Securities and Exchange Commission § 242.600

Pt. 242 17 CFR Ch. II (4–1–20 Edition)

Release Fed. Reg. Vol. and Subject No. Date Page

Commission Guidance and Revisions to the Cross-Border Tender Offer, Ex- 58597 Sept. 19, 2008 73 FR 60094 change Offer, Rights Offerings, and Business Combination Rules and Ben- eficial Ownership Reporting Rules for Certain Foreign Institutions. Regulation SHO Amendments ...... 58775 Oct. 14, 2008 73 FR 61706 Commission Guidance Regarding the Financial Accounting Standards 60519A Aug. 25, 2009 74 FR 42773 Board’s Accounting Standards Codification. Commission Guidance Regarding Disclosure Related to Climate Change ...... 61469 Feb. 2, 2010 75 FR 62973 Amendment to Municipal Securities Disclosure ...... 62184A May 26, 2010 75 FR 33156 Commission Guidance on Presentation of Liquidity and Capital Resources 62934 Sept. 17, 2010 75 FR 59897 Disclosures in Management’s Discussion and Analysis. Commission Guidance Regarding Auditing, Attestation, and Related Profes- 62991 Sept. 24, 2010 75 FR 60617 sional Practice Standards Related to Brokers and Dealers. Commission Guidance Regarding Definitions of Mortgage Related Security 67448 July 17, 2012 77 FR 42988 and Small Business Related Security. Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based 67453 July 18, 2012 77 FR 48362 Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Rec- ordkeeping. Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based 34– June 25, 2014 79 FR 47371 Swap Participant’’ Definitions to Cross-Border Security-Based Swap Activi- 72472 ties. Commission Guidance Regarding the Definition of the Terms ‘‘Spouse’’ and 34– June 19, 2015 80 FR 37536 ‘‘Marriage’’ Following the Supreme Court’s Decision in United States v. 75250 Windsor. Interpretation of the SEC’s Whistleblower Rules under Section 21F of the 34– Aug. 4, 2015 80 FR 47831 Securities Exchange Act of 1934. 75592 Interpretation Regarding Automated Quotations Under Regulation NMS ...... 34– June 17, 2016 81 FR 40793 78102 Commission Guidance Regarding Revenue Recognition for Bill-and-Hold Ar- 34– Aug. 18, 2017 82 FR 41148 rangements. 81428 Updates to Commission Guidance Regarding Accounting for Sales of Vac- 34– Aug. 18, 2017 82 FR 41150 cines and Bioterror Countermeasures to the Federal Government for 81429 Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile. Commission Interpretation and Guidance Regarding the Applicability of the 34– Aug. 21, 2019 84 FR 47419. Proxy Rules to Proxy Voting Advice. 86721 Commission Guidance on Management’s Discussion and Analysis of Finan- 34– Jan. 30, 2020 85 FR 10571 cial Condition and Results of Operations. 88094

PART 242—REGULATIONS M, SHO, REGULATION ATS—ALTERNATIVE TRADING ATS, AC, NMS, AND SBSR AND SYSTEMS CUSTOMER MARGIN REQUIRE- 242.300 Definitions. 242.301 Requirements for alternative trad- MENTS FOR SECURITY FUTURES ing systems. 242.302 Recordkeeping requirements for al- REGULATION M ternative trading systems. Sec. 242.303 Record preservation requirements 242.100 Preliminary note; definitions. for alternative trading systems. 242.101 Activities by distribution partici- 242.304 NMS Stock ATSs. pants. CUSTOMER MARGIN REQUIREMENTS FOR 242.102 Activities by issuers and selling se- SECURITY FUTURES curity holders during a distribution. 242.103 Nasdaq passive market making. 242.400 Customer margin requirements for 242.104 Stabilizing and other activities in security futures—authority, purpose, in- connection with an offering. terpretation, and scope. 242.105 Short selling in connection with a 242.401 Definitions. public offering. 242.402 General provisions. 242.403 Required margin. REGULATION SHO—REGULATION OF SHORT 242.404 Type, form and use of margin. SALES 242.405 Withdrawal of margin. 242.200 Definition of ‘‘short sale’’ and mark- 242.406 Undermargined accounts. ing requirements. REGULATION AC—ANALYST CERTIFICATION 242.201 Circuit breaker. 242.203 Borrowing and delivery require- 242.500 Definitions ments. 242.501 Certifications in connection with re- 242.204 Close-out requirement. search reports.

792

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00802 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.100

242.502 Certifications in connection with 242.1004 SCI entity business continuity and public appearances. disaster recovery plans testing require- 242.503 Certain foreign research reports. ments for members or participants. 242.504 Notification to associated persons. 242.1005 Recordkeeping requirements re- 242.505 Exclusion for news media. lated to compliance with Regulation SCI. 242.1006 Electronic filing and submission. REGULATION NMS—REGULATION OF THE 242.1007 Requirements for service bureaus. NATIONAL MARKET SYSTEM AUTHORITY: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 242.600 NMS security designation and defi- 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l, 78m, nitions. 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 242.601 Dissemination of transaction reports 78q(h), 78w(a), 78dd–1, 78mm, 80a–23, 80a–29, and last sale data with respect to trans- and 80a–37. actions in NMS stocks. SOURCE: 62 FR 544, Jan. 3, 1997, unless oth- 242.602 Dissemination of quotations in NMS erwise noted. securities. 242.603 Distribution, consolidation, and dis- REGULATION M play of information with respect to quotations for and transactions in NMS § 242.100 Preliminary note; definitions. stocks. 242.604 Display of customer limit orders. (a) Preliminary note: Any transaction 242.605 Disclosure of order execution infor- or series of transactions, whether or mation. not effected pursuant to the provisions 242.606 Disclosure of order routing informa- of Regulation M (§§ 242.100–242.105 of tion. this chapter), remain subject to the 242.607 Customer account statements. antifraud and antimanipulation provi- 242.608 Filing and amendment of national sions of the securities laws, including, market system plans. without limitation, Section 17(a) of the 242.609 Registration of securities information processors: form of application and Securities Act of 1933 [15 U.S.C. 77q(a)] amendments. and Sections 9, 10(b), and 15(c) of the 242.610 Access to quotations. Securities Exchange Act of 1934 [15 242.610T Equity transaction fee pilot. U.S.C. 78i, 78j(b), and 78o(c)]. 242.611 Order protection rule. (b) For purposes of regulation M 242.612 Minimum pricing increment. (§§ 242.100 through 242.105 of this chap- 242.613 Consolidated audit trail. ter) the following definitions shall apply: REGULATION SBSR—REGULATORY REPORTING AND PUBLIC DISSEMINATION OF SECURITY- ADTV means the worldwide average BASED SWAP INFORMATION daily trading volume during the two full calendar months immediately pre- 242.900 Definitions ceding, or any 60 consecutive calendar 242.901 Reporting obligations. 242.902 Public dissemination of transaction days ending within the 10 calendar reports. days preceding, the filing of the reg- 242.903 Coded information. istration statement; or, if there is no 242.904 Operating hours of registered secu- registration statement or if the dis- rity-based swap data repositories. tribution involves the sale of securities 242.905 Correction of errors in security- on a delayed basis pursuant to § 230.415 based swap information. of this chapter, two full calendar 242.906 Other duties of participants. months immediately preceding, or any 242.907 Policies and procedures of registered consecutive 60 calendar days ending security-based swap data repositories. 242.908 Cross-border matters. within the 10 calendar days preceding, 242.909 Registration of security-based swap the determination of the offering price. data repository as a securities informa- Affiliated purchaser means: tion processor. (1) A person acting, directly or indirectly, in concert with a distribution Regulation SCI—Systems Compliance and participant, issuer, or selling security Integrity holder in connection with the acquisition or distribution of any covered se- 242.1000 Definitions. 242.1001 Obligations related to policies and curity; or procedures of SCI entities. (2) An affiliate, which may be a sepa- 242.1002 Obligations related to SCI events. rately identifiable department or divi- 242.1003 Obligations related to systems sion of a distribution participant, changes; SCI review. issuer, or selling security holder, that,

793

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00803 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.100 17 CFR Ch. II (4–1–20 Edition)

directly or indirectly, controls the pur- be purchased, or the selection of a chases of any covered security by a dis- broker or dealer (other than the inde- tribution participant, issuer, or selling pendent agent itself) through which security holder, whose purchases are purchases may be executed; Provided, controlled by any such person, or however, That the issuer or its affiliate whose purchases are under common will not be deemed to have such con- control with any such person; or trol or influence solely because it re- (3) An affiliate, which may be a sepa- vises not more than once in any three- rately identifiable department or divi- month period the source of the shares sion of a distribution participant, to fund the plan the basis for deter- issuer, or selling security holder, that mining the amount of its contributions regularly purchases securities for its to a plan, or the basis for determining own account or for the account of oth- the frequency of its allocations to a ers, or that recommends or exercises plan, or any formula specified in a plan investment discretion with respect to that determines the amount or timing the purchase or sale of securities; Pro- of securities to be purchased by the vided, however, That this paragraph (3) agent. shall not apply to such affiliate if the Asset-backed security has the meaning following conditions are satisfied: contained in § 229.1101 of this chapter. (i) The distribution participant, At-the-market offering means an offer- issuer, or selling security holder: ing of securities at other than a fixed (A) Maintains and enforces written price. policies and procedures reasonably de- Business day refers to a 24 hour period signed to prevent the flow of informa- determined with reference to the prin- tion to or from the affiliate that might cipal market for the securities to be result in a violation of §§ 242.101, distributed, and that includes a com- 242.102, and 242.104; and plete trading session for that market. (B) Obtains an annual, independent Completion of participation in a dis- assessment of the operation of such tribution. Securities acquired in the dis- policies and procedures; and tribution for investment by any person (ii) The affiliate has no officers (or participating in a distribution, or any persons performing similar functions) affiliated purchaser of such person, or employees (other than clerical, min- shall be deemed to be distributed. A isterial, or support personnel) in com- person shall be deemed to have common with the distribution participant, pleted its participation in a distribu- issuer, or selling security holder that tion as follows: direct, effect, or recommend trans- (1) An issuer or selling security hold- actions in securities; and er, when the distribution is completed; (iii) The affiliate does not, during the (2) An underwriter, when such per- applicable restricted period, act as a son’s participation has been distrib- market maker (other than as a spe- uted, including all other securities of cialist in compliance with the rules of the same class that are acquired in a national securities exchange), or en- connection with the distribution, and gage, as a broker or a dealer, in solic- any stabilization arrangements and ited transactions or proprietary trad- trading restrictions in connection with ing, in covered securities. the distribution have been terminated; Agent independent of the issuer means Provided, however, That an under- a trustee or other person who is inde- writer’s participation will not be pendent of the issuer. The agent shall deemed to have been completed if a be deemed to be independent of the syndicate overallotment option is exer- issuer only if: cised in an amount that exceeds the (1) The agent is not an affiliate of the net syndicate short position at the issuer; and time of such exercise; and (2) Neither the issuer nor any affil- (3) Any other person participating in iate of the issuer exercises any direct the distribution, when such person’s or indirect control or influence over participation has been distributed. the prices or amounts of the securities Covered security means any security to be purchased, the timing of, or the that is the subject of a distribution, or manner in which, the securities are to any reference security.

794

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00804 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.100

Current exchange rate means the cur- Plan means any bonus, profit-shar- rent rate of exchange between two cur- ing, pension, retirement, thrift, sav- rencies, which is obtained from at least ings, incentive, stock purchase, stock one independent entity that provides option, stock ownership, stock appre- or disseminates foreign exchange ciation, dividend reinvestment, or quotations in the ordinary course of its similar plan; or any dividend or inter- business. est reinvestment plan or employee ben- Distribution means an offering of se- efit plan as defined in § 230.405 of this curities, whether or not subject to reg- chapter. istration under the Securities Act, that Principal market means the single se- is distinguished from ordinary trading curities market with the largest aggre- transactions by the magnitude of the gate reported trading volume for the offering and the presence of special class of securities during the 12 full selling efforts and selling methods. calendar months immediately pre- Distribution participant means an un- ceding the filing of the registration derwriter, prospective underwriter, statement; or, if there is no registra- broker, dealer, or other person who has tion statement or if the distribution agreed to participate or is partici- involves the sale of securities on a de- pating in a distribution. layed basis pursuant to § 230.415 of this Electronic communications network has chapter, during the 12 full calendar the meaning provided in § 242.600. months immediately preceding the de- Employee has the meaning contained termination of the offering price. For in Form S–8 (§ 239.16b of this chapter) the purpose of determining the aggre- relating to employee benefit plans. gate trading volume in a security, the Exchange Act means the Securities trading volume of depositary shares Exchange Act of 1934 (15 U.S.C. 78a et representing such security shall be in- seq.). cluded, and shall be multiplied by the Independent bid means a bid by a per- multiple or fraction of the security son who is not a distribution partici- represented by the depositary share. pant, issuer, selling security holder, or For purposes of this paragraph, deposi- affiliated purchaser. tary share means a security, evidenced NASD means the National Associa- by a depositary receipt, that represents tion of Securities Dealers, Inc. or any another security, or a multiple or frac- of its subsidiaries. tion thereof, deposited with a deposi- Nasdaq means the electronic dealer tary. quotation system owned and operated Prospective underwriter means a per- by The Nasdaq Stock Market, Inc. son: Nasdaq security means a security that (1) Who has submitted a bid to the is authorized for quotation on Nasdaq, issuer or selling security holder, and and such authorization is not sus- who knows or is reasonably certain pended, terminated, or prohibited. that such bid will be accepted, whether Net purchases means the amount by or not the terms and conditions of the which a passive market maker’s pur- underwriting have been agreed upon; or chases exceed its sales. (2) Who has reached, or is reasonably Offering price means the price at certain to reach, an understanding which the security is to be or is being with the issuer or selling security hold- distributed. er, or managing underwriter that such Passive market maker means a market person will become an underwriter, maker that effects bids or purchases in whether or not the terms and condi- accordance with the provisions of tions of the underwriting have been § 242.103. agreed upon. Penalty bid means an arrangement Public float value shall be determined that permits the managing underwriter in the manner set forth on the front to reclaim a selling concession from a page of Form 10–K (§ 249.310 of this syndicate member in connection with chapter), even if the issuer of such se- an offering when the securities origi- curities is not required to file Form 10– nally sold by the syndicate member are K, relating to the aggregate market purchased in syndicate covering trans- value of common equity securities held actions. by non-affiliates of the issuer.

795

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00805 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.101 17 CFR Ch. II (4–1–20 Edition)

Reference period means the two full dicate or group to reduce a short posi- calendar months immediately pre- tion created in connection with the of- ceding the filing of the registration fering. statement or, if there is no registration 30% ADTV limitation means 30 percent statement or if the distribution in- of the market maker’s ADTV in a cov- volves the sale of securities on a de- ered security during the reference pe- layed basis pursuant to § 230.415 of this riod, as obtained from the NASD. chapter, the two full calendar months Underwriter means a person who has immediately preceding the determina- agreed with an issuer or selling secu- tion of the offering price. rity holder: Reference security means a security (1) To purchase securities for dis- into which a security that is the sub- tribution; or ject of a distribution (‘‘subject secu- (2) To distribute securities for or on rity’’) may be converted, exchanged, or behalf of such issuer or selling security exercised or which, under the terms of holder; or the subject security, may in whole or (3) To manage or supervise a distribu- in significant part determine the value tion of securities for or on behalf of of the subject security. such issuer or selling security holder. Restricted period means: [62 FR 544, Jan. 3, 1997, as amended at 62 FR (1) For any security with an ADTV 11323, Mar. 12, 1997; 70 FR 1623, Jan. 7, 2005; 70 value of $100,000 or more of an issuer FR 37619, June 29, 2005] whose common equity securities have a public float value of $25 million or § 242.101 Activities by distribution more, the period beginning on the later participants. of one business day prior to the deter- (a) Unlawful Activity. In connection mination of the offering price or such with a distribution of securities, it time that a person becomes a distribu- shall be unlawful for a distribution par- tion participant, and ending upon such ticipant or an affiliated purchaser of person’s completion of participation in such person, directly or indirectly, to the distribution; and bid for, purchase, or attempt to induce (2) For all other securities, the period any person to bid for or purchase, a beginning on the later of five business covered security during the applicable days prior to the determination of the restricted period; Provided, however, offering price or such time that a per- That if a distribution participant or af- son becomes a distribution participant, filiated purchaser is the issuer or sell- and ending upon such person’s comple- ing security holder of the securities tion of participation in the distribu- subject to the distribution, such person tion. shall be subject to the provisions of (3) In the case of a distribution in- § 242.102, rather than this section. volving a merger, acquisition, or ex- (b) Excepted Activity. The following change offer, the period beginning on activities shall not be prohibited by the day proxy solicitation or offering paragraph (a) of this section: materials are first disseminated to se- (1) Research. The publication or dis- curity holders, and ending upon the semination of any information, opin- completion of the distribution. ion, or recommendation, if the condi- Securities Act means the Securities tions of § 230.138, § 230.139, or § 230.139b of Act of 1933 (15 U.S.C. 77a et seq.). this chapter are met; or Selling security holder means any per- (2) Transactions complying with certain son on whose behalf a distribution is other sections. Transactions complying made, other than an issuer. with §§ 242.103 or 242.104; or Stabilize or stabilizing means the plac- (3) Odd-lot transactions. Transactions ing of any bid, or the effecting of any in odd-lots; or transactions to offset purchase, for the purpose of pegging, odd-lots in connection with an odd-lot fixing, or maintaining the price of a se- tender offer conducted pursuant to curity. § 240.13e–4(h)(5) of this chapter; or Syndicate covering transaction means (4) Exercises of securities. The exercise the placing of any bid or the effecting of any option, warrant, right, or any of any purchase on behalf of the sole conversion privilege set forth in the in- distributor or the underwriting syn- strument governing a security; or

796

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00806 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.101

(5) Unsolicited transactions. Unsolic- 4(2) of the Securities Act (15 U.S.C. ited brokerage transactions; or unsolic- 77d(2)) or §§ 230.144A or § 230.500 et seq of ited purchases that are not effected this chapter; or from or through a broker or dealer, on (ii) Persons not deemed to be ‘‘U.S. a securities exchange, or through an persons’’ for purposes of §§ 230.902(o)(2) inter-dealer quotation system or elec- or 230.902(o)(7) of this chapter, during a tronic communications network; or distribution qualifying under para- (6) Basket transactions. (i) Bids or pur- graph (b)(10)(i) of this section. chases, in the ordinary course of busi- (c) Excepted Securities. The provisions ness, in connection with a basket of 20 of this section shall not apply to any of or more securities in which a covered the following securities: security does not comprise more than (1) Actively-traded securities. Securi- 5% of the value of the basket pur- ties that have an ADTV value of at chased; or least $1 million and are issued by an (ii) Adjustments to such a basket in issuer whose common equity securities the ordinary course of business as a re- have a public float value of at least sult of a change in the composition of $150 million; Provided, however, That a standardized index; or such securities are not issued by the (7) De minimis transactions. Purchases distribution participant or an affiliate during the restricted period, other than of the distribution participant; or by a passive market maker, that total (2) Investment grade nonconvertible and less than 2% of the ADTV of the secu- asset-backed securities. Nonconvertible rity being purchased, or unaccepted debt securities, nonconvertible pre- bids; Provided, however, That the person ferred securities, and asset-backed se- making such bid or purchase has main- curities, that are rated by at least one tained and enforces written policies nationally recognized statistical rating and procedures reasonably designed to organization, as that term is used in achieve compliance with the other pro- § 240.15c3–1 of this chapter, in one of its visions of this section; or generic rating categories that signifies (8) Transactions in connection with a investment grade; or distribution. Transactions among dis- (3) Exempted securities. ‘‘Exempted se- tribution participants in connection curities’’ as defined in section 3(a)(12) with a distribution, and purchases of of the Exchange Act (15 U.S.C. securities from an issuer or selling se- 78c(a)(12)); or curity holder in connection with a distribution, that are not effected on a se- (4) Face-amount certificates or securi- curities exchange, or through an inter- ties issued by an open-end management dealer quotation system or electronic investment company or unit investment communications network; or trust. Face-amount certificates issued (9) Offers to sell or the solicitation of of- by a face-amount certificate company, fers to buy. Offers to sell or the solicita- or redeemable securities issued by an tion of offers to buy the securities open-end management investment being distributed (including securities company or a unit investment trust. acquired in stabilizing), or securities Any terms used in this paragraph (c)(4) offered as principal by the person mak- that are defined in the Investment ing such offer or solicitation; or Company Act of 1940 (15 U.S.C. 80a–1 et (10) Transactions in Rule 144A securi- seq.) shall have the meanings specified ties. Transactions in securities eligible in such Act. for resale under § 230.144A(d)(3) of this (d) Exemptive authority. Upon written chapter, or any reference security, if application or upon its own motion, the Rule 144A securities are sold in the the Commission may grant an exemp- United States solely to: tion from the provisions of this sec- (i) Qualified institutional buyers, as tion, either unconditionally or on spec- defined in § 230.144A(a)(1) of this chap- ified terms and conditions, to any ter, or to purchasers that the seller and transaction or class of transactions, or any person acting on behalf of the sell- to any security or class of securities. er reasonably believes are qualified in- [62 FR 544, Jan. 3, 1997, as amended at 77 FR stitutional buyers, in transactions ex- 18685, Mar. 28, 2012; 78 FR 44805, July 24, 2013; empt from registration under section 83 FR 64222, Dec. 13, 2018]

797

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00807 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.102 17 CFR Ch. II (4–1–20 Edition)

§ 242.102 Activities by issuers and sell- tion of offers to buy the securities ing security holders during a dis- being distributed; or tribution. (6) Unsolicited purchases. Unsolicited (a) Unlawful Activity. In connection purchases that are not effected from or with a distribution of securities ef- through a broker or dealer, on a securi- fected by or on behalf of an issuer or ties exchange, or through an inter- selling security holder, it shall be un- dealer quotation system or electronic lawful for such person, or any affiliated communications network; or purchaser of such person, directly or (7) Transactions in Rule 144A securities. indirectly, to bid for, purchase, or at- Transactions in securities eligible for tempt to induce any person to bid for resale under § 230.144A(d)(3) of this or purchase, a covered security during chapter, or any reference security, if the applicable restricted period; Except the Rule 144A securities are sold in the That if an affiliated purchaser is a dis- United States solely to: tribution participant, such affiliated (i) Qualified institutional buyers, as purchaser may comply with § 242.101, defined in § 230.144A(a)(1) of this chap- rather than this section. ter, or to purchasers that the seller and (b) Excepted Activity. The following any person acting on behalf of the sell- activities shall not be prohibited by er reasonably believes are qualified in- paragraph (a) of this section: stitutional buyers, in transactions ex- (1) Odd-lot transactions. Transactions empt from registration under section in odd-lots, or transactions to offset 4(2) of the Securities Act (15 U.S.C. odd-lots in connection with an odd-lot 77d(2)) or §§ 230.144A or § 230.500 et seq of tender offer conducted pursuant to this chapter; or § 240.13e–4(h)(5) of this chapter; or (ii) Persons not deemed to be ‘‘U.S. (2) Transactions by closed-end invest- persons’’ for purposes of §§ 230.902(o)(2) ment companies. (i) Transactions com- or 230.902(o)(7) of this chapter, during a plying with § 270.23c–3 of this chapter; distribution qualifying under para- or graph (b)(7)(i) of this section. (ii) Periodic tender offers of securi- (c) Plans. (1) Paragraph (a) of this ties, at net asset value, conducted pur- section shall not apply to distributions suant to § 240.13e–4 of this chapter by a of securities pursuant to a plan, which closed-end investment company that are made: engages in a continuous offering of its (i) Solely to employees or security securities pursuant to § 230.415 of this holders of an issuer or its subsidiaries, chapter; Provided, however, That such or to a trustee or other person acquir- securities are not traded on a securi- ing such securities for the accounts of ties exchange or through an inter-deal- such persons; or er quotation system or electronic com- (ii) To persons other than employees munications network; or or security holders, if bids for or pur- (3) Redemptions by commodity pools or chases of securities pursuant to the limited partnerships. Redemptions by plan are effected solely by an agent commodity pools or limited partner- independent of the issuer and the secu- ships, at a price based on net asset rities are from a source other than the value, which are effected in accordance issuer or an affiliated purchaser of the with the terms and conditions of the issuer. instruments governing the securities; (2) Bids for or purchases of any secu- Provided, however, That such securities rity made or effected by or for a plan are not traded on a securities ex- shall be deemed to be a purchase by the change, or through an inter-dealer issuer unless the bid is made, or the quotation system or electronic commu- purchase is effected, by an agent inde- nications network; or pendent of the issuer. (4) Exercises of securities. The exercise (d) Excepted Securities. The provisions of any option, warrant, right, or any of this section shall not apply to any of conversion privilege set forth in the in- the following securities: strument governing a security; or (1) Actively-traded reference securities. (5) Offers to sell or the solicitation of of- Reference securities with an ADTV fers to buy. Offers to sell or the solicita- value of at least $1 million that are

798

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00808 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.103

issued by an issuer whose common eq- (b) Conditions to be met—(1) General uity securities have a public float limitations. A passive market maker value of at least $150 million; Provided, must effect all transactions in the ca- however, That such securities are not pacity of a registered market maker on issued by the issuer, or any affiliate of Nasdaq. A passive market maker shall the issuer, of the security in distribu- not bid for or purchase a covered secu- tion. rity at a price that exceeds the highest (2) Investment grade nonconvertible and independent bid for the covered secu- asset-backed securities. Nonconvertible rity at the time of the transaction, ex- debt securities, nonconvertible pre- cept as permitted by paragraph (b)(3) of ferred securities, and asset-backed se- this section or required by a rule pro- curities, that are rated by at least one mulgated by the Commission or the nationally recognized statistical rating NASD governing the handling of cus- organization, as that term is used in tomer orders. § 240.15c3–1 of this chapter, in one of its (2) Purchase limitation. On each day of generic rating categories that signifies the restricted period, a passive market investment grade; or maker’s net purchases shall not exceed (3) Exempted securities. ‘‘Exempted se- the greater of its 30% ADTV limitation curities’’ as defined in section 3(a)(12) or 200 shares (together, ‘‘purchase limi- of the Exchange Act (15 U.S.C. tation’’); That a pas- 78c(a)(12)); or Provided, however, sive market maker may purchase all of (4) Face-amount certificates or securi- the securities that are part of a single ties issued by an open-end management investment company or unit investment order that, when executed, results in trust. Face-amount certificates issued its purchase limitation being equalled by a face-amount certificate company, or exceeded. If a passive market mak- or redeemable securities issued by an er’s net purchases equal or exceed its open-end management investment purchase limitation, it shall withdraw company or a unit investment trust. promptly its quotations from Nasdaq. Any terms used in this paragraph (d)(4) If a passive market maker withdraws that are defined in the Investment its quotations pursuant to this para- Company Act of 1940 (15 U.S.C. 80a–1 et graph, it may not effect any bid or pur- seq.) shall have the meanings specified chase in the covered security for the in such Act. remainder of that day, irrespective of (e) Exemptive Authority. Upon written any later sales during that day, unless application or upon its own motion, otherwise permitted by § 242.101. the Commission may grant an exemp- (3) Requirement to lower the bid. If all tion from the provisions of this sec- independent bids for a covered security tion, either unconditionally or on spec- are reduced to a price below the passive ified terms and conditions, to any market maker’s bid, the passive mar- transaction or class of transactions, or ket maker must lower its bid promptly to any security or class of securities. to a level not higher than the then [62 FR 544, Jan. 3, 1997, as amended at 62 FR highest independent bid; Provided, how- 11323, Mar. 12, 1997; 77 FR 18685, Mar. 28, 2012; ever, That a passive market maker may 78 FR 44805, July 24, 2013] continue to bid and effect purchases at its bid at a price exceeding the then § 242.103 Nasdaq passive market mak- highest independent bid until the pas- ing. sive market maker purchases an aggre- (a) Scope of section. This section per- gate amount of the covered security mits broker-dealers to engage in mar- that equals or, through the purchase of ket making transactions in covered se- all securities that are part of a single curities that are Nasdaq securities order, exceeds the lesser of two times without violating the provisions of the minimum quotation size for the se- § 242.101; Except That this section shall curity, as determined by NASD rules, not apply to any security for which a or the passive market maker’s remain- stabilizing bid subject to § 242.104 is in ing purchasing capacity under para- effect, or during any at-the-market of- graph (b)(2) of this section. fering or best efforts offering.

