsors of BDTSs subject to no-action letters
that have further questions on complying with the Rule and
conditions of no-action should contact the Division.
V. Competition Findings
Section 23(a)(2) of the Act-[66]- requires the
Commission, in adopting rules under the Act, to consider the
anti-competitive effects of such rules, if any, and to balance
any impact against the regulatory benefits gained in terms of
furthering the purposes of the Act. As discussed above, several
commenters raised concerns regarding the competitive implications
of the Proposed Rule. The Commission has considered the Rule in
light of the comments and the standard cited in Section 23(a)(2).
The Rule's establishment of reporting and recordkeeping
requirements will not impose a significant burden on competition.
All BDTSs will be subject to the same requirements, and the
reporting and recordkeeping requirements, which are similar to
those currently imposed on registered brokers and dealers, should
not be unduly burdensome. In addition, the Commission has
specifically considered competitive concerns relating to SRO
access to such information.-[67]- For the reasons discussed
above, the Commission believes that adoption of the Rule will not
impose any burden on competition not necessary or appropriate in
furtherance of the Act.
VI. Summary of Final Regulatory Flexibility Analysis and
Paperwork Reduction Act
The Commission has prepared a Final Regulatory Flexibility
Analysis ("FRFA") regarding Rule 17a-23, in accordance with 5
U.S.C. 604. No public comment was received in response to the
initial regulatory flexibility analysis. The FRFA notes the
potential costs of operation and procedural changes that may be
-[64]- Sponsors of existing BDTSs must submit a system
description that is current as of the date of filing.
-[65]- See note 12, supra.
-[66]- 15 U.S.C. 78w(a)(2).
-[67]- See Availability of Reports to SROs, supra.
-------------------- BEGINNING OF PAGE #20 -------------------
necessary to comply with the Rule. As more fully explained
above, however, the Commission has determined that the
proliferation of broker-dealer automated trading systems requires
increased oversight to promote investor protection and to assess
the impact of these systems on the securities markets. The
Commission finds that the benefits of Rule 17a-23 outweigh the
costs incurred by industry participants in complying with the
Rule. A copy of the FRFA may be obtained by contacting Elaine M.
Darroch, Attorney-Advisor, Office of Automation and International
Markets, Division of Market Regulation, Securities and Exchange
Commission, 450 Fifth Street, N.W. (Mail Stop 5-1), Washington,
D.C. 20549.
No public comment was received in response to proposed Rule
17a-23 with respect to the Paperwork Reduction Act of 1980, 44
U.S.C. 3501 et seq.
-------------------- BEGINNING OF PAGE #21 -------------------
VII. Statutory Basis
The rules and regulations of the Commission are amended as
follows, pursuant to the Securities Exchange Act of 1934 and
particularly Sections 2, 3, 11A, 15(c), 17, and 23(a) thereof, 15
U.S.C. 78b, 78c, 78k-1, 78o(c), 78q, and 78w(a).
List of Subjects in 17 CFR PARTS 240 and 249
Reporting and recordkeeping requirements, Securities.
Text of Amendments
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
1. The authority citation for Part 240 is amended by
adding the following citation:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29,
80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
Section 240.17a-23 also issued under 15 U.S.C. 78b, 78c,
78o, 78q, and 78w(a);
* * * * *
2. Section 240.17a-23 is added to read as follows:
240.17a-23 Recordkeeping and Reporting Requirements relating
to Broker-Dealer Trading Systems.
(a) Scope of section. This section shall apply to any
registered broker or dealer that acts as the sponsor of a broker-
dealer trading system.
(b) Definitions. For purposes of this section:
(1) The term registered broker or dealer shall have the
meaning ascribed to it in Section 3(a)(48) of the Act.
(2) The term broker-dealer trading system means any
facility that provides a mechanism, automated in full or in part,
for:
(i) Collecting, receiving, disseminating, or displaying
system orders; and
(ii) Matching, crossing, or executing system orders, or
otherwise facilitating agreement to the basic terms of a purchase
or sale of a security between system participants, or between a
system participant and the system sponsor, through use of the
system or through the system sponsor.
(3) The term sponsor means any entity that organizes,
operates, administers, or otherwise directly controls a broker-
dealer trading system; and, if the system operator of such
broker-dealer trading system is not a registered broker or
dealer, any registered broker or dealer that, pursuant to
contract, affiliation, or other agreement with the system
operator, is involved materially on a regular basis with
executing transactions in connection with use of the broker-
dealer trading system, other than solely for its own account or
as a participant in the broker-dealer trading system.
(4) The term system order means any order or other
communication or indication submitted by any system participant
for entry into a trading system announcing an interest in
purchasing or selling a security. The term "system order" does
not include inquiries or indications of interest that are not
entered into a trading system.
(5) The term system participant means any person that is
provided access to a trading system (whether through computer
terminal, access codes, or other means) by a system sponsor for
the purpose of effecting the purchase or sale of securities
through use of such system.
