Rule 17a-25
June 15, 2000
Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549.
Re: Proposed Rule 17a-25– File No. S7-12-00
Dear Mr. Katz:
The ad hoc Committee on Electronic Bluesheeting of the Securities Industry Association (“the Committee”)1 is pleased to submit this response to proposed Rule 17a-25, contained in Release No.34-42741 (“Release”).
Overview
The Release proposes a significant expansion in the role of the “electronic blue sheet” questionnaire forms (“EBS”). Proposed Rule 17a-25 would mark the first time that the Securities Exchange Commission (“Commission”) has codified in its rules the requirement that broker-dealers electronically submit to the Commission staff, on request, information on customer and proprietary trading.
Specific Comments
Prime Brokerage Identifiers
We query the proposal on prime brokerage identifiers in one respect. As drafted, proposed Rule 17a-25(b)(1)(i) could be read as applying not only to prime broker arrangements, but also step-outs and give-ups and similar activities in other clearing relationships. The text of the proposing release only speaks of prime brokerage arrangements, so we assume that it is not the Commission’s intent to apply this data field more broadly. We request that the Commission redraft this subsection of the proposed rule to clarify this. If our assumption is incorrect, it should be emphasized that the cost of making the necessary systems changes will be considerably higher than the Commission’s cost-benefit analysis supposes. Many clearing firms either do not maintain coded identifiers for step-outs and similar aspects of ordinary correspondent clearing relationships, or if they do, they do not necessarily identify them the same way that they identify prime brokerage arrangements. Therefore, if the Commission intends to capture clearing arrangements beyond prime brokerage arrangements, the systems changes that would be required would be quite substantial. We strongly encourage the Commission to clarify that it does not intend to reach beyond prime brokerage arrangements, or to explain why it needs this information and work with the industry to develop a rough estimate of what the additional costs would be before proceeding.
Customer Information
We are very concerned about the suggestion that the names of customers’ employers should be kept in EBS-accessible format. Many firms currently maintain this information only on “hard copies” of new account forms. Often these firms have begun to capture this information electronically for new accounts as they are opened, but have not tried to capture this information electronically for existing accounts. To do so would be extremely burdensome – requiring some firms to manually enter this information for hundreds of thousands of accounts. We question whether the administrative convenience that this requirement would give to the SEC in its investigations could outweigh the burden that this would pose for many broker-dealers.
The rule is unclear as to whether it would require the customer’s or the customer’s employer’s tax identification to be included in EBS-accessible format. If it is the latter, this is information that many firms currently do not need and therefore do not have. The rule offers no explanation as to why this information is now considered necessary. While the cost of compliance is difficult to estimate, it would obviously be enormous, since it would require all broker-dealers that do not currently have the tax identification numbers of customers’ employers to get that information and make systems changes to hold that information in an EBE-accessible format.
Execution Times and Order Sequence Numbers
Expanding EBS to include execution times and order sequence numbers would be problematic, and we recommend that the Commission not include this as part of the proposed rule. A variety of firms would have significant logistical problems with this aspect of the proposal. For example, many clearing firms that handle proprietary accounts of introducing brokers do not typically keep this information about the introducing firm. The trade comparison systems of many broker-dealers do not have any need to systematically reconcile some trade details such as execution time or order sequence. Therefore, there is often no automated link between the order file, where this information would reside, and the trade file, which is the file that interfaces with EBS. While this information can usually be manually extracted, automated extraction would require building a new automated link, rather than just reconfiguring an existing link.
In many instances, trades done through allocation accounts would also face significant hurdles in complying with a requirement to report execution time or order sequence numbers to EBS. Allocation accounts are widely used by broker-dealers for their institutional business. These accounts are typically used to enable a broker-dealer to execute a single block trade for several institutions, and then allocate the trade among them, or to give multiple executions for a single institution that are confirmed on an average price basis. However, they may also be used in situations where the trade desk happens to execute a single order from an institution in a single trade.
Unfortunately, at many firms allocation accounts are currently designed to record the time the trade left the allocation account and went into the customer account, rather than the time the trade was executed in the allocation account. Expanding the time recordation element of allocation accounts would therefore be a more significant step than simply connecting an already captured element to a different system.
SRO Requirements on Capacity Information
Proposed Rule 17a-25(a)(2)(iii) would require, inter alia, automated disclosure of whether, in the case of transactions effected for a correspondent firm, the broker-dealer was “acting as principal or agent on the transaction or transactions.” Existing SRO requirements, such as NASD Rule 8211(c)(3), have a similar requirement. However, the NASD has exempted from this requirement transactions in which the firm acts in multiple capacities in filling the order, and discloses on the confirmation words to the effect of “multiple capacities – details on request.” The Commission should either modify the rule to reflect such interpretive guidance as the NASD and other SROs have given under existing EBS requirements, or at a minimum should be prepared to give no-action letters or other interpretive guidance consistent with existing SRO guidance.
Conclusion
We appreciate the opportunity to comment on proposed Rule 17a-25. We hope that the comments offered above will help the Commission to shape the rule so that it more effectively helps the Commission in market reconstructions, and in investigating and prosecuting the scourge of insider trading, without unnecessarily burdening brokerdealer systems or weakening the competitiveness of U.S. broker-dealers. If we can be of further assistance, please do not hesitate to contact the undersigned, or George R. Kramer of the SIA staff at 202/296-9410.
Sincerely,
Bernard L. Madoff
Chair, SIA Ad hoc Committee
on Electronic Bluesheeting