799

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00809 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.104 17 CFR Ch. II (4–1–20 Edition)

(4) Limitation on displayed size. At all retarding a decline in the market price times, the passive market maker’s dis- of a security. played bid size may not exceed the less- (c) Priority. To the extent permitted er of the minimum quotation size for or required by the market where stabi- the covered security, or the passive lizing occurs, any person stabilizing market maker’s remaining purchasing shall grant priority to any independent capacity under paragraph (b)(2) of this bid at the same price irrespective of section; Provided, however, That a pas- the size of such independent bid at the sive market maker whose purchasing time that it is entered. capacity at any time is between one (d) Control of stabilizing. No sole dis- and 99 shares may display a bid size of tributor or syndicate or group stabi- 100 shares. lizing the price of a security or any (5) Identification of a passive market member or members of such syndicate making bid. The bid displayed by a pas- or group shall maintain more than one sive market maker shall be designated stabilizing bid in any one market at as such. the same price at the same time. (6) Notification and reporting to the (e) At-the-market offerings. Stabilizing NASD. A passive market maker shall is prohibited in an at-the-market offer- notify the NASD in advance of its in- ing. tention to engage in passive market (f) Stabilizing levels—(1) Maximum sta- making, and shall submit to the NASD bilizing bid. Notwithstanding the other information regarding passive market provisions of this paragraph (f), no sta- making purchases, in such form as the bilizing shall be made at a price higher NASD shall prescribe. than the lower of the offering price or (7) Prospectus disclosure. The pro- the stabilizing bid for the security in spectus for any registered offering in the principal market (or, if the prin- which any passive market maker in- cipal market is closed, the stabilizing tends to effect transactions in any cov- bid in the principal market at its pre- ered security shall contain the infor- vious close). mation required in §§ 228.502, 228.508, (2) Initiating stabilizing—(i) Initiating 229.502, and 229.508 of this chapter. stabilizing when the principal market is (c) Transactions at prices resulting from open. After the opening of quotations unlawful activity. No transaction shall for the security in the principal mar- be made at a price that the passive ket, stabilizing may be initiated in any market maker knows or has reason to market at a price no higher than the know is the result of activity that is last independent transaction price for fraudulent, manipulative, or deceptive the security in the principal market if under the securities laws, or any rule the security has traded in the principal or regulation thereunder. market on the day stabilizing is initiated or on the most recent prior day of § 242.104 Stabilizing and other activi- trading in the principal market and the ties in connection with an offering. current asked price in the principal (a) Unlawful activity. It shall be un- market is equal to or greater than the lawful for any person, directly or indi- last independent transaction price. If rectly, to stabilize, to effect any syn- both conditions of the preceding sen- dicate covering transaction, or to im- tence are not satisfied, stabilizing may pose a penalty bid, in connection with be initiated in any market after the an offering of any security, in con- opening of quotations in the principal travention of the provisions of this sec- market at a price no higher than the tion. No stabilizing shall be effected at highest current independent bid for the a price that the person stabilizing security in the principal market. knows or has reason to know is in con- (ii) Initiating stabilizing when the prin- travention of this section, or is the re- cipal market is closed. (A) When the sult of activity that is fraudulent, ma- principal market for the security is nipulative, or deceptive under the secu- closed, but immediately before the rities laws, or any rule or regulation opening of quotations for the security thereunder. in the market where stabilizing will be (b) Purpose. Stabilizing is prohibited initiated, stabilizing may be initiated except for the purpose of preventing or at a price no higher than the lower of:

800

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00810 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.104

(1) The price at which stabilizing rity in the principal market if the prin- could have been initiated in the principal market is open, or, if the principal market for the security at its pre- cipal market is closed, to a price no vious close; or higher than the highest independent (2) The most recent price at which an bid in the principal market at the pre- independent transaction in the secu- vious close thereof. A stabilizing bid rity has been effected in any market may be reduced, or carried over into since the close of the principal market, another market at a reduced price, ir- if the person stabilizing knows or has respective of changes in the inde- reason to know of such transaction. pendent bids or transaction prices for (B) When the principal market for the security. If stabilizing is discon- the security is closed, but after the tinued, it shall not be resumed at a opening of quotations in the market price higher than the price at which where stabilizing will be initiated, sta- stabilizing then could be initiated. bilizing may be initiated at a price no (5) Initiating, maintaining, or adjusting higher than the lower of: a stabilizing bid to reflect the current ex- (1) The price at which stabilization change rate. If a stabilizing bid is ex- could have been initiated in the prin- pressed in a currency other than the cipal market for the security at its pre- currency of the principal market for vious close; or the security, such bid may be initiated, (2) The last independent transaction maintained, or adjusted to reflect the price for the security in that market if current exchange rate, consistent with the security has traded in that market the provisions of this section. If, in ini- on the day stabilizing is initiated or on tiating, maintaining, or adjusting a the last preceding business day and the stabilizing bid pursuant to this para- current asked price in that market is graph (f)(5), the bid would be at or equal to or greater than the last inde- below the midpoint between two trad- pendent transaction price. If both con- ing differentials, such stabilizing bid ditions of the preceding sentence are shall be adjusted downward to the not satisfied, under this paragraph lower differential. (f)(2)(ii)(B)(2), stabilizing may be initi- (6) Adjustments to stabilizing bid. If a ated at a price no higher than the high- security goes ex-dividend, ex-rights, or est current independent bid for the se- ex-distribution, the stabilizing bid curity in that market. shall be reduced by an amount equal to (iii) Initiating stabilizing when there is the value of the dividend, right, or dis- no market for the security or before the tribution. If, in reducing a stabilizing offering price is determined. If no bona bid pursuant to this paragraph (f)(6), fide market for the security being distributed exists at the time stabilizing the bid would be at or below the mid- is initiated, no stabilizing shall be ini- point between two trading differen- tiated at a price in excess of the offer- tials, such stabilizing bid shall be ad- ing price. If stabilizing is initiated be- justed downward to the lower differen- fore the offering price is determined, tial. then stabilizing may be continued after (7) Stabilizing of components. When determination of the offering price at two or more securities are being of- the price at which stabilizing then fered as a unit, the component securi- could be initiated. ties shall not be stabilized at prices the (3) Maintaining or carrying over a sta- sum of which exceeds the then permis- bilizing bid. A stabilizing bid initiated sible stabilizing price for the unit. pursuant to paragraph (f)(2) of this sec- (8) Special prices. Any stabilizing tion, which has not been discontinued, price that otherwise meets the require- may be maintained, or carried over ments of this section need not be ad- into another market, irrespective of justed to reflect special prices avail- changes in the independent bids or able to any group or class of persons transaction prices for the security. (including employees or holders of war- (4) Increasing or reducing a stabilizing rants or rights). bid. A stabilizing bid may be increased (g) Offerings with no U.S. stabilizing to a price no higher than the highest activities. (1) Stabilizing to facilitate an current independent bid for the secu- offering of a security in the United

801

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00811 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.105 17 CFR Ch. II (4–1–20 Edition)

States shall not be deemed to be in vio- statement provided for in Item 502(d) of lation of this section if all of the fol- Regulation S-B (§ 228.502(d) of this lowing conditions are satisfied: chapter) or Item 502(d) of Regulation S- (i) No stabilizing is made in the K (§ 229.502(d) of this chapter). United States; (i) Recordkeeping requirements. A per- (ii) Stabilizing outside the United son subject to this section shall keep States is made in a jurisdiction with the information and make the notifica- statutory or regulatory provisions gov- tion required by § 240.17a–2 of this chap- erning stabilizing that are comparable ter. to the provisions of this section; and (j) Excepted securities. The provisions (iii) No stabilizing is made at a price of this section shall not apply to: above the offering price in the United (1) Exempted securities. ‘‘Exempted se- States, except as permitted by para- curities,’’ as defined in section 3(a)(12) graph (f)(5) of this section. of the Exchange Act (15 U.S.C. (2) For purposes of this paragraph (g), 78c(a)(12)); or the Commission by rule, regulation, or (2) Transactions of Rule 144A securities. order may determine whether a foreign Transactions in securities eligible for statute or regulation is comparable to resale under § 230.144A(d)(3) of this this section considering, among other chapter, if such securities are sold in things, whether such foreign statute or the United States solely to: regulation: specifies appropriate pur- (i) Qualified institutional buyers, as poses for which stabilizing is per- defined in § 230.144A(a)(1) of this chap- mitted; provides for disclosure and con- ter, or to purchasers that the seller and trol of stabilizing activities; places any person acting on behalf of the sell- limitations on stabilizing levels; re- er reasonably believes are qualified in- quires appropriate recordkeeping; pro- stitutional buyers, in a transaction ex- vides other protections comparable to empt from registration under section the provisions of this section; and 4(2) of the Securities Act (15 U.S.C. whether procedures exist to enable the 77d(2)) or §§ 230.144A or § 230.500 et seq of Commission to obtain information con- this chapter; or cerning any foreign stabilizing trans- (ii) Persons not deemed to be ‘‘U.S. actions. persons’’ for purposes of §§ 230.902(o)(2) (h) Disclosure and notification. (1) Any or 230.902(o)(7) of this chapter, during a person displaying or transmitting a bid distribution qualifying under para- that such person knows is for the pur- graph (j)(2)(i) of this section. pose of stabilizing shall provide prior (k) Exemptive authority. Upon written notice to the market on which such application or upon its own motion, stabilizing will be effected, and shall the Commission may grant an exemp- disclose its purpose to the person with tion from the provisions of this sec- whom the bid is entered. tion, either unconditionally or on spec- (2) Any person effecting a syndicate ified terms and conditions, to any covering transaction or imposing a transaction or class of transactions, or penalty bid shall provide prior notice to any security or class of securities. to the self-regulatory organization [62 FR 544, Jan. 3, 1997, as amended at 62 FR with direct authority over the prin- 11323, Mar. 12, 1997; 62 FR 13213, Mar. 19, 1997; cipal market in the United States for 77 FR 18685, Mar. 28, 2012; 78 FR 44805, July the security for which the syndicate 24, 2013] covering transaction is effected or the penalty bid is imposed. § 242.105 Short selling in connection (3) Any person subject to this section with a public offering. who sells to, or purchases for the ac- (a) Unlawful activity. In connection count of, any person any security with an offering of equity securities for where the price of such security may cash pursuant to a registration state- be or has been stabilized, shall send to ment or a notification on Form 1–A the purchaser at or before the comple- (§ 239.90 of this chapter) or Form 1–E tion of the transaction, a prospectus, (§ 239.200 of this chapter) filed under the offering circular, confirmation, or Securities Act of 1933 (‘‘offered securi- other document containing a state- ties’’), it shall be unlawful for any per- ment similar to that comprising the son to sell short (as defined in

802

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00812 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.200

§ 242.200(a)) the security that is the sub- series of such company (investment ject of the offering and purchase the of- company) from purchasing an offered fered securities from an underwriter or security where any of the following broker or dealer participating in the sold the offered security short during offering if such short sale was effected the Rule 105 restricted period: during the period (‘‘Rule 105 restricted (i) An affiliated investment company, period’’) that is the shorter of the pe- or any series of such a company; or riod: (ii) A separate series of the invest- (1) Beginning five business days be- ment company. fore the pricing of the offered securi- (c) Excepted offerings. This section ties and ending with such pricing; or shall not apply to offerings that are (2) Beginning with the initial filing of not conducted on a firm commitment such registration statement or notifi- basis. cation on Form 1–A or Form 1–E and (d) Exemptive authority. Upon written ending with the pricing. application or upon its own motion, (b) Excepted activity—(1) Bona fide the Commission may grant an exemp- purchase. It shall not be prohibited for tion from the provisions of this sec- such person to purchase the offered se- tion, either unconditionally or on spec- curities as provided in paragraph (a) of ified terms and conditions, to any this section if: transaction or class of transactions, or (i) Such person makes a bona fide to any security or class of securities. purchase(s) of the security that is the subject of the offering that is: [62 FR 544, Jan. 3, 1997, as amended at 69 FR (A) At least equivalent in quantity to 48029, Aug. 6, 2004; 72 FR 45107, Aug. 10, 2007; the entire amount of the Rule 105 re- 83 FR 58427, Nov. 19, 2018] stricted period short sale(s); REGULATION SHO—REGULATION OF (B) Effected during regular trading SHORT SALES hours; (C) Reported to an ‘‘effective trans- § 242.200 Definition of ‘‘short sale’’ and action reporting plan’’ (as defined in marking requirements. § 242.600(b)(23)); and (a) The term short sale shall mean (D) Effected after the last Rule 105 any sale of a security which the seller restricted period short sale, and no does not own or any sale which is con- later than the business day prior to the summated by the delivery of a security day of pricing; and borrowed by, or for the account of, the (ii) Such person did not effect a short seller. sale, that is reported to an effective transaction reporting plan, within the (b) A person shall be deemed to own 30 minutes prior to the close of regular a security if: trading hours (as defined in (1) The person or his agent has title § 242.600(b)(68)) on the business day to it; or prior to the day of pricing. (2) The person has purchased, or has (2) Separate accounts. Paragraph (a) of entered into an unconditional contract, this section shall not prohibit the pur- binding on both parties thereto, to purchase of the offered security in an ac- chase it, but has not yet received it; or count of a person where such person (3) The person owns a security con- sold short during the Rule 105 re- vertible into or exchangeable for it and stricted period in a separate account, if has tendered such security for conver- decisions regarding securities trans- sion or exchange; or actions for each account are made sep- (4) The person has an option to pur- arately and without coordination of chase or acquire it and has exercised trading or cooperation among or be- such option; or tween the accounts. (5) The person has rights or warrants (3) Investment companies. Paragraph to subscribe to it and has exercised (a) of this section shall not prohibit an such rights or warrants; or investment company (as defined by (6) The person holds a security fu- Section 3 of the Investment Company tures contract to purchase it and has Act) that is registered under Section 8 received notice that the position will of the Investment Company Act, or a be physically settled and is irrevocably

803

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00813 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.201 17 CFR Ch. II (4–1–20 Edition)

bound to receive the underlying secu- each aggregation unit, specifies its rity. trading objective(s), and supports its (c) A person shall be deemed to own independent identity; securities only to the extent that he (2) Each aggregation unit within the has a net long position in such securi- firm determines, at the time of each ties. sale, its net position for every security (d) A broker or dealer shall be that it trades; deemed to own a security, even if it is (3) All traders in an aggregation unit not net long, if: pursue only the particular trading ob- (1) The broker or dealer acquired that jective(s) or strategy(s) of that aggre- security while acting in the capacity of gation unit and do not coordinate that a block positioner; and strategy with any other aggregation (2) If and to the extent that the unit; and broker or dealer’s short position in the (4) Individual traders are assigned to security is the subject of offsetting po- only one aggregation unit at any time. sitions created in the course of bona (g) A broker or dealer must mark all fide arbitrage, risk arbitrage, or bona sell orders of any equity security as fide hedge activities. ‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’ (e) A broker-dealer shall be deemed (1) An order to sell shall be marked to own a security even if it is not net ‘‘long’’ only if the seller is deemed to long, if: own the security being sold pursuant (1) The broker-dealer is unwinding to paragraphs (a) through (f) of this index arbitrage position involving a section and either: long basket of stock and one or more (i) The security to be delivered is in short index futures traded on a board the physical possession or control of of trade or one or more standardized the broker or dealer; or options contracts as defined in 17 CFR (ii) It is reasonably expected that the 240.9b–1(a)(4); and security will be in the physical posses- (2) If and to the extent that the sion or control of the broker or dealer broker-dealer’s short position in the se- no later than the settlement of the curity is the subject of offsetting posi- transaction. tions created and maintained in the (2) A sale order shall be marked course of bona-fide arbitrage, risk arbi- ‘‘short exempt’’ only if the provisions trage, or bona fide hedge activities; and of § 242.201(c) or (d) are met. (3) The sale does not occur during a (h) Upon written application or upon period commencing at the time that its own motion, the Commission may the NYSE Composite Index has de- grant an exemption from the provi- clined by two percent or more from its sions of this section, either uncondi- closing value on the previous day and tionally or on specified terms and con- terminating upon the end of the trad- ditions, to any transaction or class of ing day. The two percent shall be cal- transactions, or to any security or culated at the beginning of each cal- class of securities, or to any person or endar quarter and shall be two percent, class of persons. rounded down to the nearest 10 points, [69 FR 48029, Aug. 6, 2004, as amended at 72 of the average closing value of the FR 36359, July 3, 2007; 72 FR 45557, Aug. 14, NYSE Composite Index for the last 2007; 75 FR 11323, Mar. 10, 2010] month of the previous quarter. (f) In order to determine its net posi- § 242.201 Circuit breaker. tion, a broker or dealer shall aggregate (a) Definitions. For the purposes of all of its positions in a security unless this section: it qualifies for independent trading (1) The term covered security shall unit aggregation, in which case each mean any NMS stock as defined in independent trading unit shall aggre- § 242.600(b)(48). gate all of its positions in a security to (2) The term effective transaction re- determine its net position. Independent porting plan for a covered security shall trading unit aggregation is available have the same meaning as in only if: § 242.600(b)(23). (1) The broker or dealer has a written (3) The term listing market shall have plan of organization that identifies the same meaning as the term ‘‘listing

804

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00814 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.201

market’’ as defined in the effective the order was at a price above the cur- transaction reporting plan for the cov- rent national best bid; and ered security. (B) The execution or display of a (4) The term national best bid shall short sale order of a covered security have the same meaning as in marked ‘‘short exempt’’ without regard § 242.600(b)(43). to whether the order is at a price that (5) The term odd lot shall have the is less than or equal to the current na- same meaning as in § 242.600(b)(51). tional best bid. (6) The term plan processor shall have (2) A trading center shall regularly the same meaning as in § 242.600(b)(59). surveil to ascertain the effectiveness of (7) The term regular trading hours the policies and procedures required by shall have the same meaning as in paragraph (b)(1) of this section and § 242.600(b)(68). shall take prompt action to remedy de- (8) The term riskless principal shall ficiencies in such policies and proce- mean a transaction in which a broker dures. or dealer, after having received an (3) The determination regarding order to buy a security, purchases the whether the price of a covered security security as principal at the same price has decreased by 10% or more from the to satisfy the order to buy, exclusive of covered security’s closing price as de- any explicitly disclosed markup or termined by the listing market for the markdown, commission equivalent, or covered security as of the end of reg- other fee, or, after having received an ular trading hours on the prior day order to sell, sells the security as prin- shall be made by the listing market for cipal at the same price to satisfy the the covered security and, if such de- order to sell, exclusive of any explic- crease has occurred, the listing market itly disclosed markup or markdown, shall immediately notify the single commission equivalent, or other fee. plan processor responsible for consoli- (9) The term trading center shall have dation of information for the covered the same meaning as in § 242.600(b)(82). security pursuant to § 242.603(b). The (b)(1) A trading center shall estab- single plan processor must then dis- lish, maintain, and enforce written seminate this information. policies and procedures reasonably de- (c) Following any determination and signed to: notification pursuant to paragraph (i) Prevent the execution or display (b)(3) of this section with respect to a of a short sale order of a covered secu- covered security, a broker or dealer rity at a price that is less than or equal submitting a short sale order of the to the current national best bid if the covered security in question to a trad- price of that covered security decreases ing center may mark the order ‘‘short by 10% or more from the covered secu- exempt’’ if the broker or dealer identi- rity’s closing price as determined by fies the order as being at a price above the listing market for the covered se- the current national best bid at the curity as of the end of regular trading time of submission; provided, however: hours on the prior day; and (1) The broker or dealer that identi- (ii) Impose the requirements of para- fies a short sale order of a covered se- graph (b)(1)(i) of this section for the re- curity as ‘‘short exempt’’ in accordance mainder of the day and the following with this paragraph (c) must establish, day when a national best bid for the maintain, and enforce written policies covered security is calculated and dis- and procedures reasonably designed to seminated on a current and continuing prevent incorrect identification of or- basis by a plan processor pursuant to ders for purposes of this paragraph; and an effective national market system (2) The broker or dealer shall regu- plan. larly surveil to ascertain the effective- (iii) Provided, however, that the poli- ness of the policies and procedures re- cies and procedures must be reasonably quired by paragraph (c)(1) of this sec- designed to permit: tion and shall take prompt action to (A) The execution of a displayed remedy deficiencies in such policies short sale order of a covered security and procedures. by a trading center if, at the time of (d) Following any determination and initial display of the short sale order, notification pursuant to paragraph

805

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00815 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.201 17 CFR Ch. II (4–1–20 Edition)

(b)(3) of this section with respect to a (ii) The short sale order of a covered covered security, a broker or dealer security is for purposes of a lay-off sale may mark a short sale order of a cov- by an underwriter or member of a syn- ered security ‘‘short exempt’’ if the dicate or group in connection with a broker or dealer has a reasonable basis distribution of securities through a to believe that: rights or standby underwriting com- (1) The short sale order of a covered mitment. security is by a person that is deemed (6) The short sale order of a covered to own the covered security pursuant security is by a broker or dealer effect- to § 242.200, provided that the person in- ing the execution of a customer pur- tends to deliver the security as soon as chase or the execution of a customer all restrictions on delivery have been ‘‘long’’ sale on a riskless principal removed. basis. In addition, for purposes of this (2) The short sale order of a covered paragraph (d)(6), a broker or dealer security is by a market maker to offset must have written policies and proce- customer odd-lot orders or to liquidate dures in place to assure that, at a min- an odd-lot position that changes such imum: broker’s or dealer’s position by no (i) The customer order was received more than a unit of trading. prior to the offsetting transaction; (3) The short sale order of a covered (ii) The offsetting transaction is allocated to a riskless principal or cus- security is for a good faith account of tomer account within 60 seconds of exe- a person who then owns another secu- cution; and rity by virtue of which he is, or pres- (iii) The broker or dealer has super- ently will be, entitled to acquire an visory systems in place to produce equivalent number of securities of the records that enable the broker or deal- same class as the securities sold; pro- er to accurately and readily recon- vided such sale, or the purchase which struct, in a time-sequenced manner, all such sale offsets, is effected for the orders on which a broker or dealer re- bona fide purpose of profiting from a lies pursuant to this exception. current difference between the price of (7) The short sale order is for the sale the security sold and the security of a covered security at the volume owned and that such right of acquisi- weighted average price (VWAP) that tion was originally attached to or rep- meets the following criteria: resented by another security or was (i) The VWAP for the covered secu- issued to all the holders of any such se- rity is calculated by: curities of the issuer. (A) Calculating the values for every (4) The short sale order of a covered regular way trade reported in the con- security is for a good faith account and solidated system for the security dur- submitted to profit from a current ing the regular trading session, by mul- price difference between a security on tiplying each such price by the total a foreign securities market and a secu- number of shares traded at that price; rity on a securities market subject to (B) Compiling an aggregate sum of the jurisdiction of the United States, all values; and provided that the short seller has an (C) Dividing the aggregate sum by offer to buy on a foreign market that the total number of reported shares for allows the seller to immediately cover that day in the security. the short sale at the time it was made. (ii) The transactions are reported For the purposes of this paragraph using a special VWAP trade modifier. (d)(4), a depository receipt of a security (iii) The VWAP matched security: shall be deemed to be the same secu- (A) Qualifies as an ‘‘actively-traded rity as the security represented by security’’ pursuant to § 242.101 and such receipt. § 242.102; or (5)(i) The short sale order of a cov- (B) The proposed short sale trans- ered security is by an underwriter or action is being conducted as part of a member of a syndicate or group par- basket transaction of twenty or more ticipating in the distribution of a secu- securities in which the subject security rity in connection with an over-allot- does not comprise more than 5% of the ment of securities; or value of the basket traded.