-------------------- BEGINNING OF PAGE #22 -------------------
(c) Recordkeeping. Every registered broker or dealer
subject to this section pursuant to paragraph (a) of this section
shall:
(1) Make and keep current the following records relating to
the broker-dealer trading system:
(i) A record of participants in the broker-dealer trading
system (identifying any affiliations between system participants
and the system sponsor);
(ii) Daily summaries of trading in the broker-dealer trading
system, including:
(A) Securities for which transactions have been executed
through use of such system;
(B) Transaction volume (separately stated for trading
occurring during hours when consolidated trade reporting
facilities are and are not in operation), expressed with respect
to stock in trades, shares and in dollar value, and expressed
with respect to other securities in trades, number of units of
securities and in par value, dollar value, or other appropriate
commonly used measure of value of such securities; and
(C) Number of system orders, or other identifiable
indicator that accurately reflects participant trading interest,
as appropriate in light of configuration of the broker-dealer
trading system (expressed separately for priced and unpriced
orders, if applicable in light of system configuration);
(iii) Time-sequenced records of each transaction
effected through the broker-dealer trading system, including date
and time executed, price, size, security traded, counterparty
identification information, and method of execution (if broker-
dealer trading system allows alternative means or locations for
execution, such as routing to another market, matching with limit
orders, or executing against the system sponsor's quotations);
and
(2) Preserve, for a period of not less than three years,
the first two years in an easily accessible place, the following
records relating to the broker-dealer trading system:
(i) All records required to be made pursuant to paragraph
(c)(1) of this section; and
(ii) All notices provided by the system sponsor to system
participants generally (or to one or more classes of system
participant), whether written or communicated through the broker-
dealer trading system or other automated means, including, but
not limited to, notices addressing hours of system operations,
system malfunctions, changes to system procedures, maintenance of
hardware and software, instructions pertaining to access to the
broker-dealer trading system.
(d) Reporting. (1) Every registered broker or dealer
subject to this section pursuant to paragraph (a) of this section
shall:
(i) File the information required by Part I of Form 17A-23
( 249.636 of this chapter) at least 20 calendar days prior to
operating a broker-dealer trading system, or, if the sponsor is
operating the broker-dealer trading system on June 1, 1995, no
later than July 1, 1995;
(ii) During the operation of a broker-dealer trading system
of which the broker or dealer is the sponsor, file the
information described in Part IA of Form 17A-23 ( 249.636 of
this chapter) regarding a material change to operation of the
broker-dealer trading system as described in any filing
previously made with the Commission pursuant to paragraph
(d)(1)(i) of this section, at least 20 calendar days prior to
implementing such material change, or, where it is commercially
impracticable to do so, as soon as possible thereafter when the
sponsor determines that it will implement such material change,
-------------------- BEGINNING OF PAGE #23 -------------------
and in any event no later than 10 calendar days following the
implementation of such change;
(iii) During the operation of a broker-dealer trading
system of which the broker or dealer is the sponsor, file the
information described in Part II of Form 17A-23 ( 249.636 of
this chapter) within 30 calendar days after the end of each
calendar quarter in which the broker-dealer trading system has
operated after July 1, 1995; and
(iv) Within 10 calendar days after a broker-dealer trading
system of which the broker or dealer is the sponsor ceases to
operate, file the notice described in Part III of Form 17A-23 (
249.636 of this chapter).
(2) The reports provided for in paragraph (d) of this
section shall be considered filed upon receipt at the
Commission's principal office in Washington, DC. Duplicate
originals of the reports provided for in paragraphs (d)(1)(i),
(ii), and (iv) of this section must be filed with surveillance
personnel designated as such by the self-regulatory organization
that is the designated examining authority for the broker or
dealer pursuant to 240.17d-1 simultaneously with filing with
the Commission. Duplicates of the reports required by paragraphs
(d)(1)(iii) of this section must be provided to such surveillance
personnel of such self-regulatory authority upon request. All
reports filed pursuant to this paragraph (d) shall be deemed to
be confidential.
(e) Maintenance of records in alternative form. The
records required to be maintained and preserved pursuant to this
section may be produced, reproduced and maintained pursuant to
the provisions of 240.17a-4(f).
(f) Compliance with other recordkeeping and reporting
rules. Nothing in this section obviates the need for any broker
or dealer to comply with any other applicable recordkeeping or
reporting requirement in the Act and the rules and regulations
thereunder. If the information in a record required to be made
pursuant to this section is preserved in a record made pursuant
to 240.17a-3 or 240.17a-4, or otherwise preserved by the
sponsor (whether in summary or other form), paragraph (c) of this
section shall not require the sponsor to maintain such
information in a separate file, provided that the sponsor can
promptly sort and retrieve the information as if it had been kept
in a separate file as a record made pursuant to this section, and
preserves the information in accordance with the time periods
specified in paragraph (c)(2) of this section.
(g) Maintenance of records by others. The records required
to be maintained and preserved pursuant to this section may be
prepared or maintained by a service bureau, depository, or other
recordkeeping service on behalf of the sponsor of a broker-
dealer trading system, provided such entity complies with the
provisions of 240.17a-4(i). Agreement with such an entity
shall not relieve the sponsor of a broker-dealer trading system
from the responsibility to prepare and maintain records as
specified in this section.
(h) Furnishing copies of records. Every broker or dealer
subject to this section pursuant to paragraph (a) of this section
shall furnish to any representative of the Commission promptly
upon request, legible, true and complete copies of those records
of the sponsor that are required to be preserved under this
section.
(i) Exemption from this section. The Commission, by rule
or order, may exempt any sponsor of a broker-dealer trading
system from all or any of the provisions of this section, either
unconditionally or on specified terms and conditions, if the
Commission determines that such exemption is consistent with the
public interest or the protection of investors.
-------------------- BEGINNING OF PAGE #24 -------------------
PART 249 - FORMS, SECURITIES EXCHANGE ACT OF 1934
3. The authority citation for Part 249 continues to read
in part as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
4. Section 249.636 and Form 17A-23 are added to read as
follows:
Note: The text of Form 17A-23 appears as Appendix A to this
document and will not appear in the Code of Federal Regulations.
249.636 Form 17A-23, information required of certain
broker and dealer sponsors of broker-dealer trading systems
pursuant to section 17 of the Securities Exchange Act of 1934 and
240.17a-23 of this chapter.
This form shall be used by every registered broker and
dealer that is required to file reports under 240.17a-23 of
this chapter.
By the Commission.
Jonathan G. Katz
Secretary
Dated: December 20, 1994