806

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00816 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.203

(iv) The transaction is not effected prior to the scheduled settlement of for the purpose of creating actual, or the transaction, but the seller failed to apparent, active trading in or other- do so; or wise affecting the price of any security. (iii) If, prior to any loan or arrange- (v) A broker or dealer shall be per- ment to loan any security for delivery, mitted to act as principal on the or failure to deliver, a national securi- contra-side to fill customer short sale ties exchange, in the case of a sale ef- orders only if the broker’s or dealer’s fected thereon, or a national securities position in the covered security, as association, in the case of a sale not ef- committed by the broker or dealer dur- fected on an exchange, finds: ing the pre-opening period of a trading (A) That such sale resulted from a day and aggregated across all of its mistake made in good faith; customers who propose to sell short (B) That due diligence was used to as- the same security on a VWAP basis, certain that the circumstances speci- does not exceed 10% of the covered se- fied in § 242.200(g) existed; and curity’s relevant average daily trading (C) Either that the condition of the volume. market at the time the mistake was (e) No self-regulatory organization discovered was such that undue hard- shall have any rule that is not in con- ship would result from covering the formity with, or conflicts with, this transaction by a ‘‘purchase for cash’’ section. or that the mistake was made by the (f) Upon written application or upon seller’s broker and the sale was at a its own motion, the Commission may permissible price under any applicable grant an exemption from the provi- short sale price test. sions of this section, either uncondi- (b) Short sales. (1) A broker or dealer tionally or on specified terms and con- may not accept a short sale order in an ditions, to any person or class of per- equity security from another person, or sons, to any transaction or class of effect a short sale in an equity security transactions, or to any security or for its own account, unless the broker class of securities to the extent that or dealer has: such exemption is necessary or appro- (i) Borrowed the security, or entered priate, in the public interest, and is into a bona-fide arrangement to borrow consistent with the protection of inves- the security; or tors. (ii) Reasonable grounds to believe [75 FR 11323, Mar. 10, 2010, as amended at 83 that the security can be borrowed so FR 58427, Nov. 19, 2018] that it can be delivered on the date delivery is due; and § 242.203 Borrowing and delivery re- (iii) Documented compliance with quirements. this paragraph (b)(1). (a) Long sales. (1) If a broker or dealer (2) The provisions of paragraph (b)(1) knows or has reasonable grounds to be- of this section shall not apply to: lieve that the sale of an equity security (i) A broker or dealer that has ac- was or will be effected pursuant to an cepted a short sale order from another order marked ‘‘long,’’ such broker or registered broker or dealer that is re- dealer shall not lend or arrange for the quired to comply with paragraph (b)(1) loan of any security for delivery to the of this section, unless the broker or purchaser’s broker after the sale, or dealer relying on this exception con- fail to deliver a security on the date tractually undertook responsibility for delivery is due. compliance with paragraph (b)(1) of (2) The provisions of paragraph (a)(1) this section; of this section shall not apply: (ii) Any sale of a security that a per- (i) To the loan of any security by a son is deemed to own pursuant to broker or dealer through the medium § 242.200, provided that the broker or of a loan to another broker or dealer; dealer has been reasonably informed (ii) If the broker or dealer knows, or that the person intends to deliver such has been reasonably informed by the security as soon as all restrictions on seller, that the seller owns the secu- delivery have been removed. If the per- rity, and that the seller would deliver son has not delivered such security the security to the broker or dealer within 35 days after the trade date, the

807

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00817 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.203 17 CFR Ch. II (4–1–20 Edition)

broker-dealer that effected the sale (b)(3) of this section (i.e., because the must borrow securities or close out the participant of a registered clearing short position by purchasing securities agency had a fail to deliver position in of like kind and quantity; the threshold security that is attrib- (iii) Short sales effected by a market uted to short sales effected by a reg- maker in connection with bona-fide istered options market maker to estab- market making activities in the secu- lish or maintain a hedge on options po- rity for which this exception is sitions that were created before the se- claimed; and curity became a threshold security), (iv) Transactions in security futures. shall immediately close out that fail to (3) If a participant of a registered deliver position, including any adjust- clearing agency has a fail to deliver po- ments to the fail to deliver position, sition at a registered clearing agency within 35 consecutive settlement days in a threshold security for thirteen consecutive settlement days, the par- of the effective date of this amendment ticipant shall immediately thereafter by purchasing securities of like kind close out the fail to deliver position by and quantity; purchasing securities of like kind and (iv) If a participant of a registered quantity: clearing agency has a fail to deliver po- (i) Provided, however, that a partici- sition at a registered clearing agency pant of a registered clearing agency in a threshold security for thirteen that has a fail to deliver position at a consecutive settlement days, the par- registered clearing agency in a thresh- ticipant and any broker or dealer for old security on the effective date of which it clears transactions, including this amendment and which, prior to any market maker that would other- the effective date of this amendment, wise be entitled to rely on the excep- had been previously grandfathered tion provided in paragraph (b)(2)(iii) of from the close-out requirement in this this section, may not accept a short paragraph (b)(3) (i.e., because the par- sale order in the threshold security ticipant of a registered clearing agency from another person, or effect a short had a fail to deliver position at a reg- sale in the threshold security for its istered clearing agency on the settle- own account, without borrowing the ment day preceding the day that the security or entering into a bona-fide security became a threshold security), arrangement to borrow the security, shall close out that fail to deliver posi- until the participant closes out the fail tion within thirty-five consecutive set- to deliver position by purchasing secu- tlement days of the effective date of this amendment by purchasing securi- rities of like kind and quantity; ties of like kind and quantity; (v) If a participant of a registered (ii) Provided, however, that if a partic- clearing agency entitled to rely on the ipant of a registered clearing agency 35 consecutive settlement day close-out has a fail to deliver position at a reg- requirement contained in paragraph istered clearing agency in a threshold (b)(3)(i), (b)(3)(ii), or (b)(3)(iii) of this security that was sold pursuant to section has a fail to deliver position at § 230.144 of this chapter for thirty-five a registered clearing agency in the consecutive settlement days, the par- threshold security for 35 consecutive ticipant shall immediately thereafter settlement days, the participant and close out the fail to deliver position in any broker or dealer for which it clears the security by purchasing securities of transactions, including any market like kind and quantity; maker, that would otherwise be enti- (iii) Provided, however, that a partici- tled to rely on the exception provided pant of a registered clearing agency in paragraph (b)(2)(ii) of this section, that has a fail to deliver position at a may not accept a short sale order in registered clearing agency in a thresh- the threshold security from another old security on the effective date of person, or effect a short sale in the this amendment and which, prior to threshold security for its own account, the effective date of this amendment, without borrowing the security or en- had been previously excepted from the tering into a bona fide arrangement to close-out requirement in paragraph

808

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00818 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.204

borrow the security, until the partici- Exchange Act (15 U.S.C. 78l) or for pant closes out the fail to deliver posi- which the issuer is required to file re- tion by purchasing securities of like ports pursuant to section 15(d) of the kind and quantity; Exchange Act (15 U.S.C. 78o(d)): (vi) If a participant of a registered (i) For which there is an aggregate clearing agency reasonably allocates a fail to deliver position for five consecu- portion of a fail to deliver position to tive settlement days at a registered another registered broker or dealer for clearing agency of 10,000 shares or which it clears trades or for which it is more, and that is equal to at least 0.5% responsible for settlement, based on of the issue’s total shares outstanding; such broker or dealer’s short position, (ii) Is included on a list disseminated then the provisions of this paragraph to its members by a self-regulatory or- (b)(3) relating to such fail to deliver po- ganization; and sition shall apply to the portion of (iii) Provided, however, that a security such registered broker or dealer that shall cease to be a threshold security if was allocated the fail to deliver posi- the aggregate fail to deliver position at tion, and not to the participant; and a registered clearing agency does not (vii) A participant of a registered clearing agency shall not be deemed to exceed the level specified in paragraph have fulfilled the requirements of this (c)(6)(i) of this section for five consecu- paragraph (b)(3) where the participant tive settlement days. enters into an arrangement with an- (d) Exemptive authority. Upon written other person to purchase securities as application or upon its own motion, required by this paragraph (b)(3), and the Commission may grant an exemp- the participant knows or has reason to tion from the provisions of this sec- know that the other person will not de- tion, either unconditionally or on spec- liver securities in settlement of the ified terms and conditions, to any purchase. transaction or class of transactions, or (c) Definitions. (1) For purposes of this to any security or class of securities, section, the term market maker has the or to any person or class of persons. same meaning as in section 3(a)(38) of [69 FR 48029, Aug. 6, 2004, as amended at 72 the Securities Exchange Act of 1934 FR 45557, Aug. 14, 2007; 73 FR 61706, Oct. 17, (‘‘Exchange Act’’) (15 U.S.C. 78c(a)(38)). 2008] (2) For purposes of this section, the term participant has the same meaning § 242.204 Close-out requirement. as in section 3(a)(24) of the Exchange (a) A participant of a registered Act (15 U.S.C. 78c(a)(24)). clearing agency must deliver securities (3) For purposes of this section, the term registered clearing agency means a to a registered clearing agency for clearing agency, as defined in section clearance and settlement on a long or 3(a)(23)(A) of the Exchange Act (15 short sale in any equity security by U.S.C. 78c(a)(23)(A)), that is registered settlement date, or if a participant of a with the Commission pursuant to sec- registered clearing agency has a fail to tion 17A of the Exchange Act (15 U.S.C. deliver position at a registered clearing 78q–1). agency in any equity security for a (4) For purposes of this section, the long or short sale transaction in that term security future has the same mean- equity security, the participant shall, ing as in section 3(a)(55) of the Ex- by no later than the beginning of reg- change Act (15 U.S.C. 78c(a)(55)). ular trading hours on the settlement (5) For purposes of this section, the day following the settlement date, im- term settlement day means any business mediately close out its fail to deliver day on which deliveries of securities position by borrowing or purchasing se- and payments of money may be made curities of like kind and quantity; Pro- through the facilities of a registered vided, however: clearing agency. (1) If a participant of a registered (6) For purposes of this section, the clearing agency has a fail to deliver po- term threshold security means any eq- sition at a registered clearing agency uity security of an issuer that is reg- in any equity security and the partici- istered pursuant to section 12 of the pant can demonstrate on its books and

809

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00819 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.204 17 CFR Ch. II (4–1–20 Edition)

records that such fail to deliver posi- that participant for clearance and set- tion resulted from a long sale, the par- tlement, without first borrowing the ticipant shall by no later than the be- security, or entering into a bona fide ginning of regular trading hours on the arrangement to borrow the security, third consecutive settlement day fol- until the participant closes out the fail lowing the settlement date, imme- to deliver position by purchasing secu- diately close out the fail to deliver po- rities of like kind and quantity and sition by purchasing or borrowing secu- that purchase has cleared and settled rities of like kind and quantity; at a registered clearing agency; Pro- (2) If a participant of a registered vided, however: A broker or dealer shall clearing agency has a fail to deliver po- not be subject to the requirements of sition at a registered clearing agency this paragraph if the broker or dealer in any equity security resulting from a timely certifies to the participant of a sale of a security that a person is registered clearing agency that it has deemed to own pursuant to § 242.200 and not incurred a fail to deliver position that such person intends to deliver as on settlement date for a long or short soon as all restrictions on delivery sale in an equity security for which the have been removed, the participant participant has a fail to deliver posi- shall, by no later than the begining of tion at a registered clearing agency or regular trading hours on the thirty- that the broker or dealer is in compli- fifth consecutive calendar day fol- ance with paragraph (e) of this section. lowing the trade date for the trans- (c) The participant must notify any action, immediately close out the fail broker or dealer from which it receives to deliver position by purchasing secu- trades for clearance and settlement, in- rities of like kind and quantity; or cluding any market maker that would (3) If a participant of a registered otherwise be entitled to rely on the ex- clearing agency has a fail to deliver po- ception provided in § 242.203(b)(2)(iii): sition at a registered clearing agency (1) That the participant has a fail to in any equity security that is attrib- deliver position in an equity security utable to bona fide market making ac- at a registered clearing agency that tivities by a registered market maker, has not been closed out in accordance options market maker, or other market maker obligated to quote in the with the requirements of paragraph (a) over-the-counter market, the partici- of this section; and pant shall by no later than the begin- (2) When the purchase that the par- ning of regular trading hours on the ticipant has made to close out the fail third consecutive settlement day fol- to deliver position has cleared and set- lowing the settlement date, imme- tled at a registered clearing agency. diately close out the fail to deliver po- (d) If a participant of a registered sition by purchasing or borrowing secu- clearing agency reasonably allocates a rities of like kind and quantity. portion of a fail to deliver position to (b) If a participant of a registered another registered broker or dealer for clearing agency has a fail to deliver po- which it clears trades or from which it sition in any equity security at a reg- receives trades for settlement, based on istered clearing agency and does not such broker’s or dealer’s short posi- close out such fail to deliver position tion, the provisions of paragraphs (a) in accordance with the requirements of and (b) of this section relating to such paragraph (a) of this section, the par- fail to deliver position shall apply to ticipant and any broker or dealer from such registered broker or dealer that which it receives trades for clearance was allocated the fail to deliver posi- and settlement, including any market tion, and not to the participant. A maker that would otherwise be entitled broker or dealer that has been allo- to rely on the exception provided in cated a portion of a fail to deliver posi- § 242.203(b)(2)(iii), may not accept a tion that does not comply with the pro- short sale order in the equity security visions of paragraph (a) of this section from another person, or effect a short must immediately notify the partici- sale in the equity security for its own pant that it has become subject to the account, to the extent that the broker requirements of paragraph (b) of this or dealer submits its short sales to section.

810

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00820 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.300

(e) Even if a participant of a reg- REGULATION ATS—ALTERNATIVE istered clearing agency has not closed TRADING SYSTEMS out a fail to deliver position at a registered clearing agency in accordance SOURCE: Sections 242.300 through 242.303 ap- with paragraph (a) of this section, or pear at 63 FR 70921, Dec. 22, 1998, unless oth- has not allocated a fail to deliver posi- erwise noted. tion to a broker or dealer in accord- PRELIMINARY NOTES ance with paragraph (d) of this section, a broker or dealer shall not be subject 1. An alternative trading system is required to comply with the requirements in to the requirements of paragraph (a) or this Regulation ATS, unless such alternative (b) of this section if the broker or deal- trading system: er purchases or borrows the securities, (a) Is registered as a national securities ex- and if: change; (1) The purchase or borrow is bona (b) Is exempt from registration as a na- fide; tional securities exchange based on the limited volume of transactions effected on the (2) The purchase or borrow is exe- alternative trading system; or cuted after trade date but by no later (c) Trades only government securities and than the end of regular trading hours certain other related instruments. on settlement date for the transaction; All alternative trading systems must com- (3) The purchase or borrow is of a ply with the antifraud, antimanipulation, quantity of securities sufficient to and other applicable provisions of the federal cover the entire amount of that bro- securities laws. 2. The requirements imposed upon an alter- ker’s or dealer’s fail to deliver position native trading system by Regulation ATS at a registered clearing agency in that are in addition to any requirements applica- security; and ble to broker-dealers registered under sec- (4) The broker or dealer can dem- tion 15 of the Act, (15 U.S.C. 78o). onstrate that it has a net flat or net 3. An alternative trading system must long position on its books and records comply with any applicable state law relating to the offer or sale of securities or the on the day of the purchase or borrow. registration or regulation of persons or enti- (f) A participant of a registered clear- ties effecting transactions in securities. ing agency shall not be deemed to have 4. The disclosures made pursuant to the fulfilled the requirements of this sec- provisions of this section are in addition to tion where the participant enters into any other disclosure requirements under the an arrangement with another person to federal securities laws. purchase or borrow securities as re- § 242.300 Definitions. quired by this section, and the participant knows or has reason to know that For purposes of this section, the fol- the other person will not deliver secu- lowing definitions shall apply: rities in settlement of the purchase or (a) Alternative trading system means borrow. any organization, association, person, (g) Definitions. (1) For purposes of group of persons, or system: this section, the term settlement date (1) That constitutes, maintains, or shall mean the business day on which provides a market place or facilities delivery of a security and payment of for bringing together purchasers and sellers of securities or for otherwise money is to be made through the facili- performing with respect to securities ties of a registered clearing agency in the functions commonly performed by connection with the sale of a security. a stock exchange within the meaning (2) For purposes of this section, the of § 240.3b–16 of this chapter; and term regular trading hours has the same (2) That does not: meaning as in § 600(b)(68) of Regulation (i) Set rules governing the conduct of NMS (17 CFR 242.600(b)(68)). subscribers other than the conduct of [74 FR 38292, July 31, 2009, as amended at 83 such subscribers’ trading on such orga- FR 58427, Nov. 19, 2018] nization, association, person, group of persons, or system; or (ii) Discipline subscribers other than by exclusion from trading.

811

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00821 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.301 17 CFR Ch. II (4–1–20 Edition)

(b) Subscriber means any person that shall not be deemed an NMS stock for has entered into a contractual agree- purposes of this Regulation ATS. ment with an alternative trading sys- (h) Effective transaction reporting plan tem to access such alternative trading shall have the meaning provided in system for the purpose of effecting § 242.600. transactions in securities or submit- (i) Corporate debt security shall mean ting, disseminating, or displaying or- any security that: ders on such alternative trading sys- (1) Evidences a liability of the issuer tem, including a customer, member, of such security; user, or participant in an alternative (2) Has a fixed maturity date that is trading system. A subscriber, however, at least one year following the date of shall not include a national securities issuance; and exchange or national securities asso- (3) Is not an exempted security, as ciation. defined in section 3(a)(12) of the Act (15 (c) Affiliate of a subscriber means any U.S.C. 78c(a)(12)). person that, directly or indirectly, con- (j) Commercial paper shall mean any trols, is under common control with, or note, draft, or bill of exchange which is controlled by, the subscriber, includ- arises out of a current transaction or ing any employee. the proceeds of which have been or are (d) Debt security shall mean any secu- to be used for current transactions, and rity other than an equity security, as which has a maturity at the time of defined in § 240.3a11–1 of this chapter, as issuance of not exceeding nine months, well as non-participatory preferred exclusive of days of grace, or any re- stock. newal thereof the maturity of which is (e) Order means any firm indication likewise limited. of a willingness to buy or sell a secu- (k) NMS Stock ATS means an alter- rity, as either principal or agent, in- native trading system, as defined in cluding any bid or offer quotation, paragraph (a) of this section, that market order, limit order, or other trades NMS stocks, as defined in para- priced order. graph (g) of this section. (f) Control means the power, directly [62 FR 544, Jan. 3, 1997, as amended at 70 FR or indirectly, to direct the manage- 37619, June 29, 2005; 74 FR 52372, Oct. 9, 2009; ment or policies of the broker-dealer of 83 FR 38911, Aug. 7, 2018] an alternative trading system, whether through ownership of securities, by § 242.301 Requirements for alternative contract, or otherwise. A person is pre- trading systems. sumed to control the broker-dealer of (a) Scope of section. An alternative an alternative trading system, if that trading system shall comply with the person: requirements in paragraph (b) of this (1) Is a director, general partner, or section, unless such alternative trading officer exercising executive responsi- system: bility (or having similar status or per- (1) Is registered as an exchange under forming similar functions); section 6 of the Act, (15 U.S.C. 78f); (2) Directly or indirectly has the (2) Is exempted by the Commission right to vote 25 percent or more of a from registration as an exchange based class of voting security or has the on the limited volume of transactions power to sell or direct the sale of 25 effected; percent or more of a class of voting se- (3) Is operated by a national securi- curities of the broker-dealer of the al- ties association; ternative trading system; or (4)(i) Is registered as a broker-dealer (3) In the case of a partnership, has under sections 15(b) or 15C of the Act contributed, or has the right to receive (15 U.S.C. 78o(b), and 78o–5), or is a upon dissolution, 25 percent or more of bank, and the capital of the broker-dealer of the (ii) Limits its securities activities to alternative trading system. the following instruments: (g) NMS stock shall have the meaning (A) Government securities, as defined provided in § 242.600; provided, however, in section 3(a)(42) of the Act, (15 U.S.C. that a debt or convertible debt security 78c(a)(42));

812

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00822 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.301

(B) Repurchase and reverse repur- calendar days after the end of each cal- chase agreements solely involving se- endar quarter in which the alternative curities included within paragraph trading system has operated. (a)(4)(ii)(A) of this section; (iv) The alternative trading system (C) Any put, call, straddle, option, or shall promptly file an amendment on privilege on a government security, Form ATS correcting information pre- other than a put, call, straddle, option, viously reported on Form ATS after or privilege that: discovery that any information filed (1) Is traded on one or more national under paragraphs (b)(2)(i), (ii) or (iii) of securities exchanges; or this section was inaccurate when filed. (2) For which quotations are dissemi- (v) The alternative trading system nated through an automated quotation shall promptly file a cessation of oper- system operated by a registered securi- ations report on Form ATS in accord- ties association; and ance with the instructions therein (D) Commercial paper. upon ceasing to operate as an alter- (5) Is exempted, conditionally or un- native trading system. conditionally, by Commission order, (vi) Every notice or amendment filed after application by such alternative pursuant to this paragraph (b)(2) shall trading system, from one or more of constitute a ‘‘report’’ within the mean- the requirements of paragraph (b) of ing of sections 11A, 17(a), 18(a), and this section or § 242.304. The Commis- 32(a), (15 U.S.C. 78k–1, 78q(a), 78r(a), and sion will grant such exemption only 78ff(a)), and any other applicable provi- after determining that such an order is sions of the Act. consistent with the public interest, the (vii) The reports provided for in para- protection of investors, and the re- graph (b)(2) of this section shall be con- moval of impediments to, and perfec- sidered filed upon receipt by the Divi- tion of the mechanisms of, a national sion of Trading and Markets, at the market system. Commission’s principal office in Wash- (b) Requirements. Every alternative ington, DC. Duplicate originals of the trading system subject to this Regula- reports provided for in paragraphs tion ATS, pursuant to paragraph (a) of (b)(2)(i) through (v) of this section this section, shall comply with the re- must be filed with surveillance per- quirements in this paragraph (b). sonnel designated as such by any self- (1) Broker-dealer registration. The al- regulatory organization that is the des- ternative trading system shall register ignated examining authority for the al- as a broker-dealer under section 15 of ternative trading system pursuant to the Act, (15 U.S.C. 78o). § 240.17d–1 of this chapter simulta- (2) Notice. (i) The alternative trading neously with filing with the Commis- system shall file an initial operation sion. Duplicates of the reports required report on Form ATS, § 249.637 of this by paragraph (b)(9) of this section shall chapter, in accordance with the in- be provided to surveillance personnel structions therein, at least 20 days of such self-regulatory authority upon prior to commencing operation as an request. All reports filed pursuant to alternative trading system. this paragraph (b)(2) and paragraph (ii) The alternative trading system (b)(9) of this section shall be deemed shall file an amendment on Form ATS confidential when filed. at least 20 calendar days prior to im- (viii) An NMS Stock ATS that is op- plementing a material change to the erating pursuant to an initial oper- operation of the alternative trading ation report on Form ATS on file with system. the Commission as of January 7, 2019 (iii) If any information contained in (‘‘Legacy NMS Stock ATS’’) shall be the initial operation report filed under subject to the requirements of para- paragraph (b)(2)(i) of this section be- graphs (b)(2)(i) through (vii) of this sec- comes inaccurate for any reason and tion until that ATS files an initial has not been previously reported to the Form ATS–N with the Commission pur- Commission as an amendment on Form suant to § 242.304(a)(1)(iv)(A). There- ATS, the alternative trading system after, the Legacy NMS Stock ATS shall file an amendment on Form ATS shall file reports pursuant to § 242.304. correcting such information within 30 An alternative trading system that

813

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00823 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.301 17 CFR Ch. II (4–1–20 Edition)

trades NMS stocks and securities other lative size of such priced orders entered than NMS stocks shall be subject to therein at such price, or the size of the the requirements of § 242.304 of this execution sought by such broker-deal- chapter with respect to NMS stocks er. and paragraph (b)(2) of this section (4) Fees. The alternative trading sys- with respect to non-NMS stocks. As of tem shall not charge any fee to broker- January 7, 2019, an entity seeking to dealers that access the alternative operate as an NMS Stock ATS shall trading system through a national se- not be subject to the requirements of curities exchange or national securi- paragraphs (b)(2)(i) through (vii) of this ties association, that is inconsistent section and shall file reports pursuant with equivalent access to the alter- to § 242.304. native trading system required by (3) Order display and execution access. paragraph (b)(3)(iii) of this section. In (i) An alternative trading system shall addition, if the national securities ex- comply with the requirements set forth change or national securities associa- in paragraph (b)(3)(ii) of this section, tion to which an alternative trading with respect to any NMS stock in system provides the prices and sizes of which the alternative trading system: orders under paragraphs (b)(3)(ii) and (A) Displays subscriber orders to any (b)(3)(iii) of this section establishes person (other than alternative trading rules designed to assure consistency system employees); and with standards for access to quotations (B) During at least 4 of the preceding displayed on such national securities 6 calendar months, had an average exchange, or the market operated by daily trading volume of 5 percent or such national securities association, more of the aggregate average daily the alternative trading system shall share volume for such NMS stock as re- not charge any fee to members that is ported by an effective transaction re- contrary to, that is not disclosed in the porting plan. manner required by, or that is incon- (ii) Such alternative trading system sistent with any standard of equivalent shall provide to a national securities access established by such rules. exchange or national securities asso- (5) Fair access. (i) An alternative trad- ciation the prices and sizes of the or- ing system shall comply with the re- ders at the highest buy price and the quirements in paragraph (b)(5)(ii) of lowest sell price for such NMS stock, this section, if during at least 4 of the displayed to more than one person in preceding 6 calendar months, such al- the alternative trading system, for in- ternative trading system had: clusion in the quotation data made available by the national securities ex- (A) With respect to any NMS stock, 5 change or national securities associa- percent or more of the average daily tion to vendors pursuant to § 242.602. volume in that security reported by an (iii) With respect to any order dis- effective transaction reporting plan; played pursuant to paragraph (b)(3)(ii) (B) With respect to an equity secu- of this section, an alternative trading rity that is not an NMS stock and for system shall provide to any broker- which transactions are reported to a dealer that has access to the national self-regulatory organization, 5 percent securities exchange or national securi- or more of the average daily trading ties association to which the alter- volume in that security as calculated native trading system provides the by the self-regulatory organization to prices and sizes of displayed orders pur- which such transactions are reported; suant to paragraph (b)(3)(ii) of this sec- (C) With respect to municipal securi- tion, the ability to effect a transaction ties, 5 percent or more of the average with such orders that is: daily volume traded in the United (A) Equivalent to the ability of such States; or broker-dealer to effect a transaction (D) With respect to corporate debt se- with other orders displayed on the ex- curities, 5 percent or more of the aver- change or by the association; and age daily volume traded in the United (B) At the price of the highest priced States. buy order or lowest priced sell order (ii) An alternative trading system displayed for the lesser of the cumu- shall:

814

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00824 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.301

(A) Establish written standards for (B) Conduct periodic capacity stress granting access to trading on its sys- tests of critical systems to determine tem; such system’s ability to process trans- (B) Not unreasonably prohibit or actions in an accurate, timely, and ef- limit any person in respect to access to ficient manner; services offered by such alternative (C) Develop and implement reason- trading system by applying the stand- able procedures to review and keep cur- ards established under paragraph rent its system development and test- (b)(5)(ii)(A) of this section in an unfair ing methodology; or discriminatory manner; (D) Review the vulnerability of its (C) Make and keep records of: systems and data center computer op- (1) All grants of access including, for erations to internal and external all subscribers, the reasons for grant- threats, physical hazards, and natural ing such access; and disasters; (2) All denials or limitations of ac- (E) Establish adequate contingency cess and reasons, for each applicant, and disaster recovery plans; for denying or limiting access; and (F) On an annual basis, perform an (D) Report the information required independent review, in accordance with on Form ATS–R (§ 249.638 of this chap- established audit procedures and stand- ter) regarding grants, denials, and limi- ards, of such alternative trading sys- tations of access. tem’s controls for ensuring that para- (iii) Notwithstanding paragraph graphs (b)(6)(ii)(A) through (E) of this (b)(5)(i) of this section, an alternative section are met, and conduct a review trading system shall not be required to by senior management of a report con- comply with the requirements in para- taining the recommendations and con- graph (b)(5)(ii) of this section, if such clusions of the independent review; and alternative trading system: (G) Promptly notify the Commission (A) Matches customer orders for a se- staff of material systems outages and curity with other customer orders; significant systems changes. (B) Such customers’ orders are not displayed to any person, other than (iii) Notwithstanding paragraph employees of the alternative trading (b)(6)(i) of this section, an alternative system; and trading system shall not be required to (C) Such orders are executed at a comply with the requirements in para- price for such security disseminated by graph (b)(6)(ii) of this section, if such an effective transaction reporting plan, alternative trading system: or derived from such prices. (A) Matches customer orders for a se- (6) Capacity, integrity, and security of curity with other customer orders; automated systems. (i) The alternative (B) Such customers’ orders are not trading system shall comply with the displayed to any person, other than requirements in paragraph (b)(6)(ii) of employees of the alternative trading this section, if during at least 4 of the system; and preceding 6 calendar months, such al- (C) Such orders are executed at a ternative trading system had: price for such security disseminated by (A) With respect to municipal securi- an effective transaction reporting plan, ties, 20 percent or more of the average or derived from such prices. daily volume traded in the United (7) Examinations, inspections, and in- States; or vestigations. The alternative trading (B) With respect to corporate debt se- system shall permit the examination curities, 20 percent or more of the aver- and inspection of its premises, systems, age daily volume traded in the United and records, and cooperate with the ex- States. amination, inspection, or investigation (ii) With respect to those systems of subscribers, whether such examina- that support order entry, order rout- tion is being conducted by the Commis- ing, order execution, transaction re- sion or by a self-regulatory organiza- porting, and trade comparison, the al- tion of which such subscriber is a mem- ternative trading system shall: ber. (A) Establish reasonable current and (8) Recordkeeping. The alternative future capacity estimates; trading system shall:

815

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00825 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.302 17 CFR Ch. II (4–1–20 Edition)

(i) Make and keep current the records § 242.302 Recordkeeping requirements specified in § 242.302; and for alternative trading systems. (ii) Preserve the records specified in To comply with the condition set § 242.303. forth in paragraph (b)(8) of § 242.301, an (9) Reporting. The alternative trading alternative trading system shall make system shall: and keep current the following records: (i) Separately file the information re- (a) A record of subscribers to such al- quired by Form ATS-R (§ 249.638 of this ternative trading system (identifying chapter) for transactions in NMS any affiliations between the alter- stocks, as defined in paragraph (g) of native trading system and subscribers this section, and transactions in secu- to the alternative trading system, in- rities other than NMS stocks within 30 cluding common directors, officers, or calendar days after the end of each cal- owners); endar quarter in which the market has (b) Daily summaries of trading in the operated after the effective date of this alternative trading system including: section; and (1) Securities for which transactions (ii) Separately file the information have been executed; required by Form ATS-R for trans- (2) Transaction volume, expressed actions in NMS stocks and trans- with respect to equity securities in: actions in securities other than NMS (i) Number of trades; stocks within 10 calendar days after an (ii) Number of shares traded; and alternative trading system ceases to (iii) Total settlement value in terms operate. of U.S. dollars; and (10) Written procedures to ensure the (3) Transaction volume, expressed confidential treatment of trading informa- with respect to debt securities in: tion. (i) The alternative trading system (i) Number of trades; and shall establish adequate written safe- (ii) Total U.S. dollar value; and guards and written procedures to pro- (c) Time-sequenced records of order tect subscribers’ confidential trading information in the alternative trading information. Such written safeguards system, including: and written procedures shall include: (1) Date and time (expressed in terms (A) Limiting access to the confiden- of hours, minutes, and seconds) that tial trading information of subscribers the order was received; to those employees of the alternative (2) Identity of the security; trading system who are operating the (3) The number of shares, or principal system or responsible for its compli- amount of bonds, to which the order ance with these or any other applicable applies; rules; (4) An identification of the order as (B) Implementing standards control- related to a program trade or an index ling employees of the alternative trad- arbitrage trade as defined in New York ing system trading for their own ac- Stock Exchange Rule 80A; counts; and (5) The designation of the order as a (ii) The alternative trading system buy or sell order; shall adopt and implement adequate (6) The designation of the order as a written oversight procedures to ensure short sale order; that the written safeguards and proce- (7) The designation of the order as a dures established pursuant to para- market order, limit order, stop order, graph (b)(10)(i) of this section are fol- stop limit order, or other type or order; lowed. (8) Any limit or stop price prescribed (11) Name. The alternative trading by the order; system shall not use in its name the (9) The date on which the order ex- word ‘‘exchange,’’ or derivations of the pires and, if the time in force is less word ‘‘exchange,’’ such as the term than one day, the time when the order ‘‘stock market.’’ expires; [63 FR 70921, Dec. 22, 1998, as amended at 65 (10) The time limit during which the FR 13235, Mar. 13, 2000; 70 FR 37619, June 29, order is in force; 2005; 74 FR 52372, Oct. 9, 2009; 79 FR 72436, (11) Any instructions to modify or Dec. 5, 2014; 83 FR 38911, Aug. 7, 2018] cancel the order;

816

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00826 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.303

(12) The type of account, i.e., retail, counts, reports, test scripts, test re- wholesale, employee, proprietary, or sults, and other similar records. any other type of account designated (v) At least one copy of the written by the alternative trading system, for safeguards and written procedures to which the order is submitted; protect subscribers’ confidential trad- (13) Date and time (expressed in ing information and the written over- terms of hours, minutes, and seconds) sight procedures created in the course that the order was executed; of complying with paragraph (b)(10) of (14) Price at which the order was exe- § 242.301. cuted; (2) During the life of the enterprise (15) Size of the order executed (ex- and of any successor enterprise, an al- pressed in number of shares or units or ternative trading system shall pre- principal amount); and serve: (i) All partnership articles or, in the (16) Identity of the parties to the case of a corporation, all articles of in- transaction. corporation or charter, minute books § 242.303 Record preservation require- and stock certificate books; and ments for alternative trading sys- (ii) Copies of reports filed pursuant to tems. paragraph (b)(2) of § 242.301 or § 242.304 of this chapter and records made pursu- (a) To comply with the condition set ant to paragraph (b)(5) of § 242.301 of forth in paragraph (b)(8) of § 242.301, an this chapter. alternative trading system shall pre- (b) The records required to be main- serve the following records: tained and preserved pursuant to para- (1) For a period of not less than three graph (a) of this section must be pro- years, the first two years in an easily duced, reproduced, and maintained in accessible place, an alternative trading paper form or in any of the forms per- system shall preserve: mitted under § 240.17a–4(f) of this chap- (i) All records required to be made ter. pursuant to § 242.302; (c) Alternative trading systems must (ii) All notices provided by such al- comply with any other applicable rec- ternative trading system to subscribers ordkeeping or reporting requirement in generally, whether written or commu- the Act, and the rules and regulations nicated through automated means, in- thereunder. If the information in a cluding, but not limited to, notices ad- record required to be made pursuant to dressing hours of system operations, this section is preserved in a record system malfunctions, changes to sys- made pursuant to § 240.17a–3 or tem procedures, maintenance of hard- § 240.17a–4 of this chapter, or otherwise ware and software, instructions per- preserved by the alternative trading taining to access to the market and de- system (whether in summary or some nials of, or limitations on, access to other form), this section shall not re- the alternative trading system; quire the sponsor to maintain such in- (iii) If subject to paragraph (b)(5)(ii) formation in a separate file, provided of § 242.301, at least one copy of such al- that the sponsor can promptly sort and ternative trading system’s standards retrieve the information as if it had for access to trading, all documents been kept in a separate file as a record relevant to the alternative trading sys- made pursuant to this section, and pre- tems decision to grant, deny, or limit serves the information in accordance access to any person, and all other doc- with the time periods specified in para- uments made or received by the alter- graph (a) of this section. native trading system in the course of (d) The records required to be main- complying with paragraph (b)(5) of tained and preserved pursuant to this § 242.301; and section may be prepared or maintained (iv) At least one copy of all docu- by a service bureau, depository, or ments made or received by the alter- other recordkeeping service on behalf native trading system in the course of of the alternative trading system. An complying with paragraph (b)(6) of agreement with a service bureau, de- § 242.301, including all correspondence, pository, or other recordkeeping serv- memoranda, papers, books, notices, ac- ice shall not relieve the alternative

817

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00827 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.304 17 CFR Ch. II (4–1–20 Edition)

trading system from the responsibility mission an initial Form ATS–N, in ac- to prepare and maintain records as cordance with the conditions of this specified in this section. The service section, and the initial Form ATS–N is bureau, depository, or other record- effective pursuant to paragraph keeping service shall file with the (a)(1)(iii) or (a)(1)(iv)(A) of this section. Commission a written undertaking in a (ii) Commission review period. (A) The form acceptable to the Commission, Commission may, by order, as provided signed by a duly authorized person, to in paragraph (a)(1)(iii) of this section, the effect that such records are the declare an initial Form ATS–N filed by property of the alternative trading sys- an NMS Stock ATS ineffective no later tem required to be maintained and pre- than 120 calendar days from the date of served and will be surrendered prompt- filing with the Commission, or, if ap- ly on request of the alternative trading plicable, the end of the extended review system, and shall include the following period. The Commission may extend provision: With respect to any books the initial Form ATS–N review period and records maintained or preserved on for: behalf of (name of alternative trading (1) An additional 90 calendar days, if system), the undersigned hereby under- the Form ATS–N is unusually lengthy takes to permit examination of such or raises novel or complex issues that books and records at any time, or from require additional time for review, in time to time, during business hours by which case the Commission will notify the staff of the Securities and Ex- the NMS Stock ATS in writing within change Commission, any self-regu- the initial 120-calendar day review pe- latory organization of which the alter- riod and will briefly describe the rea- native trading system is a member, or son for the determination for which ad- any State securities regulator having ditional time for review is required; or jurisdiction over the alternative trad- (2) Any extended review period to ing system, and to promptly furnish to which a duly authorized representative the Commission, self-regulatory orga- of the NMS Stock ATS agrees in writ- nization of which the alternative trading. ing system is a member, or any State (B) During review by the Commission securities regulator having jurisdiction of the initial Form ATS–N, the NMS over the alternative trading system a Stock ATS shall amend its initial true, correct, complete and current Form ATS–N pursuant to the require- hard copy of any, all, or any part of, ments of paragraphs (a)(2)(i)(B) and (C) such books and records. of this section. To make material (e) Every alternative trading system changes to its initial Form ATS–N dur- shall furnish to any representative of ing the Commission review period, the the Commission promptly upon re- NMS Stock ATS shall withdraw its quest, legible, true, and complete cop- filed initial Form ATS–N and may ies of those records that are required to refile an initial Form ATS–N pursuant be preserved under this section. to paragraph (a)(1) of this section. [63 FR 70921, Dec. 22, 1998, as amended at 66 (iii) Effectiveness; Ineffectiveness deter- FR 55841, Nov. 2, 2001; 83 FR 38911, Aug. 7, mination. (A) An initial Form ATS–N, 2018] as amended, filed by an NMS Stock ATS will become effective, unless de- § 242.304 NMS Stock ATSs. clared ineffective, upon the earlier of: (a) Conditions to the exemption. Unless (1) The completion of review by the not required to comply with Regula- Commission and publication pursuant tion ATS pursuant to § 242.301(a), an to paragraph (b)(2)(i) of this section; or NMS Stock ATS must comply with (2) The expiration of the review pe- §§ 242.300 through 242.304 (except riod, or, if applicable, the end of the ex- § 242.301(b)(2)(i) through (vii)) to be extended review period, pursuant to para- empt pursuant to § 240.3a1–1(a)(2). graph (a)(1)(ii) of this section. (1) Initial Form ATS–N. (i) Filing and (B) The Commission will, by order, effectiveness requirement. No exemption declare an initial Form ATS–N ineffec- is available to an NMS Stock ATS pur- tive if it finds, after notice and oppor- suant to § 240.3a1–1(a)(2) unless the tunity for hearing, that such action is NMS Stock ATS files with the Com- necessary or appropriate in the public

818

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00828 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.304

interest, and is consistent with the endar day review period and will brief- protection of investors. If the Commis- ly describe the reason for the deter- sion declares an initial Form ATS–N mination for which additional time for ineffective, the NMS Stock ATS shall review is required; or be prohibited from operating as an (2) Any extended review period to NMS Stock ATS pursuant to § 240.3a1– which a duly-authorized representative 1(a)(2). An initial Form ATS–N de- of the Legacy NMS Stock ATS agrees clared ineffective does not prevent the in writing. NMS Stock ATS from subsequently fil- (C) Amendments to initial Form ATS–N. ing a new Form ATS–N. During review by the Commission of (iv) Transition for Legacy NMS Stock the initial Form ATS–N filed by a Leg- ATSs. (A) Initial Form ATS–N filing re- acy NMS Stock ATS, the Legacy NMS quirements. A Legacy NMS Stock ATS Stock ATS shall amend its initial shall file with the Commission an ini- Form ATS–N pursuant to the require- tial Form ATS–N, in accordance with ments of paragraphs (a)(2)(i)(A) the conditions of this section, no ear- through (D) of this section. lier than January 7, 2019, and no later (2) Form ATS–N amendment. (i) Filing than February 8, 2019. An initial Form requirements. An NMS Stock ATS shall ATS–N filed by a Legacy NMS Stock amend a Form ATS–N, in accordance ATS shall supersede and replace for with the conditions of this section: purposes of the exemption the pre- (A) At least 30 calendar days, except viously filed Form ATS of the Legacy as provided by paragraph (a)(2)(i)(D) of NMS Stock ATS. The Legacy NMS this section, prior to the date of imple- Stock ATS may operate, on a provi- mentation of a material change to the sional basis, pursuant to the filed ini- operations of the NMS Stock ATS or to tial Form ATS–N, and any amend- the activities of the broker-dealer op- ments thereto, during the review of the erator or its affiliates that are subject initial Form ATS–N by the Commis- to disclosure on Form ATS–N (‘‘Mate- sion. An initial Form ATS–N filed by a rial Amendment’’); Legacy NMS Stock ATS, as amended, (B) No later than 30 calendar days will become effective, unless declared after the end of each calendar quarter ineffective, upon the earlier of: to correct information that has become (1) The completion of review by the inaccurate or incomplete for any rea- Commission and publication pursuant son and was not required to be reported to paragraph (b)(2)(i) of this section; or to the Commission as a Form ATS–N (2) The expiration of the review pe- amendment pursuant to paragraphs riod, or, if applicable, the end of the ex- (a)(2)(i)(A), (C), or (D) of this section tended review period, pursuant to para- (‘‘Updating Amendment’’); graph (a)(1)(iv)(B) of this section. (C) Promptly, to correct information (B) Commission review period; Ineffec- in any previous disclosure on Form tiveness determination. The Commission ATS–N, after discovery that any infor- may, by order, as provided in para- mation previously filed on Form ATS– graph (a)(1)(iii) of this section, declare N was materially inaccurate or incom- an initial Form ATS–N filed by a Leg- plete when filed (‘‘Correcting Amend- acy NMS Stock ATS ineffective no ment’’); or later than 120 calendar days from the (D) No later than seven calendar days date of filing with the Commission, or, after information required to be dis- if applicable, the end of the extended closed in Part III, Items 24 and 25 on review period. The Commission may Form ATS–N has become inaccurate or extend the initial Form ATS–N review incomplete (‘‘Order Display and Fair period for a Legacy NMS Stock ATS Access Amendment’’). for: (ii) Commission review period; Ineffec- (1) An additional 120 calendar days if tiveness determination. The Commission the initial Form ATS–N is unusually will, by order, declare ineffective any lengthy or raises novel or complex Form ATS–N amendment filed pursu- issues that require additional time for ant to paragraphs (a)(2)(i)(A) through review, in which case the Commission (D) of this section, no later than 30 cal- will notify the Legacy NMS Stock ATS endar days from filing with the Com- in writing within the initial 120-cal- mission, if the Commission finds that

819

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00829 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.304 17 CFR Ch. II (4–1–20 Edition)

such action is necessary or appropriate (b) Public disclosures. (1) Every Form in the public interest, and is consistent ATS–N filed pursuant to this section with the protection of investors. A shall constitute a ‘‘report’’ within the Form ATS–N amendment declared inef- meaning of sections 11A, 17(a), 18(a), fective shall prohibit the NMS Stock and 32(a) (15 U.S.C. 78k–1, 78q(a), 78r(a), ATS from operating pursuant to the in- and 78ff(a)), and any other applicable effective Form ATS–N amendment. A provisions of the Act. Form ATS–N amendment declared inef- (2) The Commission will make public fective does not prevent the NMS via posting on the Commission’s Stock ATS from subsequently filing a website, each: new Form ATS–N amendment. During (i) Effective initial Form ATS–N, as review by the Commission of a Mate- amended; rial Amendment, the NMS Stock ATS (ii) Order of ineffective initial Form shall amend the Material Amendment ATS–N; pursuant to the requirements of para- (iii) Form ATS–N amendment to an graphs (a)(2)(i)(B) through (C) of this effective Form ATS–N: section. To make material changes to a (A) Material Amendments: The cover filed Material Amendment during the page of the Material Amendment will Commission review period, an NMS be made public by the Commission Stock ATS shall withdraw its filed Ma- upon filing and, unless the Commission terial Amendment and must file the declares the Material Amendment inef- new Material Amendment pursuant to fective, the entirety of the Material (a)(2)(i)(A) of this section. Amendment, as amended, will be made (3) Notice of cessation. An NMS Stock public by the Commission following ATS shall notice its cessation of oper- the expiration of the review period pur- ations on Form ATS–N at least 10 busi- suant to paragraph (a)(2)(ii) of this sec- ness days prior to the date the NMS tion. Stock ATS will cease to operate as an (B) Updating, Correcting, and Order NMS Stock ATS. The notice of ces- Display and Fair Access Amendments: sation shall cause the Form ATS–N to The entirety of Updating, Correcting, become ineffective on the date des- and Order Display and Fair Access ignated by the NMS Stock ATS. Amendments will be made public by (4) Suspension, limitation, and revoca- the Commission upon filing. Notwith- tion of the exemption from the definition standing the foregoing, an Updating or of exchange. (i) The Commission will, Correcting Amendment filed to a Mate- by order, if it finds, after notice and rial Amendment will be made public by opportunity for hearing, that such ac- the Commission following the expiration is necessary or appropriate in the tion of the review period for such Mate- public interest, and is consistent with rial Amendment pursuant to paragraph the protection of investors, suspend for (a)(2)(ii) of this section. a period not exceeding twelve months, (iv) Order of ineffective Form ATS–N limit, or revoke the exemption for an amendment; NMS Stock ATS pursuant to § 240.3a1– (v) Notice of cessation; and 1(a)(2) of this chapter. (vi) Order suspending, limiting, or re- (ii) If the exemption for an NMS voking the exemption for an NMS Stock ATS is suspended or revoked Stock ATS from the definition of an pursuant to paragraph (a)(4)(i) of this ‘‘exchange’’ pursuant to § 240.3a1–1(a)(2) section, the NMS Stock ATS shall be of this chapter. prohibited from operating pursuant to (3) Each NMS Stock ATS shall make the exemption pursuant to § 240.3a1– public via posting on its website a di- 1(a)(2) of this chapter. If the exemption rect URL hyperlink to the Commis- for an NMS Stock ATS is limited pur- sion’s website that contains the docu- suant to paragraph (a)(4)(i) of this sec- ments enumerated in paragraph (b)(2) tion, the NMS Stock ATS shall be pro- of this section. hibited from operating in a manner (c) Form ATS–N disclosure require- otherwise inconsistent with the terms ments. (1) An NMS Stock ATS must file and conditions of the Commission a Form ATS–N in accordance with the order. instructions therein.

820

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00830 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.400

(2) Any report required to be filed Act (15 U.S.C. 78s(b)(2)) or section with the Commission under this sec- 19(b)(7) of the Act (15 U.S.C. 78s(b)(7)) tion shall be filed on Form ATS–N, and and, as applicable, section 5c(c) of the include all information as prescribed in Commodity Exchange Act (‘‘CEA’’) (7 Form ATS–N and the instructions U.S.C. 7a–2(c)), or a security futures thereto. Such document shall be exe- intermediary from imposing additional cuted at, or prior to, the time Form margin requirements on security fu- ATS–N is filed and shall be retained by tures, including higher initial or main- the NMS Stock ATS in accordance tenance margin levels, consistent with with §§ 242.303 and § 232.302 of this chap- this Regulation (§§ 242.400 through ter, and the instructions in Form ATS– 242.406), or from taking appropriate ac- N. tion to preserve its financial integrity. (2) This Regulation (§§ 242.400 through [83 FR 38911, Aug. 7, 2018] 242.406) does not apply to: CUSTOMER MARGIN REQUIREMENTS FOR (i) Financial relations between a cus- SECURITY FUTURES tomer and a security futures intermediary to the extent that they com- SOURCE: 67 FR 53176, Aug. 14, 2002, unless ply with a portfolio margining system otherwise noted. under rules that meet the criteria set forth in section 7(c)(2)(B) of the Act (15 § 242.400 Customer margin require- U.S.C. 78g(c)(2)(B)) and that are effec- ments for security futures—author- tive in accordance with section 19(b)(2) ity, purpose, interpretation, and of the Act (15 U.S.C. 78s(b)(2)) and, as scope. applicable, section 5c(c) of the CEA (7 (a) Authority and purpose. Sections U.S.C. 7a–2(c)); 242.400 through 242.406 and 17 CFR 41.42 (ii) Financial relations between a se- through 41.49 (‘‘this Regulation, curity futures intermediary and a for- §§ 242.400 through 242.406’’) are issued by eign person involving security futures the Securities and Exchange Commis- traded on or subject to the rules of a sion (‘‘Commission’’) jointly with the foreign board of trade; Commodity Futures Trading Commis- (iii) Margin requirements that clear- sion (‘‘CFTC’’), pursuant to authority ing agencies registered under section delegated by the Board of Governors of 17A of the Exchange Act (15 U.S.C. 78q– the Federal Reserve System under sec- 1) or derivatives clearing organizations tion 7(c)(2)(A) of the Securities Ex- registered under section 5b of the CEA change Act of 1934 (‘‘Act’’) (15 U.S.C. (7 U.S.C. 7a–1) impose on their mem- 78g(c)(2)(A)). The principal purpose of bers; this Regulation (§§ 242.400 through (iv) Financial relations between a se- 242.406) is to regulate customer margin curity futures intermediary and a per- collected by brokers, dealers, and son based on a good faith determina- members of national securities ex- tion by the security futures inter- changes, including futures commission mediary that such person is an exempt- merchants required to register as bro- ed person; and kers or dealers under section 15(b)(11) (v) Financial relations between a se- of the Act (15 U.S.C. 78o(b)(11)), relat- curity futures intermediary and, or ar- ing to security futures. ranged by a security futures inter- (b) Interpretation. This Regulation mediary for, a person relating to trad- (§§ 242.400 through 242.406) shall be ing in security futures by such person jointly interpreted by the Commission for its own account, if such person: and the CFTC, consistent with the cri- (A) Is a member of a national securi- teria set forth in clauses (i) through ties exchange or national securities as- (iv) of section 7(c)(2)(B) of the Act (15 sociation registered pursuant to sec- U.S.C. 78g(c)(2)(B)) and the provisions tion 15A(a) of the Act (15 U.S.C. 78o– of Regulation T (12 CFR part 220). 3(a)); and (c) Scope. (1) This Regulation (B) Is registered with such exchange (§§ 242.400 through 242.406) does not pre- or such association as a security fu- clude a self-regulatory authority, tures dealer pursuant to rules that are under rules that are effective in ac- effective in accordance with section cordance with section 19(b)(2) of the 19(b)(2) of the Act (15 U.S.C. 78s(b)(2))

821

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00831 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.401 17 CFR Ch. II (4–1–20 Edition)

and, as applicable, section 5c(c) of the account or futures account as provided CEA (7 U.S.C. 7a–2(c)), that: in § 242.402(a) of this Regulation (1) Require such member to be reg- (§§ 242.400 through 242.406). istered as a floor trader or a floor (2) Broker shall have the meaning broker with the CFTC under Section provided in section 3(a)(4) of the Act (15 4f(a)(1) of the CEA (7 U.S.C. 6f(a)(1)), or U.S.C. 78c(a)(4)). as a dealer with the Commission under (3) Contract multiplier means the num- section 15(b) of the Act (15 U.S.C. ber of units of a narrow-based security 78o(b)); index expressed as a dollar amount, in (2) Require such member to maintain accordance with the terms of the secu- records sufficient to prove compliance rity future contract. with this paragraph (c)(2)(v) and the (4) Current market value means, on rules of the exchange or association of any day: which it is a member; (i) With respect to a security future: (3) Require such member to hold (A) If the instrument underlying such itself out as being willing to buy and security future is a stock, theproduct sell security futures for its own ac- of the daily settlement price of such se- count on a regular or continuous basis; curity future as shown by any regu- and larly published reporting or quotation (4) Provide for disciplinary action, service, and the applicable number of including revocation of such member’s shares per contract; or registration as a security futures dealer, for such member’s failure to comply (B) If the instrument underlying such with this Regulation (§§ 242.400 through security future is a narrow-based secu- 242.406) or the rules of the exchange or rity index, as defined in section association. 3(a)(55)(B) of the Act (15 U.S.C. (d) Exemption. The Commission may 78c(a)(55)(B)), the product of the daily exempt, either unconditionally or on settlement price of such security fu- specified terms and conditions, finan- ture as shown by any regularly pub- cial relations involving any security lished reporting or quotation service, futures intermediary, customer, posi- and the applicable contract multiplier. tion, or transaction, or any class of se- (ii) With respect to a security other curity futures intermediaries, cus- than a security future, the most recent tomers, positions, or transactions, closing sale price of the security, as from one or more requirements of this shown by any regularly published re- Regulation (§§ 242.400 through 242.406), porting or quotation service. If there is if the Commission determines that no recent closing sale price, the secu- such exemption is necessary or appro- rity futures intermediary may use any priate in the public interest and con- reasonable estimate of the market sistent with the protection of inves- value of the security as of the most re- tors. An exemption granted pursuant cent close of business. to this paragraph shall not operate as (5) Customer excludes an exempted an exemption from any CFTC rules. person and includes: Any exemption that may be required (i) Any person or persons acting from such rules must be obtained sepa- jointly: rately from the CFTC. (A) On whose behalf a security futures intermediary effects a security § 242.401 Definitions. futures transaction or carries a secu- (a) For purposes of this Regulation rity futures position; or (§§ 242.400 through 242.406) only, the fol- (B) Who would be considered a cus- lowing terms shall have the meanings tomer of the security futures inter- set forth in this section. mediary according to the ordinary (1) Applicable margin rules and margin usage of the trade; rules applicable to an account mean the (ii) Any partner in a security futures rules and regulations applicable to fi- intermediary that is organized as a nancial relations between a security partnership who would be considered a futures intermediary and a customer customer of the security futures inter- with respect to security futures and re- mediary absent the partnership rela- lated positions carried in a securities tionship; and

822

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00832 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.401

(iii) Any joint venture in which a se- futures, or commodity options with curity futures intermediary partici- persons other than brokers, dealers, pates and which would be considered a persons associated with a broker or customer of the security futures inter- dealer, futures commission merchants, mediary if the security futures inter- floor brokers, floor traders, and per- mediary were not a participant. sons affiliated with a futures commis- (6) Daily settlement price means, with sion merchant, floor broker, or floor respect to a security future, the settle- trader. ment price of such security future de- (ii) For purposes of paragraph (a)(9)(i) termined at the close of trading each of this section only, persons affiliated day, under the rules of the applicable with a futures commission merchant, exchange, clearing agency, or deriva- floor broker, or floor trader means any tives clearing organization. partner, officer, director, or branch (7) Dealer shall have the meaning pro- manager of such futures commission vided in section 3(a)(5) of the Act (15 merchant, floor broker, or floor trader U.S.C. 78c(a)(5)). (or any person occupying a similar sta- (8) Equity means the equity or margin tus or performing similar functions), equity in a securities or futures ac- any person directly or indirectly con- count, as computed in accordance with trolling, controlled by, or under com- the margin rules applicable to the ac- mon control with such futures commis- count and subject to adjustment under sion merchant, floor broker, or floor § 242.404(c), (d) and (e) of this Regula- trader, or any employee of such a fu- tion (§§ 242.400 through 242.406). tures commission merchant, floor (9) Exempted person means: broker, or floor trader. (i) A member of a national securities (iii) A member of a national securi- exchange, a registered broker or dealer, ties exchange, a registered broker or or a registered futures commission dealer, or a registered futures commis- merchant, a substantial portion of sion merchant that has been in exist- whose business consists of transactions ence for less than one year may meet in securities, commodity futures, or the definition of exempted person commodity options with persons other based on a six-month period. than brokers, dealers, futures commission merchants, floor brokers, or floor (10) Exempted security shall have the traders, and includes a person who: meaning provided in section 3(a)(12) of (A) Maintains at least 1000 active ac- the Act (15 U.S.C. 78c(a)(12)). counts on an annual basis for persons (11) Floor broker shall have the mean- other than brokers, dealers, persons as- ing provided in Section 1a(16) of the sociated with a broker or dealer, fu- CEA (7 U.S.C. 1a(16)). tures commission merchants, floor bro- (12) Floor trader shall have the mean- kers, floor traders, and persons affili- ing provided in Section 1a(17) of the ated with a futures commission mer- CEA (7 U.S.C. 1a(17)). chant, floor broker, or floor trader that (13) Futures account shall have the are effecting transactions in securities, meaning provided in § 240.15c3–3(a) of commodity futures, or commodity op- this chapter. tions; (14) Futures commission merchant shall (B) Earns at least $10 million in gross have the meaning provided in Section revenues on an annual basis from 1a of the CEA (7 U.S.C. 1a). transactions in securities, commodity (15) Good faith, with respect to mak- futures, or commodity options with ing a determination or accepting a persons other than brokers, dealers, statement concerning financial rela- persons associated with a broker or tions with a person, means that the se- dealer, futures commission merchants, curity futures intermediary is alert to floor brokers, floor traders, and per- the circumstances surrounding such fi- sons affiliated with a futures commis- nancial relations, and if in possession sion merchant, floor broker, or floor of information that would cause a pru- trader; or dent person not to make the deter- (C) Earns at least 10 percent of its mination or accept the notice or cer- gross revenues on an annual basis from tification without inquiry, investigates transactions in securities, commodity and is satisfied that it is correct.

823

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00833 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.401 17 CFR Ch. II (4–1–20 Edition)

(16) Listed option means a put or call (26) Related position, with respect to a option that is: security future, means any position in (i) Issued by a clearing agency that is an account that is combined with the registered under section 17A of the Act security future to create an offsetting (15 U.S.C. 17q–1) or cleared and guaran- position as provided in § 242.403(b)(2) of teed by a derivatives clearing organiza- this Regulation (§§ 242.400 through tion that is registered under Section 5b 242.406). of the CEA (7 U.S.C. 7a–1); and (27) Related transaction, with respect (ii) Traded on or subject to the rules to a position or transaction in a secu- of a self-regulatory authority. rity future, means: (17) Margin call means a demand by a (i) Any transaction that creates, security futures intermediary to a cus- eliminates, increases or reduces an off- tomer for a deposit of cash, securities setting position involving a security or other assets to satisfy the required future and a related position, as pro- margin for security futures or related vided in § 242.403(b)(2) of this Regula- positions or a special margin require- tion (§§ 242.400 through 242.406); or ment. (ii) Any deposit or withdrawal of (18) Margin deficiency means the margin for the security future or a re- amount by which the required margin lated position, except as provided in in an account is not satisfied by the eq- § 242.405(b) of this Regulation (§§ 242.400 uity in the account, as computed in ac- through 242.406). cordance with § 242.404 of this Regula- (28) Securities account shall have the tion (§§ 242.400 through 242.406). meaning provided in § 240.15c3–3(a) of (19) Margin equity security shall have this chapter. the meaning provided in Regulation T. (29) Security futures intermediary (20) Margin security shall have the means any creditor as defined in Regu- meaning provided in Regulation T. lation T with respect to its financial (21) Member shall have the meaning relations with any person involving se- provided in section 3(a)(3) of the Act (15 curity futures. U.S.C. 78c(a)(3)), and shall include per- (30) Self-regulatory authority means a sons registered under section 15(b)(11) national securities exchange registered of the Act (15 U.S.C. 78o(b)(11)) that are under section 6 of the Act (15 U.S.C. permitted to effect transactions on a 78f), a national securities association national securities exchange without registered under section 15A of the Act the services of another person acting as (15 U.S.C. 78o–3), a contract market executing broker. registered under Section 5 of the CEA (22) Money market mutual fund means (7 U.S.C. 7) or Section 5f of the CEA (7 any security issued by an investment U.S.C. 7b–1), or a derivatives trans- company registered under section 8 of action execution facility registered the Investment Company Act of 1940 (15 under Section 5a of the CEA (7 U.S.C. U.S.C. 80a–8) that is considered a 7a). money market fund under § 270.2a–7 of (31) Special margin requirement shall this chapter. have the meaning provided in (23) Persons associated with a broker or § 242.404(e)(1)(ii) of this Regulation dealer shall have the meaning provided (§§ 242.400 through 242.406). in section 3(a)(18) of the Act (15 U.S.C. (32) Variation settlement means any 78c(a)(18)). credit or debit to a customer account, (24) Regulation T means Regulation T made on a daily or intraday basis, for promulgated by the Board of Governors the purpose of marking to market a se- of the Federal Reserve System, 12 CFR curity future or any other contract part 220, as amended from time to that is: time. (i) Issued by a clearing agency that is (25) Regulation T collateral value, with registered under section 17A of the Act respect to a security, means the cur- (15 U.S.C. 78q–1) or cleared and guaran- rent market value of the security re- teed by a derivatives clearing organiza- duced by the percentage of required tion that is registered under Section 5b margin for a position in the security of the CEA (7 U.S.C. 7a–1); and held in a margin account under Regula- (ii) Traded on or subject to the rules tion T. of a self-regulatory authority.

824

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00834 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.402

(b) Terms used in this Regulation intermediary shall consider all futures (§§ 242.400 through 242.406) and not oth- accounts in which security futures and erwise defined in this section shall related positions are held that are have the meaning set forth in the mar- within the same regulatory classifica- gin rules applicable to the account. tion or account type and are owned by (c) Terms used in this Regulation the same customer to be a single ac- (§§ 242.400 through 242.406) and not oth- count for purposes of this Regulation erwise defined in this section or in the (§§ 242.400 through 242.406). The security margin rules applicable to the account futures intermediary may combine shall have the meaning set forth in the such accounts with other futures ac- Act and the CEA; if the definitions of a counts that are within the same regu- term in the Act and the CEA are incon- latory classification or account type sistent as applied in particular cir- and are owned by the same customer cumstances, such term shall have the for purposes of computing a customer’s meaning set forth in rules, regulations, overall margin requirement, as per- or interpretations jointly promulgated mitted or required by applicable mar- by the Commission and the CFTC. gin rules. (c) Accounts of partners. If a partner § 242.402 General provisions. of the security futures intermediary (a) Applicable margin rules. Except to has an account with the security fu- the extent inconsistent with this Regu- tures intermediary in which security lation (§§ 242.400 through 242.406): futures or related positions are held, (1) A security futures intermediary the security futures intermediary shall that carries a security future on behalf disregard the partner’s financial rela- of a customer in a securities account tions with the firm (as shown in the shall record and conduct all financial partner’s capital and ordinary drawing relations with respect to such security accounts) in calculating the margin or future and related positions in accord- equity of any such account. ance with Regulation T and the margin (d) Contribution to joint venture. If an rules of the self-regulatory authorities account in which security futures or of which the security futures inter- related positions are held is the ac- mediary is a member. count of a joint venture in which the (2) A security futures intermediary security futures intermediary partici- that carries a security future on behalf pates, any interest of the security fu- of a customer in a futures account tures intermediary in the joint account shall record and conduct all financial in excess of the interest which the se- relations with respect to such security curity futures intermediary would have future and related positions in accord- on the basis of its right to share in the ance with the margin rules of the self- profits shall be margined in accordance regulatory authorities of which the se- with this Regulation (§§ 242.400 through curity futures intermediary is a mem- 242.406). ber. (e) Extensions of credit. (1) No security (b) Separation and consolidation of ac- futures intermediary may extend or counts. (1) The requirements for secu- maintain credit to or for any customer rity futures and related positions in for the purpose of evading or circum- one account may not be met by consid- venting any requirement under this ering items in any other account, ex- Regulation (§§ 242.400 through 242.406). cept as permitted or required under (2) A security futures intermediary paragraph (b)(2) of this section or ap- may arrange for the extension or main- plicable margin rules. If withdrawals of tenance of credit to or for any cus- cash, securities or other assets depos- tomer by any person, provided that the ited as margin are permitted under this security futures intermediary does not Regulation (§§ 242.400 through 242.406), willfully arrange credit that would bookkeeping entries shall be made constitute a violation of Regulation T, when such cash, securities, or assets U or X of the Board of Governors of the are used for purposes of meeting re- Federal Reserve System (12 CFR parts quirements in another account. 220, 221, and 224) by such person. (2) Notwithstanding paragraph (b)(1) (f) Change in exempted person status. of this section, the security futures Once a person ceases to qualify as an

825

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00835 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.403 17 CFR Ch. II (4–1–20 Edition)

exempted person, it shall notify the se- required margin for security futures curity futures intermediary of this fact and related positions in an account is before entering into any new security not satisfied by the equity in the ac- futures transaction or related trans- count, subject to adjustment under action that would require additional paragraph (c) of this section. margin to be deposited under this Reg- (b) Acceptable margin deposits. (1) The ulation (§§ 242.400 through 242.406). Fi- required margin may be satisfied by a nancial relations with respect to any deposit of cash, margin securities (sub- such transactions shall be subject to ject to paragraph (b)(2) of this section), the provisions of this Regulation exempted securities, any other asset (§§ 242.400 through 242.406). permitted under Regulation T to satisfy a margin deficiency in a securities § 242.403 Required margin. margin account, or any combination (a) Applicability. Each security fu- thereof, each as valued in accordance tures intermediary shall determine the with paragraph (c) of this section. required margin for the security fu- (2) Shares of a money market mutual tures and related positions held on be- fund may be accepted as a margin de- half of a customer in a securities ac- posit for purposes of this Regulation count or futures account as set forth in (§§ 242.400 through 242.406), provided this section. that: (b) Required margin—(1) General rule. (i) The customer waives any right to The required margin for each long or redeem the shares without the consent short position n a security future shall of the security futures intermediary be twenty (20) percent of the current and instructs the fund or its transfer market value of such security future. agent accordingly; (2) Offsetting positions. Notwith- (ii) The security futures inter- standing the margin levels specified in mediary (or clearing agency or deriva- paragraph (b)(1) of this section, a self- tives clearing organization with which regulatory authority may set the re- the shares are deposited as margin) ob- quired initial or maintenance margin tains the right to redeem the shares in level for an offsetting position involv- cash, promptly upon request; and ing security futures and related posi- (iii) The fund agrees to satisfy any tions at a level lower than the level conditions necessary or appropriate to that would be required under para- ensure that the shares may be re- graph (b)(1) of this section if such posi- deemed in cash, promptly upon re- tions were margined separately, pursu- quest. ant to rules that meet the criteria set (c) Adjustments—(1) Futures accounts. forth in section 7(c)(2)(B) of the Act (15 For purposes of this section, the equity U.S.C. 78g(c)(2)(B)) and are effective in in a futures account shall be computed accordance with section 19(b)(2) of the in accordance with the margin rules Act (15 U.S.C. 78s(b)(2)) and, as applica- applicable to the account, subject to ble, Section 5c(c) of the CEA (7 U.S.C. the following: 7a–2(c)). (i) A security future shall have no (c) Procedures for certain margin level value; adjustments. An exchange registered (ii) Each net long or short position in under section 6(g) of the Act (15 U.S.C. a listed option on a contract for future 78f(g)), or a national securities associa- delivery shall be valued in accordance tion registered under section 15A(k) of with the margin rules applicable to the the Act (15 U.S.C. 78o–3(k)), may raise account; or lower the required margin level for a (iii) Except as permitted in para- security future to a level not lower graph (e) of this section, each margin than that specified in this section, in equity security shall be valued at an accordance with section 19(b)(7) of the amount no greater than its Regulation Act (15 U.S.C. 78s(b)(7)). T collateral value; (iv) Each other security shall be val- § 242.404 Type, form and use of mar- ued at an amount no greater than its gin. current market value reduced by the (a) When margin is required. Margin is percentage specified for such security required to be deposited whenever the in § 240.15c3–1(c)(2)(vi) of this chapter;

826

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00836 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.404

(v) Freely convertible foreign cur- to section 6(a) of the Act (15 U.S.C. rency may be valued at an amount no 78f(a)); greater than its daily marked-to-mar- (ii) Additional margin is required to ket U.S. dollar equivalent; be deposited on any day when the day’s (vi) Variation settlement receivable security futures transactions and re- (or payable) by an account at the close lated transactions would create or in- of trading on any day shall be treated crease a margin deficiency in the ac- as a credit (or debit) to the account on count if the margin equity securities that day; and were valued at their Regulation T col- (vii) Each other acceptable margin lateral value, and shall be for the deposit or component of equity shall be amount of the margin deficiency so valued at an amount no greater than created or increased (a ‘‘special margin its value under Regulation T. requirement’’); and (2) Securities accounts. For purposes of (iii) Cash, securities, or other assets this section, the equity in a securities deposited as margin for the positions in account shall be computed in accord- an account are not permitted to be ance with the margin rules applicable withdrawn from the account at any to the account, subject to the fol- time that: lowing: (A) Additional cash, securities, or other assets are required to be depos- (i) A security future shall have no ited as margin under this section for a value; transaction in the account on the same (ii) Freely convertible foreign cur- or a previous day; or rency may be valued at an amount no (B) The withdrawal, together with greater than its daily mark-to-market other transactions, deposits, and with- U.S. dollar equivalent; and drawals on the same day, would create (iii) Variation settlement receivable or increase a margin deficiency if the (or payable) to an account at the close margin equity securities were valued of trading on any day shall be treated at their Regulation T collateral value. as a credit (or debit) by the account on (2) All security futures transactions that day. and related transactions on any day (d) Satisfaction restriction. Any trans- shall be combined to determine the action, position or deposit that is used amount of a special margin require- to satisfy the required margin for secu- ment. Additional margin deposited to rity futures or related positions under satisfy a special margin requirement this Regulation (§§ 242.400 through shall be valued at an amount no great- 242.406), including a related position, er than its Regulation T collateral shall be unavailable to satisfy the re- value. quired margin for any other position or (3) If the alternative collateral valu- transaction or any other requirement. ation method set forth in paragraph (e) (e) Alternative collateral valuation for of this section is used with respect to margin equity securities in a futures ac- an account in which security futures or count. (1) Notwithstanding paragraph related positions are carried: (c)(1)(iii) of this section, a security fu- (i) An account that is transferred tures intermediary need not value a from one security futures intermediary margin equity security at its Regula- to another may be treated as if it had tion T collateral value when deter- been maintained by the transferee from mining whether the required margin the date of its origin, if the transferee for the security futures and related po- accepts, in good faith, a signed state- sitions in a futures account is satisfied, ment of the transferor (or, if that is provided that: not practicable, of the customer), that (i) The margin equity security is val- any margin call issued under this Reg- ued at an amount no greater than the ulation (§§ 242.400 through 242.406) has current market value of the security been satisfied; and reduced by the lowest percentage level (ii) An account that is transferred of margin required for a long position from one customer to another as part in the security held in a margin ac- of a transaction, not undertaken to count under the rules of a national se- avoid the requirements of this Regula- curities exchange registered pursuant tion (§§ 242.400 through 242.406), may be

827

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00837 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.405 17 CFR Ch. II (4–1–20 Edition)

treated as if it had been maintained for count under Regulation T, to the ex- the transferee from the date of its ori- tent permitted under applicable margin, if the security futures inter- gin rules. mediary accepts in good faith and keeps with the transferee account a § 242.406 Undermargined accounts. signed statement of the transferor de- (a) Failure to satisfy margin call. If any scribing the circumstances for the margin call required by this Regula- transfer. tion (§§ 242.400 through 242.406) is not (f) Guarantee of accounts. No guar- met in full, the security futures inter- antee of a customer’s account shall be mediary shall take the deduction re- given any effect for purposes of deter- quired with respect to an undermar- mining whether the required margin in gined account in computing its net an account is satisfied, except as per- capital under Commission or CFTC mitted under applicable margin rules. rules. (b) Accounts that liquidate to a deficit. § 242.405 Withdrawal of margin. If at any time there is a liquidating (a) By the customer. Except as other- deficit in an account in which security wise provided in § 242.404(e)(1)(ii) of this futures are held, the security futures Regulation (§§ 242.400 through 242.406), intermediary shall take steps to liq- cash, securities, or other assets depos- uidate positions in the account ited as margin for positions in an ac- promptly and in an orderly manner. count may be withdrawn, provided that (c) Liquidation of undermargined ac- the equity in the account after such counts not required. Notwithstanding withdrawal is sufficient to satisfy the Section 402(a) of this Regulation required margin for the security fu- (§§ 242.400 through 242.406), section tures and related positions in the ac- 220.4(d) of Regulation T (12 CFR count under this Regulation (§§ 242.400 220.4(d)) respecting liquidation of posi- through 242.406). tions in lieu of deposit shall not apply (b) By the security futures inter- with respect to security futures carried mediary. Notwithstanding paragraph (a) in a securities account. of this section, the security futures intermediary, in its usual practice, REGULATION AC—ANALYST may deduct the following items from CERTIFICATION an account in which security futures or related positions are held if they are SOURCE: 68 FR 9492, February 27, 2003, un- considered in computing the balance of less otherwise noted. such account: (1) Variation settlement payable, di- § 242.500 Definitions. rectly or indirectly, to a clearing agen- For purposes of Regulation AC cy that is registered under section 17A (§§ 242.500 through 242.505 of this chap- of the Act (15 U.S.C. 78q–1) or a deriva- ter) the term: tives clearing organization that is reg- Covered person of a broker or dealer istered under section 5b of the CEA (7 means an associated person of that U.S.C. 7a–1); broker or dealer but does not include: (2) Interest charged on credit main- (1) An associated person: tained in the account; (i) If the associated person has no of- (3) Communication or shipping ficers (or persons performing similar charges with respect to transactions in functions) or employees in common the account; with the broker or dealer who can in- (4) Payment of commissions, broker- fluence the activities of research ana- age, taxes, storage and other charges lysts or the content of research re- lawfully accruing in connection with ports; and the positions and transactions in the (ii) If the broker or dealer maintains account; and enforces written policies and pro- (5) Any service charges that the secu- cedures reasonably designed to prevent rity futures intermediary may impose; the broker or dealer, any controlling or persons, officers (or persons performing (6) Any other withdrawals that are similar functions), and employees of permitted from a securities margin ac- the broker or dealer from influencing

828

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00838 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.501

the activities of research analysts and that broker or dealer or any associated the content of research reports pre- person of that broker or dealer; and pared by the associated person. (2) With respect to a covered person (2) An associated person who is an in- of a broker or dealer, any research ana- vestment adviser: lyst not employed by that covered per- (i) Not registered with the Commis- son, by the broker or dealer with whom sion as an investment adviser because that covered person is associated, or by of the prohibition of section 203A of the any other associated person of the Investment Advisers Act of 1940 (15 broker or dealer with whom that cov- U.S.C. 80b–3a); and ered person is associated. (ii) Not registered or required to be United States has the meaning con- registered with the Commission as a tained in § 230.902(l) of this chapter. broker or dealer. U.S. person has the meaning con- NOTE TO DEFINITION OF COVERED PERSON: An tained in § 230.902(k) of this chapter. associated person of a broker or dealer who is not a covered person continues to be sub- § 242.501 Certifications in connection ject to the federal securities laws, including with research reports. the anti-fraud provisions of the federal securities laws. (a) A broker or dealer or covered person that publishes, circulates, or pro- Foreign person means any person who vides a research report prepared by a is not a U.S. person. research analyst to a U.S. person in the Foreign security means a security United States shall include in that re- issued by a foreign issuer for which a search report a clear and prominent U.S. market is not the principal trad- certification by the research analyst ing market. containing the following: Public appearance means any partici- (1) A statement attesting that all of pation by a research analyst in a sem- the views expressed in the research re- inar, forum (including an interactive port accurately reflect the research an- electronic forum), or radio or tele- alyst’s personal views about any and vision or other interview, in which the all of the subject securities or issuers; research analyst makes a specific rec- and ommendation or provides information (2)(i) A statement attesting that no reasonably sufficient upon which to part of the research analyst’s com- base an investment decision about a se- pensation was, is, or will be, directly or curity or an issuer. indirectly, related to the specific rec- Registered broker or dealer means a ommendations or views expressed by broker or dealer registered or required the research analyst in the research re- to register pursuant to section 15 or port; or section 15B of the Securities Exchange Act of 1934 (15 U.S.C. 78o or 78o–4) or a (ii) A statement: government securities broker or gov- (A) Attesting that part or all of the ernment securities dealer registered or research analyst’s compensation was, required to register pursuant to section is, or will be, directly or indirectly, re- 15C(a)(1)(A) of the Securities Exchange lated to the specific recommendations Act of 1934 (15 U.S.C. 78o–5(a)(1)(A)). or views expressed by the research ana- Research analyst means any natural lyst in the research report; person who is primarily responsible for (B) Identifying the source, amount, the preparation of the content of a re- and purpose of such compensation; and search report. (C) Further disclosing that the com- Research report means a written compensation could influence the rec- munication (including an electronic ommendations or views expressed in communication) that includes an anal- the research report. ysis of a security or an issuer and pro- (b) A broker or dealer or covered per- vides information reasonably sufficient son that publishes, circulates, or pro- upon which to base an investment deci- vides a research report prepared by a sion. third party research analyst to a U.S. Third party research analyst means: person in the United States shall be ex- (1) With respect to a broker or dealer, empt from the requirements of this any research analyst not employed by section with respect to such research

829

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00839 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.502 17 CFR Ch. II (4–1–20 Edition)

report if the following conditions are did not provide the certifications speci- satisfied: fied in paragraph (a) of this section; (1) The employer of the third party and research analyst has no officers (or per- (2) For 120 days following notification sons performing similar functions) or pursuant to paragraph (b)(1) of this sec- employees in common with the broker tion, the broker or dealer shall disclose or dealer or covered person; and in any research report prepared by the (2) The broker or dealer (or, with re- research analyst and published, cir- spect to a covered person, the broker or culated, or provided to a U.S. person in dealer with whom the covered person is the United States that the research an- associated) maintains and enforces alyst did not provide the certifications written policies and procedures reason- specified in paragraph (a) of this sec- ably designed to prevent the broker or tion. dealer, any controlling persons, offi- (c) In the case of a research analyst cers (or persons performing similar who is employed outside the United functions), and employees of the broker States by a foreign person located out- or dealer from influencing the activi- side the United States, this section ties of the third party research analyst shall only apply to a public appearance and the content of research reports while the research analyst is phys- prepared by the third party research ically present in the United States. analyst. (d) A broker or dealer shall preserve the records specified in paragraphs (a) § 242.502 Certifications in connection and (b) of this section in accordance with public appearances. with § 240.17a–4 of this chapter and for a (a) If a broker or dealer publishes, period of not less than 3 years, the first circulates, or provides a research re- 2 years in an accessible place. port prepared by a research analyst employed by the broker or dealer or § 242.503 Certain foreign research re- covered person to a U.S. person in the ports. United States, the broker or dealer A foreign person, located outside the must make a record within 30 days United States and not associated with after any calendar quarter in which the a registered broker or dealer, who pre- research analyst made a public appear- pares a research report concerning a ance that contains the following: foreign security and provides it to a (1) A statement by the research ana- U.S. person in the United States in ac- lyst attesting that the views expressed cordance with the provisions of by the research analyst in all public § 240.15a–6(a)(2) of this chapter shall be appearances during the calendar quar- exempt from the requirements of this ter accurately reflected the research regulation. analyst’s personal views at that time about any and all of the subject securi- § 242.504 Notification to associated ties or issuers; and persons. (2) A statement by the research ana- A broker or dealer shall notify any lyst attesting that no part of the re- person with whom that broker or deal- search analyst’s compensation was, is, er is associated who publishes, cir- or will be, directly or indirectly, re- culates, or provides research reports: lated to the specific recommendations (a) Whether the broker or dealer or views expressed by the research ana- maintains and enforces written policies lyst in such public appearances. and procedures reasonably designed to (b) If the broker or dealer does not prevent the broker or dealer, any con- obtain a statement by the research an- trolling persons, officers (or persons alyst in accordance with paragraph (a) performing similar functions), or em- of this section: ployees of the broker or dealer from in- (1) The broker or dealer shall prompt- fluencing the activities of research an- ly notify in writing its examining au- alysts and the content of research re- thority, designated pursuant to section ports prepared by the associated per- 17(d) of the Securities Exchange Act of son; and 1934 (15 U.S.C. 78q(d)) and § 240.17d–2 of (b) Whether the associated person has this chapter, that the research analyst any officers (or persons performing

830

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00840 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.600

similar functions) or employees in (i) Permits an incoming order to be common with the broker or dealer who marked as immediate-or-cancel; can influence the activities of research (ii) Immediately and automatically analysts or the content of research re- executes an order marked as imme- ports and, if so, the identity of those diate-or-cancel against the displayed persons. quotation up to its full size; (iii) Immediately and automatically § 242.505 Exclusion for news media. cancels any unexecuted portion of an No provision of this Regulation AC order marked as immediate-or-cancel shall apply to any person who: without routing the order elsewhere; (a) Is the publisher of any bona fide (iv) Immediately and automatically newspaper, news magazine or business transmits a response to the sender of or financial publication of general and an order marked as immediate-or-can- regular circulation; and cel indicating the action taken with re- (b) Is not registered or required to be spect to such order; and registered with the Commission as a (v) Immediately and automatically broker or dealer or investment adviser. displays information that updates the displayed quotation to reflect any REGULATION NMS—REGULATION OF THE change to its material terms. NATIONAL MARKET SYSTEM (5) Automated trading center means a trading center that: SOURCE: 70 FR 37620, June 29, 2005, unless (i) Has implemented such systems, otherwise noted. procedures, and rules as are necessary to render it capable of displaying § 242.600 NMS security designation quotations that meet the requirements and definitions. for an automated quotation set forth in (a) The term national market system paragraph (b)(4) of this section; security as used in section 11A(a)(2) of (ii) Identifies all quotations other the Act (15 U.S.C. 78k–1(a)(2)) shall than automated quotations as manual mean any NMS security as defined in quotations; paragraph (b) of this section. (iii) Immediately identifies its (b) For purposes of Regulation NMS quotations as manual quotations when- (§§ 242.600 through 242.612), the fol- ever it has reason to believe that it is lowing definitions shall apply: not capable of displaying automated (1) Actionable indication of interest quotations; and means any indication of interest that (iv) Has adopted reasonable standards explicitly or implicitly conveys all of limiting when its quotations change the following information with respect from automated quotations to manual to any order available at the venue quotations, and vice versa, to specifi- sending the indication of interest: cally defined circumstances that pro- (i) Symbol; mote fair and efficient access to its (ii) Side (buy or sell); automated quotations and are con- (iii) A price that is equal to or better sistent with the maintenance of fair than the national best bid for buy or- and orderly markets. ders and the national best offer for sell (6) Average effective spread means the orders; and share-weighted average of effective (iv) A size that is at least equal to spreads for order executions cal- one round lot. culated, for buy orders, as double the (2) Aggregate quotation size means the amount of difference between the exe- sum of the quotation sizes of all re- cution price and the midpoint of the sponsible brokers or dealers who have national best bid and national best communicated on any national securi- offer at the time of order receipt and, ties exchange bids or offers for an NMS for sell orders, as double the amount of security at the same price. difference between the midpoint of the (3) Alternative trading system has the national best bid and national best meaning provided in § 242.300(a). offer at the time of order receipt and (4) Automated quotation means a the execution price. quotation displayed by a trading center (7) Average realized spread means the that: share-weighted average of realized

831

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00841 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.600 17 CFR Ch. II (4–1–20 Edition)

spreads for order executions cal- (15) Consolidated last sale information culated, for buy orders, as double the means the price, volume, and market amount of difference between the exe- identification of the most recent trans- cution price and the midpoint of the action report for a security that is dis- national best bid and national best seminated pursuant to an effective na- offer five minutes after the time of tional market system plan. order execution and, for sell orders, as (16) Covered order means any market double the amount of difference be- order or any limit order (including im- tween the midpoint of the national mediate-or-cancel orders) received by a best bid and national best offer five market center during regular trading minutes after the time of order execu- hours at a time when a national best tion and the execution price; provided, bid and national best offer is being dis- however, that the midpoint of the final seminated, and, if executed, is executed national best bid and national best during regular trading hours, but shall offer disseminated for regular trading exclude any order for which the cus- hours shall be used to calculate a real- tomer requests special handling for ized spread if it is disseminated less execution, including, but not limited than five minutes after the time of to, orders to be executed at a market order execution. opening price or a market closing (8) Best bid and best offer mean the price, orders submitted with stop highest priced bid and the lowest prices, orders to be executed only at priced offer. their full size, orders to be executed on (9) Bid or offer means the bid price or a particular type of tick or bid, orders the offer price communicated by a submitted on a ‘‘not held’’ basis, orders member of a national securities ex- for other than regular settlement, and change or member of a national securi- orders to be executed at prices unre- ties association to any broker or deal- lated to the market price of the secu- er, or to any customer, at which it is rity at the time of execution. willing to buy or sell one or more (17) Customer means any person that round lots of an NMS security, as ei- is not a broker or dealer. ther principal or agent, but shall not (18) Customer limit order means an include indications of interest. order to buy or sell an NMS stock at a (10) Block size with respect to an order specified price that is not for the ac- means it is: count of either a broker or dealer; pro- (i) Of at least 10,000 shares; or vided, however, that the term customer limit order shall include an order trans- (ii) For a quantity of stock having a mitted by a broker or dealer on behalf market value of at least $200,000. of a customer. (11) Categorized by order size means di- (19) Customer order means an order to viding orders into separate categories buy or sell an NMS security that is not for sizes from 100 to 499 shares, from 500 for the account of a broker or dealer, to 1999 shares, from 2000 to 4999 shares, but shall not include any order for a and 5000 or greater shares. quantity of a security having a market (12) Categorized by order type means value of at least $50,000 for an NMS se- dividing orders into separate cat- curity that is an option contract and a egories for market orders, marketable market value of at least $200,000 for limit orders, inside-the-quote limit or- any other NMS security. ders, at-the-quote limit orders, and (20) Directed order means an order near-the-quote limit orders. from a customer that the customer (13) Categorized by security means di- specifically instructed the broker or viding orders into separate categories dealer to route to a particular venue for each NMS stock that is included in for execution. a report. (21) Dynamic market monitoring device (14) Consolidated display means: means any service provided by a vendor (i) The prices, sizes, and market iden- on an interrogation device or other dis- tifications of the national best bid and play that: national best offer for a security; and (i) Permits real-time monitoring, on (ii) Consolidated last sale informa- a dynamic basis, of transaction re- tion for a security. ports, last sale data, or quotations

832

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00842 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.600

with respect to a particular security; (27) Executed at the quote means, for and buy orders, execution at a price equal (ii) Displays the most recent trans- to the national best offer at the time of action report, last sale data, or order receipt and, for sell orders, exe- quotation with respect to that security cution at a price equal to the national until such report, data, or quotation best bid at the time of order receipt. has been superseded or supplemented (28) Executed outside the quote means, by the display of a new transaction re- for buy orders, execution at a price port, last sale data, or quotation re- higher than the national best offer at flecting the next reported transaction the time of order receipt and, for sell or quotation in that security. orders, execution at a price lower than (22) Effective national market system the national best bid at the time of plan means any national market sys- order receipt. tem plan approved by the Commission (29) Executed with price improvement (either temporarily or on a permanent means, for buy orders, execution at a basis) pursuant to § 242.608. price lower than the national best offer (23) Effective transaction reporting plan at the time of order receipt and, for means any transaction reporting plan sell orders, execution at a price higher approved by the Commission pursuant than the national best bid at the time to § 242.601. of order receipt. (30) Inside-the-quote limit order, at-the- (24) Electronic communications network quote limit order, and near-the-quote limit means, for the purposes of order mean non-marketable buy orders § 242.602(b)(5), any electronic system with limit prices that are, respectively, that widely disseminates to third par- higher than, equal to, and lower by ties orders entered therein by an ex- $0.10 or less than the national best bid change market maker or OTC market at the time of order receipt, and non- maker, and permits such orders to be marketable sell orders with limit executed against in whole or in part; prices that are, respectively, lower except that the term electronic commu- than, equal to, and higher by $0.10 or nications network shall not include: less than the national best offer at the (i) Any system that crosses multiple time of order receipt. orders at one or more specified times (31) Intermarket sweep order means a at a single price set by the system (by limit order for an NMS stock that algorithm or by any derivative pricing meets the following requirements: mechanism) and does not allow orders (i) When routed to a trading center, to be crossed or executed against di- the limit order is identified as an inter- rectly by participants outside of such market sweep order; and times; or (ii) Simultaneously with the routing (ii) Any system operated by, or on be- of the limit order identified as an half of, an OTC market maker or ex- intermarket sweep order, one or more change market maker that executes additional limit orders, as necessary, customer orders primarily against the are routed to execute against the full account of such market maker as prin- displayed size of any protected bid, in cipal, other than riskless principal. the case of a limit order to sell, or the (25) Exchange market maker means any full displayed size of any protected member of a national securities ex- offer, in the case of a limit order to change that is registered as a specialist buy, for the NMS stock with a price or market maker pursuant to the rules that is superior to the limit price of of such exchange. the limit order identified as an inter- (26) Exchange-traded security means market sweep order. These additional any NMS security or class of NMS se- routed orders also must be marked as curities listed and registered, or admit- intermarket sweep orders. ted to unlisted trading privileges, on a (32) Interrogation device means any se- national securities exchange; provided, curities information retrieval system however, that securities not listed on capable of displaying transaction re- any national securities exchange that ports, last sale data, or quotations are traded pursuant to unlisted trading upon inquiry, on a current basis on a privileges are excluded. terminal or other device.

833

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00843 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.600 17 CFR Ch. II (4–1–20 Edition)

(33) Joint self-regulatory organization offers for an NMS security, the best bid plan means a plan as to which two or or best offer (as the case may be) shall more self-regulatory organizations, be determined by ranking all such acting jointly, are sponsors. identical bids or offers (as the case may (34) Last sale data means any price or be) first by size (giving the highest volume data associated with a trans- ranking to the bid or offer associated action. with the largest size), and then by time (35) Listed equity security means any (giving the highest ranking to the bid equity security listed and registered, or offer received first in time). or admitted to unlisted trading privi- (44) National market system plan means leges, on a national securities ex- any joint self-regulatory organization change. plan in connection with: (36) Listed option means any option (i) The planning, development, oper- traded on a registered national securi- ation or regulation of a national mar- ties exchange or automated facility of ket system (or a subsystem thereof) or a national securities association. one or more facilities thereof; or (37) Make publicly available means (ii) The development and implemen- posting on an Internet Web site that is tation of procedures and/or facilities free and readily accessible to the pub- designed to achieve compliance by self- lic, furnishing a written copy to cus- regulatory organizations and their tomers on request without charge, and members with any section of this Reg- notifying customers at least annually ulation NMS and part 240, subpart A of in writing that a written copy will be this chapter promulgated pursuant to furnished on request. section 11A of the Act (15 U.S.C. 78k–1). (38) Manual quotation means any (45) National securities association quotation other than an automated means any association of brokers and quotation. dealers registered pursuant to section (39) Market center means any ex- 15A of the Act (15 U.S.C. 78o-3). change market maker, OTC market (46) National securities exchange means maker, alternative trading system, na- any exchange registered pursuant to tional securities exchange, or national section 6 of the Act (15 U.S.C. 78f). securities association. (47) NMS security means any security (40) Marketable limit order means any or class of securities for which trans- buy order with a limit price equal to or action reports are collected, processed, greater than the national best offer at and made available pursuant to an ef- the time of order receipt, or any sell fective transaction reporting plan, or order with a limit price equal to or less an effective national market system than the national best bid at the time plan for reporting transactions in list- of order receipt. ed options. (41) Moving ticker means any contin- (48) NMS stock means any NMS secu- uous real-time moving display of trans- rity other than an option. action reports or last sale data (other (49) Non-directed order means any than a dynamic market monitoring de- order from a customer other than a di- vice) provided on an interrogation or rected order. other display device. (50) Non-marketable limit order means (42) Nasdaq security means any reg- any limit order other than a market- istered security listed on The Nasdaq able limit order. Stock Market, Inc. (51) Odd-lot means an order for the (43) National best bid and national best purchase or sale of an NMS stock in an offer means, with respect to quotations amount less than a round lot. for an NMS security, the best bid and (52) Options class means all of the put best offer for such security that are option or call option series overlying a calculated and disseminated on a cur- security, as defined in section 3(a)(10) rent and continuing basis by a plan of the Act (15 U.S.C. 78c(a)(10)). processor pursuant to an effective na- (53) Options series means the con- tional market system plan; provided, tracts in an options class that have the that in the event two or more market same unit of trade, expiration date, centers transmit to the plan processor and exercise price, and other terms or pursuant to such plan identical bids or conditions.

834

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00844 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.600

(54) Orders providing liquidity means change and displayed by a vendor on a orders that were executed against after terminal or other display device at the resting at a trading center. time an order is presented for execu- (55) Orders removing liquidity means tion to a responsible broker or dealer. orders that executed against resting (64) Published bid and published offer trading interest at a trading center. means the bid or offer of a responsible (56) OTC market maker means any broker or dealer for an NMS security dealer that holds itself out as being communicated by it to its national se- willing to buy from and sell to its cus- curities exchange or association pursu- tomers, or others, in the United States, ant to § 242.602 and displayed by a ven- an NMS stock for its own account on a dor on a terminal or other display de- regular or continuous basis otherwise vice at the time an order is presented than on a national securities exchange for execution to such responsible in amounts of less than block size. broker or dealer. (57) Participants, when used in con- (65) Published quotation size means the nection with a national market system quotation size of a responsible broker plan, means any self-regulatory organi- or dealer communicated by it to its na- zation which has agreed to act in ac- tional securities exchange or associa- cordance with the terms of the plan tion pursuant to § 242.602 and displayed but which is not a signatory of such by a vendor on a terminal or other dis- plan. play device at the time an order is pre- (58) Payment for order flow has the sented for execution to such respon- meaning provided in § 240.10b–10 of this sible broker or dealer. chapter. (66) Quotation means a bid or an offer. (59) Plan processor means any self-reg- (67) Quotation size, when used with re- ulatory organization or securities in- spect to a responsible broker’s or deal- formation processor acting as an exclu- er’s bid or offer for an NMS security, sive processor in connection with the means: development, implementation and/or (i) The number of shares (or units of operation of any facility contemplated trading) of that security which such re- by an effective national market system sponsible broker or dealer has speci- plan. fied, for purposes of dissemination to (60) Profit-sharing relationship means vendors, that it is willing to buy at the any ownership or other type of affili- bid price or sell at the offer price com- ation under which the broker or dealer, prising its bid or offer, as either prin- directly or indirectly, may share in cipal or agent; or any profits that may be derived from (ii) In the event such responsible the execution of non-directed orders. broker or dealer has not so specified, a (61) Protected bid or protected offer normal unit of trading for that NMS means a quotation in an NMS stock security. that: (68) Regular trading hours means the (i) Is displayed by an automated trad- time between 9:30 a.m. and 4:00 p.m. ing center; Eastern Time, or such other time as is (ii) Is disseminated pursuant to an ef- set forth in the procedures established fective national market system plan; pursuant to § 242.605(a)(2). and (69) Responsible broker or dealer (iii) Is an automated quotation that means: is the best bid or best offer of a na- (i) When used with respect to bids or tional securities exchange, the best bid offers communicated on a national se- or best offer of The Nasdaq Stock Mar- curities exchange, any member of such ket, Inc., or the best bid or best offer of national securities exchange who com- a national securities association other municates to another member on such than the best bid or best offer of The national securities exchange, at the lo- Nasdaq Stock Market, Inc. cation (or locations) or through the fa- (62) Protected quotation means a pro- cility or facilities designated by such tected bid or a protected offer. national securities exchange for trad- (63) Published aggregate quotation size ing in an NMS security a bid or offer means the aggregate quotation size for such NMS security, as either prin- calculated by a national securities ex- cipal or agent; provided, however, that,

835

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00845 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.600 17 CFR Ch. II (4–1–20 Edition)

in the event two or more members of a (75) SRO display-only facility means a national securities exchange have com- facility operated by or on behalf of a municated on or through such national national securities exchange or na- securities exchange bids or offers for an tional securities association that dis- NMS security at the same price, each plays quotations in a security, but does such member shall be considered a re- not execute orders against such sponsible broker or dealer for that bid or quotations or present orders to mem- offer, subject to the rules of priority bers for execution. and precedence then in effect on that (76) SRO trading facility means a facil- national securities exchange; and fur- ity operated by or on behalf of a na- ther provided, that for a bid or offer tional securities exchange or a na- which is transmitted from one member tional securities association that exe- of a national securities exchange to an- cutes orders in a security or presents other member who undertakes to rep- orders to members for execution. resent such bid or offer on such na- (77) Subject security means: tional securities exchange as agent, (i) With respect to a national securi- only the last member who undertakes ties exchange: to represent such bid or offer as agent (A) Any exchange-traded security shall be considered the responsible other than a security for which the ex- broker or dealer for that bid or offer; ecuted volume of such exchange, dur- and ing the most recent calendar quarter, (ii) When used with respect to bids comprised one percent or less of the ag- and offers communicated by a member gregate trading volume for such secu- of an association to a broker or dealer rity as reported pursuant to an effec- or a customer, the member commu- tive transaction reporting plan or ef- nicating the bid or offer (regardless of fective national market system plan; whether such bid or offer is for its own and account or on behalf of another per- (B) Any other NMS security for son). which such exchange has in effect an (70) Revised bid or offer means a mar- election, pursuant to § 242.602(a)(5)(i), ket maker’s bid or offer which super- to collect, process, and make available sedes its published bid or published to a vendor bids, offers, quotation offer. sizes, and aggregate quotation sizes (71) Revised quotation size means a communicated on such exchange; and market maker’s quotation size which (ii) With respect to a member of a na- supersedes its published quotation size. tional securities association: (72) Self-regulatory organization means (A) Any exchange-traded security for any national securities exchange or na- which such member acts in the capac- tional securities association. ity of an OTC market maker unless the (73) Specified persons, when used in executed volume of such member, dur- connection with any notification re- ing the most recent calendar quarter, quired to be provided pursuant to comprised one percent or less of the ag- § 242.602(a)(3) and any election (or with- gregate trading volume for such secu- drawal thereof) permitted under rity as reported pursuant to an effec- § 242.602(a)(5), means: tive transaction reporting plan or ef- (i) Each vendor; fective national market system plan; (ii) Each plan processor; and and (iii) The processor for the Options (B) Any other NMS security for Price Reporting Authority (in the case which such member acts in the capac- of a notification for a subject security ity of an OTC market maker and has in which is a class of securities under- effect an election, pursuant to lying options admitted to trading on § 242.602(a)(5)(ii), to communicate to its any national securities exchange). association bids, offers, and quotation (74) Sponsor, when used in connection sizes for the purpose of making such with a national market system plan, bids, offers, and quotation sizes avail- means any self-regulatory organization able to a vendor. which is a signatory to such plan and (78) Time of order execution means the has agreed to act in accordance with time (to the second) that an order was the terms of the plan. executed at any venue.

836

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00846 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.601

(79) Time of order receipt means the communications network, moving time (to the second) that an order was ticker, or interrogation device. received by a market center for execution. [62 FR 544, Jan. 3, 1997, as amended at 83 FR 58427, Nov. 19, 2018] (80) Time of the transaction has the meaning provided in § 240.10b–10 of this § 242.601 Dissemination of transaction chapter. reports and last sale data with re- (81) Trade-through means the pur- spect to transactions in NMS stocks. chase or sale of an NMS stock during (a) Filing and effectiveness of trans- regular trading hours, either as prin- action reporting plans. (1) Every na- cipal or agent, at a price that is lower tional securities exchange shall file a than a protected bid or higher than a transaction reporting plan regarding protected offer. transactions in listed equity and (82) Trading center means a national Nasdaq securities executed through its securities exchange or national securi- facilities, and every national securities ties association that operates an SRO association shall file a transaction re- trading facility, an alternative trading porting plan regarding transactions in system, an exchange market maker, an listed equity and Nasdaq securities exe- OTC market maker, or any other cuted by its members otherwise than broker or dealer that executes orders on a national securities exchange. internally by trading as principal or (2) Any transaction reporting plan, or crossing orders as agent. any amendment thereto, filed pursuant (83) Trading rotation means, with re- to this section shall be filed with the spect to an options class, the time pe- Commission, and considered for ap- riod on a national securities exchange proval, in accordance with the proce- during which: dures set forth in § 242.608(a) and (b). (i) Opening, re-opening, or closing Any such plan, or amendment thereto, transactions in options series in such shall specify, at a minimum: options class are not yet completed; and (i) The listed equity and Nasdaq secu- (ii) Continuous trading has not yet rities or classes of such securities for commenced or has not yet ended for which transaction reports shall be re- the day in options series in such op- quired by the plan; tions class. (ii) Reporting requirements with re- (84) Transaction report means a report spect to transactions in listed equity containing the price and volume asso- securities and Nasdaq securities, for ciated with a transaction involving the any broker or dealer subject to the purchase or sale of one or more round plan; lots of a security. (iii) The manner of collecting, proc- (85) Transaction reporting association essing, sequencing, making available means any person authorized to imple- and disseminating transaction reports ment or administer any transaction re- and last sale data reported pursuant to porting plan on behalf of persons act- such plan; ing jointly under § 242.601(a). (iv) The manner in which such trans- (86) Transaction reporting plan means action reports reported pursuant to any plan for collecting, processing, such plan are to be consolidated with making available or disseminating transaction reports from national secu- transaction reports with respect to rities exchanges and national securi- transactions in securities filed with the ties associations reported pursuant to Commission pursuant to, and meeting any other effective transaction report- the requirements of, § 242.601. ing plan; (87) Vendor means any securities in- (v) The applicable standards and formation processor engaged in the methods which will be utilized to en- business of disseminating transaction sure promptness of reporting, and accu- reports, last sale data, or quotations racy and completeness of transaction with respect to NMS securities to bro- reports; kers, dealers, or investors on a real- (vi) Any rules or procedures which time or other current and continuing may be adopted to ensure that trans- basis, whether through an electronic action reports or last sale data will not

837

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00847 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.602 17 CFR Ch. II (4–1–20 Edition)

be disseminated in a fraudulent or ma- data made available pursuant to any nipulative manner; effective transaction reporting plan; (vii) Specific terms of access to provided, however, that a national secu- transaction reports made available or rities exchange or national securities disseminated pursuant to the plan; and association may, by means of an effec- (viii) That transaction reports or last tive transaction reporting plan, condi- sale data made available to any vendor tion such retransmission upon appro- for display on an interrogation device priate undertakings to ensure that any identify the marketplace where each charges for the distribution of trans- transaction was executed. action reports or last sale data in mov- (3) No transaction reporting plan ing tickers permitted by paragraph (d) filed pursuant to this section, or any of this section are collected. amendment to an effective transaction (d) Charges. Nothing in this section reporting plan, shall become effective shall preclude any national securities unless approved by the Commission or exchange or national securities asso- otherwise permitted in accordance ciation, separately or jointly, pursuant with the procedures set forth in to the terms of an effective transaction § 242.608. reporting plan, from imposing reason- (b) Prohibitions and reporting require- able, uniform charges (irrespective of ments. (1) No broker or dealer may exe- geographic location) for distribution of cute any transaction in, or induce or transaction reports or last sale data. attempt to induce the purchase or sale (e) Appeals. The Commission may, in of, any NMS stock: its discretion, entertain appeals in con- (i) On or through the facilities of a nection with the implementation or op- national securities exchange unless eration of any effective transaction re- there is an effective transaction report- porting plan in accordance with the ing plan with respect to transactions in provisions of § 242.608(d). such security executed on or through (f) Exemptions. The Commission may such exchange facilities; or exempt from the provisions of this sec- (ii) Otherwise than on a national se- tion, either unconditionally or on spec- curities exchange unless there is an ef- ified terms and conditions, any na- fective transaction reporting plan with tional securities exchange, national se- respect to transactions in such secu- curities association, broker, dealer, or rity executed otherwise than on a na- specified security if the Commission tional securities exchange by such determines that such exemption is con- broker or dealer. sistent with the public interest, the (2) Every broker or dealer who is a protection of investors and the removal member of a national securities ex- of impediments to, and perfection of change or national securities associa- the mechanisms of, a national market tion shall promptly transmit to the ex- system. change or association of which it is a member all information required by § 242.602 Dissemination of quotations any effective transaction reporting in NMS securities. plan filed by such exchange or associa- (a) Dissemination requirements for nation (either individually or jointly with tional securities exchanges and national other exchanges and/or associations). securities associations. (1) Every na- (c) Retransmission of transaction re- tional securities exchange and national ports or last sale data. Notwithstanding securities association shall establish any provision of any effective trans- and maintain procedures and mecha- action reporting plan, no national se- nisms for collecting bids, offers, curities exchange or national securi- quotation sizes, and aggregate ties association may, either individ- quotation sizes from responsible bro- ually or jointly, by rule, stated policy kers or dealers who are members of or practice, transaction reporting plan such exchange or association, proc- or otherwise, prohibit, condition or essing such bids, offers, and sizes, and otherwise limit, directly or indirectly, making such bids, offers, and sizes the ability of any vendor to re- available to vendors, as follows: transmit, for display in moving tick- (i) Each national securities exchange ers, transaction reports or last sale shall at all times such exchange is open

838

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00848 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.602

for trading, collect, process, and make usual market conditions is such that available to vendors the best bid, the the exchange is incapable of collecting, best offer, and aggregate quotation processing, and making available to sizes for each subject security listed or vendors the data for a subject security admitted to unlisted trading privileges required to be made available pursuant which is communicated on any na- to paragraph (a)(1) of this section in a tional securities exchange by any re- manner that accurately reflects the sponsible broker or dealer, but shall current state of the market on such ex- not include: change, such exchange shall imme- (A) Any bid or offer executed immediately notify all specified persons of diately after communication and any that determination. Upon such notifi- bid or offer communicated by a respon- cation, responsible brokers or dealers sible broker or dealer other than an ex- that are members of that exchange change market maker which is can- shall be relieved of their obligation celled or withdrawn if not executed im- under paragraphs (b)(2) and (c)(3) of mediately after communication; and this section and such exchange shall be (B) Any bid or offer communicated relieved of its obligations under para- during a period when trading in that graphs (a)(1) and (2) of this section for security has been suspended or halted, that security; provided, however, that or prior to the commencement of trad- such exchange will continue, to the ing in that security on any trading maximum extent practicable under the day, on that exchange. circumstances, to collect, process, and (ii) Each national securities associa- make available to vendors data for tion shall, at all times that last sale that security in accordance with para- information with respect to NMS secu- graph (a)(1) of this section. rities is reported pursuant to an effective transaction reporting plan, col- (ii) During any period a national select, process, and make available to curities exchange, or any responsible vendors the best bid, best offer, and broker or dealer that is a member of quotation sizes communicated other- that exchange, is relieved of any obli- wise than on an exchange by each gation imposed by this section for any member of such association acting in subject security by virtue of a notifica- the capacity of an OTC market maker tion made pursuant to paragraph for each subject security and the iden- (a)(3)(i) of this section, such exchange tity of that member (excluding any bid shall monitor the activity or condi- or offer executed immediately after tions which formed the basis for such communication), except during any pe- notification and shall immediately re- riod when over-the-counter trading in notify all specified persons when that that security has been suspended. exchange is once again capable of col- (2) Each national securities exchange lecting, processing, and making avail- shall, with respect to each published able to vendors the data for that secu- bid and published offer representing a rity required to be made available pur- bid or offer of a member for a subject suant to paragraph (a)(1) of this section security, establish and maintain proce- in a manner that accurately reflects dures for ascertaining and disclosing to the current state of the market on other members of that exchange, upon such exchange. Upon such renotifica- presentation of orders sought to be exe- tion, any exchange or responsible cuted by them in reliance upon para- broker or dealer which had been re- graph (b)(2) of this section, the identity lieved of any obligation imposed by of the responsible broker or dealer who this section as a consequence of the made such bid or offer and the prior notification shall again be sub- quotation size associated with it. ject to such obligation. (3)(i) If, at any time a national secu- (4) Nothing in this section shall pre- rities exchange is open for trading, clude any national securities exchange such exchange determines, pursuant to or national securities association from rules approved by the Commission pur- making available to vendors indica- suant to section 19(b)(2) of the Act (15 tions of interest or bids and offers for a U.S.C. 78s(b)(2)), that the level of trad- subject security at any time such ex- ing activities or the existence of un- change or association is not required to

839

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00849 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.602 17 CFR Ch. II (4–1–20 Edition)

do so pursuant to paragraph (a)(1) of person belonging to a category of per- this section. sons with whom such responsible (5)(i) Any national securities ex- broker or dealer customarily deals, at change may make an election for pur- a price at least as favorable to such poses of the definition of subject secu- buyer or seller as the responsible bro- rity in § 242.600(b)(77) for any NMS secu- ker’s or dealer’s published bid or pub- rity, by collecting, processing, and lished offer (exclusive of any commis- making available bids, offers, sion, commission equivalent or dif- quotation sizes, and aggregate ferential customarily charged by such quotation sizes in that security; except responsible broker or dealer in connec- that for any NMS security previously tion with execution of any such order) listed or admitted to unlisted trading in any amount up to its published privileges on only one exchange and quotation size. not traded by any OTC market maker, (3)(i) No responsible broker or dealer such election shall be made by noti- shall be obligated to execute a trans- fying all specified persons, and shall be action for any subject security as pro- effective at the opening of trading on vided in paragraph (b)(2) of this section the business day following notification. to purchase or sell that subject secu- (ii) Any member of a national securi- rity in an amount greater than such re- ties association acting in the capacity vised quotation size if: of an OTC market maker may make an (A) Prior to the presentation of an election for purposes of the definition order for the purchase or sale of a sub- of subject security in § 242.600(b)(77) for ject security, a responsible broker or any NMS security, by communicating dealer has communicated to its ex- to its association bids, offers, and change or association, pursuant to quotation sizes in that security; except paragraph (b)(1) of this section, a re- that for any other NMS security listed vised quotation size; or or admitted to unlisted trading privi- (B) At the time an order for the pur- leges on only one exchange and not chase or sale of a subject security is traded by any other OTC market maker, such election shall be made by presented, a responsible broker or deal- notifying its association and all speci- er is in the process of effecting a trans- fied persons, and shall be effective at action in such subject security, and im- the opening of trading on the business mediately after the completion of such day following notification. transaction, it communicates to its ex- (iii) The election of a national securi- change or association a revised ties exchange or member of a national quotation size, such responsible broker securities association for any NMS se- or dealer shall not be obligated by curity pursuant to this paragraph (a)(5) paragraph (b)(2) of this section to pur- shall cease to be in effect if such ex- chase or sell that subject security in an change or member ceases to make amount greater than such revised available or communicate bids, offers, quotation size. and quotation sizes in such security. (ii) No responsible broker or dealer (b) Obligations of responsible brokers shall be obligated to execute a trans- and dealers. (1) Each responsible broker action for any subject security as pro- or dealer shall promptly communicate vided in paragraph (b)(2) of this section to its national securities exchange or if: national securities association, pursu- (A) Before the order sought to be exe- ant to the procedures established by cuted is presented, such responsible that exchange or association, its best broker or dealer has communicated to bids, best offers, and quotation sizes for its exchange or association pursuant to any subject security. paragraph (b)(1) of this section, a re- (2) Subject to the provisions of para- vised bid or offer; or graph (b)(3) of this section, each re- (B) At the time the order sought to sponsible broker or dealer shall be obli- be executed is presented, such respon- gated to execute any order to buy or sible broker or dealer is in the process sell a subject security, other than an of effecting a transaction in such sub- odd-lot order, presented to it by an- ject security, and, immediately after other broker or dealer, or any other the completion of such transaction,

840

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00850 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.602

such responsible broker or dealer com- that widely disseminates such order municates to its exchange or associa- shall be deemed to be in compliance tion pursuant to paragraph (b)(1) of with paragraph (b)(5)(i)(A) of this sec- this section, a revised bid or offer; pro- tion if the electronic communications vided, however, that such responsible network: broker or dealer shall nonetheless be (A)(1) Provides to a national securi- obligated to execute any such order in ties exchange or national securities as- such subject security as provided in sociation (or an exclusive processor paragraph (b)(2) of this section at its acting on behalf of one or more ex- revised bid or offer in any amount up changes or associations) the prices and to its published quotation size or re- sizes of the orders at the highest buy vised quotation size. price and the lowest sell price for such (4) Subject to the provisions of para- security entered in, and widely dis- graph (a)(4) of this section: seminated by, the electronic commu- (i) No national securities exchange or nications network by exchange market OTC market maker may make avail- makers and OTC market makers for able, disseminate or otherwise commu- the NMS security, and such prices and nicate to any vendor, directly or indi- sizes are included in the quotation data rectly, for display on a terminal or made available by such exchange, asso- other display device any bid, offer, ciation, or exclusive processor to ven- quotation size, or aggregate quotation dors pursuant to this section; and size for any NMS security which is not (2) Provides, to any broker or dealer, a subject security with respect to such the ability to effect a transaction with exchange or OTC market maker; and a priced order widely disseminated by (ii) No vendor may disseminate or the electronic communications net- display on a terminal or other display work entered therein by an exchange device any bid, offer, quotation size, or market maker or OTC market maker aggregate quotation size from any na- that is: tional securities exchange or OTC mar- (i) Equivalent to the ability of any ket maker for any NMS security which broker or dealer to effect a transaction is not a subject security with respect with an exchange market maker or to such exchange or OTC market OTC market maker pursuant to the maker. rules of the national securities ex- (5)(i) Entry of any priced order for an change or national securities associa- NMS security by an exchange market tion to which the electronic commu- maker or OTC market maker in that nications network supplies such bids security into an electronic communica- and offers; and tions network that widely disseminates (ii) At the price of the highest priced such order shall be deemed to be: buy order or lowest priced sell order, or (A) A bid or offer under this section, better, for the lesser of the cumulative to be communicated to the market size of such priced orders entered maker’s exchange or association pursu- therein by exchange market makers or ant to this paragraph (b) for at least OTC market makers at such price, or the minimum quotation size that is re- the size of the execution sought by the quired by the rules of the market mak- broker or dealer, for such security; or er’s exchange or association if the (B) Is an alternative trading system priced order is for the account of a that: market maker, or the actual size of the (1) Displays orders and provides the order up to the minimum quotation ability to effect transactions with such size required if the priced order is for orders under § 242.301(b)(3); and the account of a customer; and (2) Otherwise is in compliance with (B) A communication of a bid or offer Regulation ATS (§ 242.300 through to a vendor for display on a display de- § 242.303). vice for purposes of paragraph (b)(4) of (c) Transactions in listed options. (1) A this section. national securities exchange or na- (ii) An exchange market maker or tional securities association: OTC market maker that has entered a (i) Shall not be required, under para- priced order for an NMS security into graph (a) of this section, to collect an electronic communications network from responsible brokers or dealers

841

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00851 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.602 17 CFR Ch. II (4–1–20 Edition)

who are members of such exchange or option, in an amount up to the size es- association, or to make available to tablished by such exchange’s or asso- vendors, the quotation sizes and aggre- ciation’s rules under paragraph (c)(1) of gate quotation sizes for listed options, this section. if such exchange or association estab- (3) Thirty second response. Each re- lishes by rule and periodically pub- sponsible broker or dealer, within thir- lishes the quotation size for which such ty seconds of receiving an order to buy responsible brokers or dealers are obli- or sell a listed option in an amount gated to execute an order to buy or sell greater than the quotation size estab- an options series that is a subject secu- lished by a national securities ex- rity at its published bid or offer under change’s or national securities associa- paragraph (b)(2) of this section; tion’s rules pursuant to paragraph (ii) May establish by rule and periodically publish a quotation size, which (c)(1) of this section, or its published shall not be for less than one contract, quotation size must: for which responsible brokers or deal- (i) Execute the entire order; or ers who are members of such exchange (ii)(A) Execute that portion of the or association are obligated under order equal to at least: paragraph (b)(2) of this section to exe- (1) The quotation size established by cute an order to buy or sell a listed op- a national securities exchange’s or nation for the account of a broker or tional securities association’s rules, dealer that is in an amount different pursuant to paragraph (c)(1) of this sec- from the quotation size for which it is tion, to the extent that such exchange obligated to execute an order for the or association does not collect and account of a customer; and make available to vendors quotation (iii) May establish and maintain pro- size and aggregate quotation size under cedures and mechanisms for collecting paragraph (a) of this section; or from responsible brokers and dealers (2) Its published quotation size; and who are members of such exchange or (B) Revise its bid or offer. association, and making available to (4) Notwithstanding paragraph (c)(3) vendors, the quotation sizes and aggregate quotation sizes in listed options of this section, no responsible broker for which such responsible broker or or dealer shall be obligated to execute dealer will be obligated under para- a transaction for any listed option as graph (b)(2) of this section to execute provided in paragraph (b)(2) of this sec- an order from a customer to buy or sell tion if: a listed option and establish by rule (i) Any of the circumstances in para- and periodically publish the size, which graph (b)(3) of this section exist; or shall not be less than one contract, for (ii) The order for the purchase or sale which such responsible brokers or deal- of a listed option is presented during a ers are obligated to execute an order trading rotation in that listed option. for the account of a broker or dealer. (d) Exemptions. The Commission may (2) If, pursuant to paragraph (c)(1) of exempt from the provisions of this sec- this section, the rules of a national se- tion, either unconditionally or on spec- curities exchange or national securi- ified terms and conditions, any respon- ties association do not require its sible broker or dealer, electronic com- members to communicate to it their munications network, national securi- quotation sizes for listed options, a re- ties exchange, or national securities sponsible broker or dealer that is a association if the Commission deter- member of such exchange or associa- mines that such exemption is con- tion shall: (i) Be relieved of its obligations sistent with the public interest, the under paragraph (b)(1) of this section protection of investors and the removal to communicate to such exchange or of impediments to and perfection of the association its quotation sizes for any mechanism of a national market sys- listed option; and tem. (ii) Comply with its obligations under [62 FR 544, Jan. 3, 1997, as amended at 83 FR paragraph (b)(2) of this section by exe- 58427, Nov. 19, 2018] cuting any order to buy or sell a listed

842

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00852 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.604

§ 242.603 Distribution, consolidation, any person, security, or item of infor- and display of information with re- mation, or any class or classes of per- spect to quotations for and trans- sons, securities, or items of informa- actions in NMS stocks. tion, if the Commission determines (a) Distribution of information. (1) Any that such exemption is necessary or ap- exclusive processor, or any broker or propriate in the public interest, and is dealer with respect to information for consistent with the protection of inves- which it is the exclusive source, that tors. distributes information with respect to quotations for or transactions in an § 242.604 Display of customer limit or- NMS stock to a securities information ders. processor shall do so on terms that are (a) Specialists and OTC market makers. fair and reasonable. For all NMS stocks: (2) Any national securities exchange, (1) Each member of a national securi- national securities association, broker, ties exchange that is registered by that or dealer that distributes information exchange as a specialist, or is author- with respect to quotations for or trans- ized by that exchange to perform func- actions in an NMS stock to a securities tions substantially similar to that of a information processor, broker, dealer, specialist, shall publish immediately a or other persons shall do so on terms bid or offer that reflects: that are not unreasonably discrimina- (i) The price and the full size of each tory. customer limit order held by the spe- (b) Consolidation of information. Every cialist that is at a price that would im- national securities exchange on which prove the bid or offer of such specialist an NMS stock is traded and national in such security; and securities association shall act jointly (ii) The full size of each customer pursuant to one or more effective na- limit order held by the specialist that: tional market system plans to dissemi- (A) Is priced equal to the bid or offer nate consolidated information, includ- of such specialist for such security; ing a national best bid and national (B) Is priced equal to the national best offer, on quotations for and trans- best bid or national best offer; and actions in NMS stocks. Such plan or (C) Represents more than a de minimis plans shall provide for the dissemina- change in relation to the size associ- tion of all consolidated information for ated with the specialist’s bid or offer. an individual NMS stock through a sin- (2) Each registered broker or dealer gle plan processor. that acts as an OTC market maker (c) Display of information. (1) No secu- shall publish immediately a bid or offer rities information processor, broker, or that reflects: dealer shall provide, in a context in (i) The price and the full size of each which a trading or order-routing deci- customer limit order held by the OTC sion can be implemented, a display of market maker that is at a price that any information with respect to would improve the bid or offer of such quotations for or transactions in an OTC market maker in such security; NMS stock without also providing, in and an equivalent manner, a consolidated (ii) The full size of each customer display for such stock. limit order held by the OTC market (2) The provisions of paragraph (c)(1) maker that: of this section shall not apply to a dis- (A) Is priced equal to the bid or offer play of information on the trading of such OTC market maker for such se- floor or through the facilities of a na- curity; tional securities exchange or to a dis- (B) Is priced equal to the national play in connection with the operation best bid or national best offer; and of a market linkage system imple- (C) Represents more than a de minimis mented in accordance with an effective change in relation to the size associ- national market system plan. ated with the OTC market maker’s bid (d) Exemptions. The Commission, by or offer. order, may exempt from the provisions (b) Exceptions. The requirements in of this section, either unconditionally paragraph (a) of this section shall not or on specified terms and conditions, apply to any customer limit order:

843

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00853 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.605 17 CFR Ch. II (4–1–20 Edition)

(1) That is executed upon receipt of that may be important to investors in the order. evaluating the order routing services of (2) That is placed by a customer who a broker-dealer. In addition, any par- expressly requests, either at the time ticular market center’s statistics will that the order is placed or prior there- encompass varying types of orders to pursuant to an individually nego- routed by different broker-dealers on tiated agreement with respect to such behalf of customers with a wide range customer’s orders, that the order not of objectives. Accordingly, the statis- be displayed. tical information required by this sec- (3) That is an odd-lot order. tion alone does not create a reliable (4) That is a block size order, unless basis to address whether any particular a customer placing such order requests broker-dealer failed to obtain the most that the order be displayed. favorable terms reasonably available (5) That is delivered immediately under the circumstances for customer upon receipt to a national securities orders. exchange or national securities asso- (a) Monthly electronic reports by mar- ciation-sponsored system, or an elec- ket centers. (1) Every market center tronic communications network that shall make available for each calendar complies with the requirements of month, in accordance with the proce- § 242.602(b)(5)(ii) with respect to that dures established pursuant to para- order. graph (a)(2) of this section, a report on (6) That is delivered immediately the covered orders in NMS stocks that upon receipt to another exchange mem- it received for execution from any per- ber or OTC market maker that com- son. Such report shall be in electronic plies with the requirements of this sec- form; shall be categorized by security, tion with respect to that order. order type, and order size; and shall in- (7) That is an ‘‘all or none’’ order. clude the following columns of infor- (c) Exemptions. The Commission may mation: exempt from the provisions of this sec- (i) For market orders, marketable tion, either unconditionally or on spec- limit orders, inside-the-quote limit or- ified terms and conditions, any respon- ders, at-the-quote limit orders, and sible broker or dealer, electronic com- near-the-quote limit orders: munications network, national securi- (A) The number of covered orders; ties exchange, or national securities (B) The cumulative number of shares association if the Commission deter- of covered orders; mines that such exemption is con- (C) The cumulative number of shares sistent with the public interest, the of covered orders cancelled prior to protection of investors and the removal execution; of impediments to and perfection of the mechanism of a national market sys- (D) The cumulative number of shares tem. of covered orders executed at the receiving market center; § 242.605 Disclosure of order execution (E) The cumulative number of shares information. of covered orders executed at any other This section requires market centers venue; to make available standardized, (F) The cumulative number of shares monthly reports of statistical informa- of covered orders executed from 0 to 9 tion concerning their order executions. seconds after the time of order receipt; This information is presented in ac- (G) The cumulative number of shares cordance with uniform standards that of covered orders executed from 10 to 29 are based on broad assumptions about seconds after the time of order receipt; order execution and routing practices. (H) The cumulative number of shares The information will provide a starting of covered orders executed from 30 sec- point to promote visibility and com- onds to 59 seconds after the time of petition on the part of market centers order receipt; and broker-dealers, particularly on the (I) The cumulative number of shares factors of execution price and speed. of covered orders executed from 60 sec- The disclosures required by this seconds to 299 seconds after the time of tion do not encompass all of the factors order receipt;

844

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00854 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.606

(J) The cumulative number of shares readily accessible to the public for a of covered orders executed from 5 min- period of three years from the initial utes to 30 minutes after the time of date of posting on the internet website. order receipt; and (3) A market center shall make avail- (K) The average realized spread for able the report required by paragraph executions of covered orders; and (a)(1) of this section within one month (ii) For market orders and market- after the end of the month addressed in able limit orders: the report. (A) The average effective spread for (b) Exemptions. The Commission may, executions of covered orders; by order upon application, condi- (B) The cumulative number of shares tionally or unconditionally exempt any of covered orders executed with price person, security, or transaction, or any improvement; class or classes of persons, securities, (C) For shares executed with price or transactions, from any provision or improvement, the share-weighted aver- provisions of this section, if the Com- age amount per share that prices were mission determines that such exemp- improved; tion is necessary or appropriate in the (D) For shares executed with price public interest, and is consistent with improvement, the share-weighted aver- the protection of investors. age period from the time of order re- [62 FR 544, Jan. 3, 1997, as amended at 83 FR ceipt to the time of order execution; 58427, Nov. 19, 2018] (E) The cumulative number of shares of covered orders executed at the § 242.606 Disclosure of order routing quote; information. (F) For shares executed at the quote, (a) Quarterly report on order routing. the share-weighted average period from (1) Every broker or dealer shall make the time of order receipt to the time of publicly available for each calendar order execution; quarter a report on its routing of non- (G) The cumulative number of shares directed orders in NMS stocks that are of covered orders executed outside the submitted on a held basis and of non- quote; directed orders that are customer or- (H) For shares executed outside the ders in NMS securities that are option quote, the share-weighted average contracts during that quarter broken amount per share that prices were out- down by calendar month and keep such side the quote; and report posted on an internet website (I) For shares executed outside the that is free and readily accessible to quote, the share-weighted average pe- the public for a period of three years riod from the time of order receipt to from the initial date of posting on the the time of order execution. internet website. Such report shall in- (2) Every national securities exclude a section for NMS stocks—sepa- change on which NMS stocks are trad- rated by securities that are included in ed and each national securities associa- the S&P 500 Index as of the first day of tion shall act jointly in establishing that quarter and other NMS stocks— procedures for market centers to follow and a separate section for NMS securi- in making available to the public the ties that are option contracts. Such re- reports required by paragraph (a)(1) of port shall be made available using the this section in a uniform, readily ac- most recent versions of the XML sche- cessible, and usable electronic form. In ma and the associated PDF renderer as the event there is no effective national published on the Commission’s website market system plan establishing such for all reports required by this section. procedures, market centers shall pre- Each section in a report shall include pare their reports in a consistent, usa- the following information: ble, and machine-readable electronic (i) The percentage of total orders for format, and make such reports avail- the section that were non-directed or- able for downloading from an Internet ders, and the percentages of total non- Web site that is free and readily acces- directed orders for the section that sible to the public. Every market cen- were market orders, marketable limit ter shall keep such reports posted on orders, non-marketable limit orders, an internet website that is free and and other orders;

845

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00855 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.606 17 CFR Ch. II (4–1–20 Edition)

(ii) The identity of the ten venues to (b) Customer requests for information which the largest number of total non- on order routing. (1) Every broker or directed orders for the section were dealer shall, on request of a customer, routed for execution and of any venue disclose to its customer, for: to which five percent or more of non- (i) Orders in NMS stocks that are directed orders were routed for execu- submitted on a held basis; tion, the percentage of total non-di- (ii) Orders in NMS stocks that are rected orders for the section routed to submitted on a not held basis and the the venue, and the percentages of total broker or dealer is not required to pro- non-directed market orders, total non- vide the customer a report under para- directed marketable limit orders, total graph (b)(3) of this section; and non-directed non-marketable limit or- (iii) Orders in NMS securities that ders, and total non-directed other or- are option contracts, the identity of ders for the section that were routed to the venue to which the customer’s or- the venue; ders were routed for execution in the (iii) For each venue identified pursu- six months prior to the request, wheth- ant to paragraph (a)(1)(ii) of this sec- er the orders were directed orders or tion, the net aggregate amount of any non-directed orders, and the time of payment for order flow received, pay- the transactions, if any, that resulted ment from any profit-sharing relation- from such orders. Such disclosure shall ship received, transaction fees paid, be made available using the most re- and transaction rebates received, both cent versions of the XML schema and as a total dollar amount and per share, the associated PDF renderer as pub- for each of the following non-directed lished on the Commission’s website for order types: all reports required by this section. (A) Market orders; (2) A broker or dealer shall notify (B) Marketable limit orders; customers in writing at least annually (C) Non-marketable limit orders; and of the availability on request of the in- (D) Other orders. formation specified in paragraph (b)(1) (iv) A discussion of the material as- of this section. pects of the broker’s or dealer’s rela- (3) Except as provided for in para- tionship with each venue identified graphs (b)(4) and (5) of this section, pursuant to paragraph (a)(1)(ii) of this every broker or dealer shall, on request section, including a description of any of a customer that places, directly or arrangement for payment for order indirectly, one or more orders in NMS flow and any profit-sharing relation- stocks that are submitted on a not held ship and a description of any terms of basis with the broker or dealer, dis- such arrangements, written or oral, close to such customer within seven that may influence a broker’s or deal- business days of receiving the request, er’s order routing decision including, a report on its handling of such orders among other things: for that customer for the prior six (A) Incentives for equaling or exceed- months by calendar month. Such re- ing an agreed upon order flow volume port shall be made available using the threshold, such as additional payments most recent versions of the XML sche- or a higher rate of payment; ma and the associated PDF renderer as (B) Disincentives for failing to meet published on the Commission’s website an agreed upon minimum order flow for all reports required by this section. threshold, such as lower payments or For purposes of such report, the han- the requirement to pay a fee; dling of a NMS stock order submitted (C) Volume-based tiered payment by a customer to a broker-dealer on a schedules; and not held basis includes the handling of (D) Agreements regarding the min- all child orders derived from that imum amount of order flow that the order. Such report shall be divided into broker-dealer would send to a venue. two sections: One for directed orders (2) A broker or dealer shall make the and one for non-directed orders. Each report required by paragraph (a)(1) of section of such report shall include, this section publicly available within with respect to such order flow sent by one month after the end of the quarter the customer to the broker or dealer, addressed in the report. the total number of shares sent to the

846

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00856 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.606

broker or dealer by the customer dur- (C) Average time between order entry ing the relevant period; the total num- and execution or cancellation, for or- ber of shares executed by the broker or ders providing liquidity (in milli- dealer as principal for its own account; seconds); and the total number of orders exposed by (D) Average net execution rebate or the broker or dealer through an action- fee for shares of orders providing li- able indication of interest; and the quidity (cents per 100 shares, specified venue or venues to which orders were to four decimal places). exposed by the broker or dealer (iv) Information on Orders that Re- through an actionable indication of in- moved Liquidity. (A) Total number of terest, provided that, where applicable, shares executed of orders removing li- a broker or dealer must disclose that it quidity; exposed a customer’s order through an (B) Percentage of shares executed of actionable indication of interest to orders removing liquidity; and other customers but need not disclose (C) Average net execution fee or re- the identity of such customers. Each bate for shares of orders removing li- section of such report also shall in- quidity (cents per 100 shares, specified clude the following columns of infor- to four decimal places). mation for each venue to which the (4) Except as provided below, no broker or dealer routed such orders for broker or dealer shall be required to the customer, in the aggregate: provide reports pursuant to paragraph (i) Information on Order Routing.(A) (b)(3) of this section if the percentage Total shares routed; of shares of not held orders in NMS (B) Total shares routed marked im- stocks the broker or dealer received mediate or cancel; from its customers over the prior six (C) Total shares routed that were fur- calendar months was less than five per- ther routable; and cent of the total shares in NMS stocks (D) Average order size routed. the broker or dealer received from its (ii) Information on Order Execution. customers during that time (the ‘‘five (A) Total shares executed; percent threshold’’ for purposes of this (B) Fill rate (shares executed divided paragraph). A broker or dealer that by the shares routed); equals or exceeds this five percent threshold shall be required (subject to (C) Average fill size; paragraph (b)(5) of this section) to pro- (D) Average net execution fee or re- vide reports pursuant to paragraph bate (cents per 100 shares, specified to (b)(3) of this section for at least six cal- four decimal places); endar months (‘‘Compliance Period’’) (E) Total number of shares executed regardless of the percentage of shares at the midpoint; of not held orders in NMS stocks the (F) Percentage of shares executed at broker or dealer receives from its cus- the midpoint; tomers during the Compliance Period. (G) Total number of shares executed The Compliance Period shall begin the that were priced on the side of the first calendar day of the next calendar spread more favorable to the order; month after the broker or dealer (H) Percentage of total shares exe- equaled or exceeded the five percent cuted that were priced at the side of threshold, unless it is the first time the the spread more favorable to the order; broker or dealer has equaled or exceed- (I) Total number of shares executed ed the five percent threshold, in which that were priced on the side of the case the Compliance Period shall begin spread less favorable to the order; and the first calendar day four calendar (J) Percentage of total shares exe- months later. A broker or dealer shall cuted that were priced on the side of not be required to provide reports pur- the spread less favorable to the order. suant to paragraph (b)(3) of this section (iii) Information on Orders that Pro- for orders that the broker or dealer did vided Liquidity. (A) Total number of not receive during a Compliance Pe- shares executed of orders providing li- riod. If, at any time after the end of a quidity; Compliance Period, the percentage of (B) Percentage of shares executed of shares of not held orders in NMS orders providing liquidity; stocks the broker or dealer received

847

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00857 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.607 17 CFR Ch. II (4–1–20 Edition)

from its customers was less than five of the nature of the compensation re- percent of the total shares in NMS ceived; and stocks the broker or dealer received (2) The broker’s or dealer’s policies from its customers over the prior six for determining where to route cus- calendar months, the broker or dealer tomer orders that are the subject of shall not be required to provide reports payment for order flow absent specific pursuant to paragraph (b)(3) of this sec- instructions from customers, including tion, except for orders that the broker a description of the extent to which or- or dealer received during the portion of ders can be executed at prices superior a Compliance Period that remains cov- to the national best bid and national ered by paragraph (b)(3) of this section. best offer. (5) No broker or dealer shall be sub- (b) Exemptions. The Commission, ject to the requirements of paragraph upon request or upon its own motion, (b)(3) of this section with respect to a may exempt by rule or by order, any customer that traded on average each broker or dealer or any class of brokers month for the prior six months less or dealers, security or class of securi- than $1,000,000 of notional value of not ties from the requirements of para- held orders in NMS stocks through the graph (a) of this section with respect to broker or dealer. any transaction or class of trans- (c) Exemptions. The Commission may, actions, either unconditionally or on by order upon application, condi- specified terms and conditions, if the tionally or unconditionally exempt any Commission determines that such ex- person, security, or transaction, or any emption is consistent with the public class or classes of persons, securities, interest and the protection of inves- or transactions, from any provision or tors. provisions of this section, if the Com- mission determines that such exemp- § 242.608 Filing and amendment of nation is necessary or appropriate in the tional market system plans. public interest, and is consistent with (a) Filing of national market system the protection of investors. plans and amendments thereto. (1) Any [62 FR 544, Jan. 3, 1997, as amended at 83 FR two or more self-regulatory organiza- 58427, Nov. 19, 2018] tions, acting jointly, may file a national market system plan or may pro- § 242.607 Customer account state- pose an amendment to an effective na- ments. tional market system plan (‘‘proposed (a) No broker or dealer acting as amendment’’) by submitting the text of agent for a customer may effect any the plan or amendment to the Sec- transaction in, induce or attempt to in- retary of the Commission, together duce the purchase or sale of, or direct with a statement of the purpose of such orders for purchase or sale of, any NMS plan or amendment and, to the extent stock or a security authorized for applicable, the documents and informa- quotation on an automated inter-deal- tion required by paragraphs (a)(4) and er quotation system that has the char- (5) of this section. acteristics set forth in section 17B of (2) The Commission may propose the Act (15 U.S.C. 78q–2), unless such amendments to any effective national broker or dealer informs such cus- market system plan by publishing the tomer, in writing, upon opening a new text thereof, together with a statement account and on an annual basis thereof the purpose of such amendment, in after, of the following: accordance with the provisions of para- (1) The broker’s or dealer’s policies graph (b) of this section. regarding receipt of payment for order (3) Self-regulatory organizations are flow from any broker or dealer, na- authorized to act jointly in: tional securities exchange, national se- (i) Planning, developing, and oper- curities association, or exchange mem- ating any national market subsystem ber to which it routes customers’ or- or facility contemplated by a national ders for execution, including a state- market system plan; ment as to whether any payment for (ii) Preparing and filing a national order flow is received for routing cus- market system plan or any amendment tomer orders and a detailed description thereto; or

848

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00858 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.608

(iii) Implementing or administering amendment will be determined and im- an effective national market system posed (including any provision for dis- plan. tribution of any net proceeds from such (4) Every national market system fees or charges to the sponsors and/or plan filed pursuant to this section, or participants) and the amount of such any amendment thereto, shall be ac- fees or charges; companied by: (iii) The method by which, and the (i) Copies of all governing or con- frequency with which, the performance stituent documents relating to any of any person acting as plan processor person (other than a self-regulatory or- with respect to the implementation ganization) authorized to implement or and/or operation of the plan will be administer such plan on behalf of its evaluated; and sponsors; and (iv) The method by which disputes (ii) To the extent applicable: arising in connection with the oper- (A) A detailed description of the ation of the plan will be resolved. manner in which the plan or amend- (6) In connection with the selection ment, and any facility or procedure of any person to act as plan processor contemplated by the plan or amend- with respect to any facility con- ment, will be implemented; templated by a national market sys- (B) A listing of all significant phases tem plan (including renewal of any of development and implementation contract for any person to so act), the (including any pilot phase) con- sponsors shall file with the Commis- templated by the plan or amendment, sion a statement identifying the person together with the projected date of selected, describing the material terms completion of each phase; under which such person is to serve as (C) An analysis of the impact on com- plan processor, and indicating the so- petition of implementation of the plan licitation efforts, if any, for alter- or amendment or of any facility con- native plan processors, the alternatives templated by the plan or amendment; considered and the reasons for selec- (D) A description of any written un- tion of such person. derstandings or agreements between or (7) Any national market system plan among plan sponsors or participants (or any amendment thereto) which is relating to interpretations of the plan intended by the sponsors to satisfy a or conditions for becoming a sponsor or plan filing requirement contained in participant in the plan; and any other section of this Regulation (E) In the case of a proposed amend- NMS and part 240, subpart A of this ment, a statement that such amend- chapter shall, in addition to compli- ment has been approved by the spon- ance with this section, also comply sors in accordance with the terms of with the requirements of such other the plan. section. (5) Every national market system (8)(i) A participant in an effective na- plan, or any amendment thereto, filed tional market system plan shall ensure pursuant to this section shall include a that a current and complete version of description of the manner in which any the plan is posted on a plan Web site or facility contemplated by the plan or on a Web site designated by plan par- amendment will be operated. Such de- ticipants within two business days scription shall include, to the extent after notification by the Commission applicable: of effectiveness of the plan. Each par- (i) The terms and conditions under ticipant in an effective national mar- which brokers, dealers, and/or self-reg- ket system plan shall ensure that such ulatory organizations will be granted Web site is updated to reflect amend- or denied access (including specific pro- ments to such plan within two business cedures and standards governing the days after the plan participants have granting or denial of access); been notified by the Commission of its (ii) The method by which any fees or approval of a proposed amendment pur- charges collected on behalf of all of the suant to paragraph (b) of this section. sponsors and/or participants in connec- If the amendment is not effective for a tion with access to, or use of, any facil- certain period, the plan participants ity contemplated by the plan or shall clearly indicate the effective date

849

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00859 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.608 17 CFR Ch. II (4–1–20 Edition)

in the relevant text of the plan. Each ject to such conditions as the Commis- plan participant also shall provide a sion may deem necessary or appro- link on its own Web site to the Web priate, if it finds that such plan or site with the current version of the amendment is necessary or appropriate plan. in the public interest, for the protec- (ii) The plan participants shall en- tion of investors and the maintenance sure that any proposed amendments of fair and orderly markets, to remove filed pursuant to paragraph (a) of this impediments to, and perfect the mech- section are posted on a plan Web site or anisms of, a national market system, a designated Web site no later than two or otherwise in furtherance of the pur- business days after the filing of the poses of the Act. Approval of a national proposed amendments with the Com- market system plan, or an amendment mission. The plan participants shall to an effective national market system maintain any proposed amendment to plan (other than an amendment initi- the plan on a plan Web site or a des- ated by the Commission), shall be by ignated Web site until the Commission order. Promulgation of an amendment approves the plan amendment and the to an effective national market system plan participants update the Web site plan initiated by the Commission shall to reflect such amendment or the plan be by rule. participants withdraw the proposed (3) A proposed amendment may be amendment. If the plan participants put into effect upon filing with the withdraw proposed amendments, the Commission if designated by the spon- plan participants shall remove such sors as: amendments from the plan Web site or (i) Establishing or changing a fee or designated Web site within two busi- other charge collected on behalf of all ness days of withdrawal. Each plan par- of the sponsors and/or participants in ticipant shall provide a link to the Web connection with access to, or use of, site with the current version of the any facility contemplated by the plan plan. or amendment (including changes in (b) Effectiveness of national market sys- any provision with respect to distribu- tem plans. (1) The Commission shall tion of any net proceeds from such fees publish notice of the filing of any national market system plan, or any pro- or other charges to the sponsors and/or posed amendment to any effective na- participants); tional market system plan (including (ii) Concerned solely with the admin- any amendment initiated by the Com- istration of the plan, or involving the mission), together with the terms of governing or constituent documents re- substance of the filing or a description lating to any person (other than a self- of the subjects and issues involved, and regulatory organization) authorized to shall provide interested persons an op- implement or administer such plan on portunity to submit written comments. behalf of its sponsors; or No national market system plan, or (iii) Involving solely technical or any amendment thereto, shall become ministerial matters. At any time with- effective unless approved by the Com- in 60 days of the filing of any such mission or otherwise permitted in ac- amendment, the Commission may sum- cordance with paragraph (b)(3) of this marily abrogate the amendment and section. require that such amendment be refiled (2) Within 120 days of the date of pub- in accordance with paragraph (a)(1) of lication of notice of filing of a national this section and reviewed in accordance market system plan or an amendment with paragraph (b)(2) of this section, if to an effective national market system it appears to the Commission that such plan, or within such longer period as action is necessary or appropriate in the Commission may designate up to the public interest, for the protection 180 days of such date if it finds such of investors, or the maintenance of fair longer period to be appropriate and and orderly markets, to remove im- publishes its reasons for so finding or pediments to, and perfect the mecha- as to which the sponsors consent, the nisms of, a national market system or Commission shall approve such plan or otherwise in furtherance of the pur- amendment, with such changes or sub- poses of the Act.

850

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00860 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.608

(4) Notwithstanding the provisions of its members and persons associated paragraph (b)(1) of this section, a pro- with its members. posed amendment may be put into ef- (d) Appeals. The Commission may, in fect summarily upon publication of no- its discretion, entertain appeals in con- tice of such amendment, on a tem- nection with the implementation or op- porary basis not to exceed 120 days, if eration of any effective national mar- the Commission finds that such action ket system plan as follows: is necessary or appropriate in the pub- (1) Any action taken or failure to act lic interest, for the protection of inves- by any person in connection with an ef- tors or the maintenance of fair and or- fective national market system plan derly markets, to remove impediments (other than a prohibition or limitation to, and perfect the mechanisms of, a of access reviewable by the Commis- national market system or otherwise sion pursuant to section 11A(b)(5) or in furtherance of the purposes of the section 19(d) of the Act (15 U.S.C. 78k– Act. (5) Any plan (or amendment thereto) 1(b)(5) or 78s(d))) shall be subject to re- in connection with: view by the Commission, on its own (i) The planning, development, oper- motion or upon application by any per- ation, or regulation of a national mar- son aggrieved thereby (including, but ket system (or a subsystem thereof) or not limited to, self-regulatory organi- one or more facilities thereof; or zations, brokers, dealers, issuers, and (ii) The development and implemen- vendors), filed not later than 30 days tation of procedures and/or facilities after notice of such action or failure to designed to achieve compliance by self- act or within such longer period as the regulatory organizations and/or their Commission may determine. members of any section of this Regula- (2) Application to the Commission for tion NMS (§§ 242.600 through 242.612) review, or the institution of review by and part 240, subpart A of this chapter the Commission on its own motion, promulgated pursuant to section 11A of shall not operate as a stay of any such the Act (15 U.S.C. 78k–1), approved by action unless the Commission deter- the Commission pursuant to section mines otherwise, after notice and op- 11A of the Act (or pursuant to any rule portunity for hearing on the question or regulation thereunder) prior to the of a stay (which hearing may consist effective date of this section (either only of affidavits or oral arguments). temporarily or permanently) shall be (3) In any proceedings for review, if deemed to have been filed and approved the Commission, after appropriate no- pursuant to this section and no addi- tice and opportunity for hearing (which tional filing need be made by the spon- hearing may consist solely of consider- sors with respect to such plan or ation of the record of any proceedings amendment; provided, however, that all conducted in connection with such ac- terms and conditions associated with tion or failure to act and an oppor- any such approval (including time limitations) shall continue to be applica- tunity for the presentation of reasons ble; provided, further, that any amend- supporting or opposing such action or ment to such plan filed with or ap- failure to act) and upon consideration proved by the Commission on or after of such other data, views, and argu- the effective date of this section shall ments as it deems relevant, finds that be subject to the provisions of, and the action or failure to act is in accord- considered in accordance with the pro- ance with the applicable provisions of cedures specified in, this section. such plan and that the applicable pro- (c) Compliance with terms of national visions are, and were, applied in a man- market system plans. Each self-regu- ner consistent with the public interest, latory organization shall comply with the protection of investors, the mainte- the terms of any effective national nance of fair and orderly markets, and market system plan of which it is a the removal of impediments to, and the sponsor or a participant. Each self-reg- perfection of the mechanisms of a na- ulatory organization also shall, absent tional market system, the Commission, reasonable justification or excuse, en- by order, shall dismiss the proceeding. force compliance with any such plan by If the Commission does not make any

851

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00861 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.609 17 CFR Ch. II (4–1–20 Edition)

such finding, or if it finds that such ac- 17(a), 18(a) and 32(a) of the Act (15 tion or failure to act imposes any bur- U.S.C. 78q(a), 78r(a), and 78ff(a)). den on competition not necessary or appropriate in furtherance of the pur- § 242.610 Access to quotations. poses of the Act, the Commission, by (a) Quotations of SRO trading facility. order, shall set aside such action and/or A national securities exchange or na- require such action with respect to the tional securities association shall not matter reviewed as the Commission impose unfairly discriminatory terms deems necessary or appropriate in the that prevent or inhibit any person from public interest, for the protection of in- obtaining efficient access through a vestors, and the maintenance of fair member of the national securities ex- and orderly markets, or to remove im- change or national securities associa- pediments to, and perfect the mecha- tion to the quotations in an NMS stock nisms of, a national market system. displayed through its SRO trading fa- (e) Exemptions. The Commission may cility. exempt from the provisions of this sec- (b) Quotations of SRO display-only fa- tion, either unconditionally or on spec- cility. (1) Any trading center that dis- ified terms and conditions, any self- plays quotations in an NMS stock regulatory organization, member through an SRO display-only facility thereof, or specified security, if the shall provide a level and cost of access Commission determines that such ex- to such quotations that is substan- emption is consistent with the public tially equivalent to the level and cost interest, the protection of investors, of access to quotations displayed by the maintenance of fair and orderly SRO trading facilities in that stock. markets and the removal of impedi- (2) Any trading center that displays ments to, and perfection of the mecha- quotations in an NMS stock through an nisms of, a national market system. SRO display-only facility shall not im- [70 FR 37620, June 29, 2005; 71 FR 232, Jan. 4, pose unfairly discriminatory terms 2006] that prevent or inhibit any person from obtaining efficient access to such § 242.609 Registration of securities in- quotations through a member, sub- formation processors: form of appli- scriber, or customer of the trading cen- cation and amendments. ter. (a) An application for the registra- (c) Fees for access to quotations. A tion of a securities information proc- trading center shall not impose, nor essor shall be filed on Form SIP permit to be imposed, any fee or fees (§ 249.1001 of this chapter) in accordance for the execution of an order against a with the instructions contained there- protected quotation of the trading cen- in. ter or against any other quotation of (b) If any information reported in the trading center that is the best bid items 1–13 or item 21 of Form SIP or in or best offer of a national securities ex- any amendment thereto is or becomes change, the best bid or best offer of The inaccurate for any reason, whether be- Nasdaq Stock Market, Inc., or the best fore or after the registration has been bid or best offer of a national securities granted, the securities information association other than the best bid or processor shall promptly file an best offer of The Nasdaq Stock Market, amendment on Form SIP correcting Inc. in an NMS stock that exceed or ac- such information. cumulate to more than the following (c) The Commission, upon its own limits: motion or upon application by any se- (1) If the price of a protected curities information processor, may quotation or other quotation is $1.00 or conditionally or unconditionally ex- more, the fee or fees cannot exceed or empt any securities information proc- accumulate to more than $0.003 per essor from any provision of the rules or share; or regulations adopted under section (2) If the price of a protected 11A(b) of the Act (15 U.S.C. 78k–1(b)). quotation or other quotation is less (d) Every amendment filed pursuant than $1.00, the fee or fees cannot exceed to this section shall constitute a ‘‘re- or accumulate to more than 0.3% of the port’’ within the meaning of sections quotation price per share.

852

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00862 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.610T

(d) Locking or crossing quotations. (2) For Test Group 2, provide to any Each national securities exchange and person, or permit to be provided to any national securities association shall es- person, a rebate or other remuneration tablish, maintain, and enforce written in connection with an execution, or rules that: offer, or permit to be offered, any (1) Require its members reasonably linked pricing that provides a discount to avoid: or incentive on transaction fees appli- (i) Displaying quotations that lock or cable to removing (providing) liquidity cross any protected quotation in an that is linked to providing (removing) NMS stock; and liquidity, except to the extent the ex- (ii) Displaying manual quotations change has a rule to provide non-rebate that lock or cross any quotation in an linked pricing to its registered market NMS stock disseminated pursuant to makers in consideration for meeting an effective national market system market quality metrics; and plan; (3) For the Control Group, impose, or (2) Are reasonably designed to assure permit to be imposed, any fee or fees in the reconciliation of locked or crossed contravention of the limits specified in quotations in an NMS stock; and § 242.610(c). (b) Pilot securities—(1) Initial List of (3) Prohibit its members from engag- Pilot Securities. (i) The Commission ing in a pattern or practice of dis- shall designate by notice the initial playing quotations that lock or cross List of Pilot Securities, and shall as- any protected quotation in an NMS sign each Pilot Security to one Test stock, or of displaying manual Group or the Control Group. Further, quotations that lock or cross any the Commission may designate by no- quotation in an NMS stock dissemi- tice the assignment of NMS stocks nated pursuant to an effective national that are interlisted on a Canadian se- market system plan, other than dis- curities exchange to Test Group 2 or playing quotations that lock or cross the Control Group. any protected or other quotation as (ii) For purposes of this section, permitted by an exception contained in ‘‘Pilot Securities’’ means the NMS its rules established pursuant to para- stocks designated by the Commission graph (d)(1) of this section. on the initial List of Pilot Securities (e) Exemptions. The Commission, by pursuant to paragraph (b)(1)(i) of this order, may exempt from the provisions section and any successors to such of this section, either unconditionally NMS stocks. At the time of selection or on specified terms and conditions, by the Commission, an NMS stock any person, security, quotations, or- must have a minimum share price of $2 ders, or fees, or any class or classes of to be included in the Pilot and must persons, securities, quotations, orders, have an unlimited duration or a dura- or fees, if the Commission determines tion beyond the end of the post-Pilot that such exemption is necessary or ap- Period. In addition, an NMS stock propriate in the public interest, and is must have an average daily volume of consistent with the protection of inves- 30,000 shares or more to be included in tors. the Pilot. If the share price of a Pilot Security in one of the Test Groups or § 242.610T Equity transaction fee pilot. the Control Group closes below $1 at (a) Pilot pricing restrictions. Notwith- the end of a trading day, it shall be re- standing § 242.610(c), on a pilot basis for moved from the Pilot. the period specified in paragraph (c) of (iii) For purposes of this section, this section, in connection with a ‘‘primary listing exchange’’ means the transaction in an NMS stock, a na- national securities exchange on which tional securities exchange shall not: the NMS stock is listed. If an NMS (1) For Test Group 1, impose, or per- stock is listed on more than one na- mit to be imposed, any fee or fees for tional securities exchange, the na- the display of, or execution against, tional securities exchange upon which the displayed best bid or best offer of the NMS stock has been listed the such market that exceed or accumulate longest shall be the primary listing ex- to more than $0.0010 per share; change.

853

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00863 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.610T 17 CFR Ch. II (4–1–20 Edition)

(2) Pilot Securities Exchange Lists. (i) the Pilot Securities Change Lists shall After the Commission selects the ini- contain the following fields: tial List of Pilot Securities and prior (A) New Ticker Symbol (if applica- to the beginning of trading on the first ble); day of the Pilot Period each primary (B) New Security Name (if applica- listing exchange shall publicly post on ble); its website downloadable files con- (C) Deleted Date (if applicable); taining a list, in pipe-delimited ASCII (D) Date Security Closed Below $1 (if format, of the Pilot Securities for applicable); which the exchange serves as the pri- (E) Effective Date of Change; and mary listing exchange. Each primary (F) Reason for the Change. listing exchange shall maintain and up- (4) Posting requirement. All informa- date this list as necessary prior to the tion publicly posted in downloadable beginning of trading on each business files pursuant to paragraphs (b)(2) and day that the U.S. equities markets are (3) of this section shall be and remain open for trading through the end of the freely and persistently available and post-Pilot Period. easily accessible by the general public (ii) The Pilot Securities Exchange on the primary listing exchange’s Lists shall contain the following fields: website for a period of not less than (A) Ticker Symbol; five years from the conclusion of the (B) Security Name; post-Pilot Period. In addition, the in- (C) Primary Listing Exchange; formation shall be presented in a man- (D) Security Type: ner that facilitates access by machines (1) Common Stock; without encumbrance, and shall not be (2) ETP; subject to any restrictions, including (3) Preferred Stock; restrictions on access, retrieval, dis- (4) Warrant; tribution and reuse. (5) Closed-End Fund; (6) Structured Product; (c) Pilot duration. (1) The Pilot shall (7) ADR; and include: (8) Other; (i) A six-month ‘‘pre-Pilot Period;’’ (E) Pilot Group: (ii) A two-year ‘‘Pilot Period’’ with (1) Control Group; an automatic sunset at the end of the (2) Test Group 1; and first year unless, no later than thirty (3) Test Group 2; days prior to that time, the Commis- (F) Stratum Code; and sion publishes a notice that the Pilot (G) Date the Entry Was Last Up- shall continue for up to one additional dated. year; and (3) Pilot Securities Change Lists. (i) (iii) A six-month ‘‘post-Pilot Period.’’ Prior to the beginning of trading on (2) The Commission shall designate each trading day the U.S. equities mar- by notice the commencement and ter- kets are open for trading throughout mination dates of the pre-Pilot Period, the end of the post-Pilot Period, each Pilot Period, and post-Pilot Period, in- primary listing exchange shall publicly cluding any suspension of the one-year post on its website downloadable files sunset of the Pilot Period. containing a Pilot Securities Change (d) Order routing datasets. Throughout List, in pipe-delimited ASCII format, the duration of the Pilot, including the that lists each separate change applica- pre-Pilot Period and post-Pilot Period, ble to any Pilot Securities for which it each national securities exchange that serves or has served as the primary facilitates trading in NMS stocks shall listing exchange. The Pilot Securities prepare and transmit to the Commis- Change List will provide a cumulative sion a file, in pipe-delimited ASCII for- list of all changes to the Pilot Securi- mat, no later than the last day of each ties that the primary listing exchange month, containing sets of order routing has made to the Pilot Securities Ex- data, for the prior month, in accord- change List published pursuant to ance with the specifications in para- paragraph (b)(2) of this section. graphs (d)(1) and (2) of this section. For (ii) In addition to the fields required the pre-Pilot Period, order routing for the Pilot Securities Exchange List, datasets shall include each NMS stock.

854

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00864 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.610T

For the Pilot Period and post-Pilot Pe- (C) 100 milliseconds to < 1 second of riod, order routing datasets shall in- order receipt; clude each Pilot Security. Each na- (D) 1 second to < 30 seconds of order tional securities exchange shall treat receipt; the order routing datasets as regu- (E) 30 seconds to < 60 seconds of order latory information and shall not access receipt; or use that information for any com- (F) 60 seconds to < 5 minutes of order mercial or non-regulatory purpose. receipt; (1) Dataset of daily volume statistics, (G) 5 minutes to < 30 minutes of order with field names as the first record and receipt; and a consistent naming convention that (H) ≥ 30 minutes of order receipt. indicates the exchange and date of the (2) Dataset of daily volume statistics, file, that include the following speci- with field names as the first record and fications of liquidity-providing orders a consistent naming convention that by security and separating orders by indicates the exchange and date of the order designation (exchanges may ex- file, that include the following speci- clude auction orders) and order capac- fications of liquidity-taking orders by ity: security and separating orders by order (i) Code identifying the submitting designation (exchanges may exclude exchange. auction orders) and order capacity: (ii) Eight-digit code identifying the (i) Code identifying the submitting date of the calendar day of trading in exchange. the format ‘‘yyyymmdd.’’ (ii) Eight-digit code identifying the (iii) Symbol assigned to an NMS date of the calendar day of trading in stock (including ETPs) under the na- the format ‘‘yyyymmdd.’’ tional market system plan to which (iii) Symbol assigned to an NMS the consolidated best bid and offer for stock (including ETPs) under the na- such a security are disseminated. tional market system plan to which (iv) The broker-dealer’s CRD number the consolidated best bid and offer for and MPID. such a security are disseminated. (v) Order type code: (iv) The broker-dealer’s CRD number (A) Inside-the-quote orders; and MPID. (B) At-the-quote limit orders; and (v) Order type code: (C) Near-the-quote limit orders. (A) Market orders; and (B) Marketable limit orders. (vi) Order size codes: (vi) Order size codes: (A) <100 share bucket; (A) <100 share bucket; (B) 100–499 share bucket; (B) 100–499 share bucket; (C) 500–1,999 share bucket; (C) 500–1,999 share bucket; (D) 2,000–4,999 share bucket; (D) 2,000–4,999 share bucket; (E) 5,000–9,999 share bucket; and (E) 5,000–9,999 share bucket; and (F) ≥10,000 share bucket. (F) ≥10,000 share bucket. (vii) Number of orders received. (vii) Number of orders received. (viii) Cumulative number of shares of (viii) Cumulative number of shares of orders received. orders received. (ix) Cumulative number of shares of (ix) Cumulative number of shares of orders cancelled prior to execution. orders cancelled prior to execution. (x) Cumulative number of shares of (x) Cumulative number of shares of orders executed at receiving market orders executed at receiving market center. center. (xi) Cumulative number of shares of (xi) Cumulative number of shares of orders routed to another execution orders routed to another execution venue. venue. (xii) Cumulative number of shares of (e) Exchange Transaction Fee Sum- orders executed within: mary. Throughout the duration of the (A) 0 to < 100 microseconds of order Pilot, including the pre-Pilot Period receipt; and post-Pilot Period, each national se- (B) 100 microseconds to < 100 milli- curities exchange that facilitates trad- seconds of order receipt; ing in NMS stocks shall publicly post

855

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00865 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.611 17 CFR Ch. II (4–1–20 Edition)

on its website downloadable files con- (7) Effective Date of Fee or Rebate; taining information relating to trans- (8) End Date of Currently Reported action fees and rebates and changes Fee or Rebate (if applicable); thereto (applicable to securities having (9) Month and Year of the monthly a price equal to or greater than $1). realized reported average and median Each national securities exchange per share fees and rebates; shall post its initial Exchange Trans- (10) Pre/Post Fee Changes Indicator action Fee Summary prior to the start (if applicable) denoting implementa- of trading on the first day of the pre- tion of a new fee or rebate on a day Pilot Period and update its Exchange other than the first day of the month; Transaction Fee Summary on a month- (11) Base and Top Tier Fee or Rebate: ly basis within 10 business days of the (i) Take (to remove): first day of each calendar month, to re- (A) Base Fee/Rebate reflecting the flect data collected for the prior standard amount assessed or rebated month. The information prescribed by before any applicable discounts, tiers, this section shall be made available caps, or other incentives are applied; using the most recent version of the and XML schema published on the Commis- (B) Top Tier Fee/Rebate reflecting sion’s website. All information publicly the amount assessed or rebated after posted pursuant to this paragraph (e) any applicable discounts, tiers, caps, or shall be and remain freely and persist- other incentives are applied; and ently available and easily accessible on (ii) Make (to provide): the national securities exchange’s (A) Base Fee/Rebate reflecting the website for a period of not less than standard amount assessed or rebated five years from the conclusion of the before any applicable discounts, tiers, post-Pilot Period. In addition, the in- caps, or other incentives are applied; formation shall be presented in a man- and ner that facilitates access by machines (B) Top Tier Fee/Rebate reflecting without encumbrance, and shall not be the amount assessed or rebated after subject to any restrictions, including any applicable discounts, tiers, caps, or other incentives are applied; restrictions on access, retrieval, dis- (12) Average Take Fee (Rebate)/Aver- tribution, and reuse. The Exchange age Make Rebate (Fee), by Participant Transaction Fee Summary shall con- Type, Test Group, Displayed/Non-Dis- tain the following fields: played, and Top/Depth of Book; and (1) Exchange Name; (13) Median Take Fee (Rebate)/Me- (2) Record Type Indicator: dian Make Fee (Rebate), by Partici- (i) Reported Fee is the Monthly Aver- pant Type, Test Group, Displayed/Non- age; Displayed, and Top/Depth of Book. (ii) Reported Fee is the Median; and (iii) Reported Fee is the Spot Month- [84 FR 5298, Feb. 20, 2019] ly; EFFECTIVE DATE NOTE: At 84 FR 5298, Feb. (3) Participant Type: 20, 2019, § 242.610T was added, effective Apr. (i) Registered Market Maker; and 22, 2019, through Dec. 29, 2023. (ii) All Others; (4) Pilot Group: § 242.611 Order protection rule. (i) Control Group; (a) Reasonable policies and procedures. (ii) Test Group 1; and (1) A trading center shall establish, (iii) Test Group 2; maintain, and enforce written policies (5) Applicability to Displayed and and procedures that are reasonably de- Non-Displayed Interest: signed to prevent trade-throughs on (i) Displayed only; that trading center of protected (ii) Non-displayed only; and quotations in NMS stocks that do not (iii) Both displayed and non-dis- fall within an exception set forth in played; paragraph (b) of this section and, if re- (6) Applicability to Top and Depth of lying on such an exception, that are Book Interest: reasonably designed to assure compli- (i) Top of book only; ance with the terms of the exception. (ii) Depth of book only; and (2) A trading center shall regularly (iii) Both top and depth of book; surveil to ascertain the effectiveness of

856

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00866 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.612

the policies and procedures required by cution at no worse than a specified paragraph (a)(1) of this section and price (a ‘‘stopped order’’), where: shall take prompt action to remedy de- (i) The stopped order was for the ac- ficiencies in such policies and proce- count of a customer; dures. (ii) The customer agreed to the speci- (b) Exceptions. (1) The transaction fied price on an order-by-order basis; that constituted the trade-through was and effected when the trading center dis- (iii) The price of the trade-through playing the protected quotation that transaction was, for a stopped buy was traded through was experiencing a order, lower than the national best bid failure, material delay, or malfunction in the NMS stock at the time of execu- of its systems or equipment. tion or, for a stopped sell order, higher (2) The transaction that constituted than the national best offer in the NMS the trade-through was not a ‘‘regular stock at the time of execution. way’’ contract. (c) Intermarket sweep orders. The trad- (3) The transaction that constituted ing center, broker, or dealer respon- the trade-through was a single-priced sible for the routing of an intermarket opening, reopening, or closing trans- sweep order shall take reasonable steps action by the trading center. to establish that such order meets the (4) The transaction that constituted requirements set forth in the trade-through was executed at a § 242.600(b)(31). time when a protected bid was priced (d) Exemptions. The Commission, by higher than a protected offer in the order, may exempt from the provisions NMS stock. of this section, either unconditionally (5) The transaction that constituted or on specified terms and conditions, the trade-through was the execution of any person, security, transaction, an order identified as an intermarket quotation, or order, or any class or sweep order. classes of persons, securities, (6) The transaction that constituted quotations, or orders, if the Commis- the trade-through was effected by a sion determines that such exemption is trading center that simultaneously necessary or appropriate in the public routed an intermarket sweep order to interest, and is consistent with the execute against the full displayed size protection of investors. of any protected quotation in the NMS stock that was traded through. [62 FR 544, Jan. 3, 1997, as amended at 83 FR (7) The transaction that constituted 58429, Nov. 19, 2018] the trade-through was the execution of § 242.612 Minimum pricing increment. an order at a price that was not based, directly or indirectly, on the quoted (a) No national securities exchange, price of the NMS stock at the time of national securities association, alter- execution and for which the material native trading system, vendor, or terms were not reasonably deter- broker or dealer shall display, rank, or minable at the time the commitment accept from any person a bid or offer, to execute the order was made. an order, or an indication of interest in (8) The trading center displaying the any NMS stock priced in an increment protected quotation that was traded smaller than $0.01 if that bid or offer, through had displayed, within one sec- order, or indication of interest is priced ond prior to execution of the trans- equal to or greater than $1.00 per share. action that constituted the trade- (b) No national securities exchange, through, a best bid or best offer, as ap- national securities association, alter- plicable, for the NMS stock with a native trading system, vendor, or price that was equal or inferior to the broker or dealer shall display, rank, or price of the trade-through transaction. accept from any person a bid or offer, (9) The transaction that constituted an order, or an indication of interest in the trade-through was the execution by any NMS stock priced in an increment a trading center of an order for which, smaller than $0.0001 if that bid or offer, at the time of receipt of the order, the order, or indication of interest is priced trading center had guaranteed an exe- less than $1.00 per share.

857

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00867 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.613 17 CFR Ch. II (4–1–20 Edition)

(c) The Commission, by order, may consolidated audit trail data, including exempt from the provisions of this sec- the capacity of the consolidated audit tion, either unconditionally or on spec- trail to efficiently incorporate, in a ified terms and conditions, any person, cost-effective manner, improvements security, quotation, or order, or any in technology, additional capacity, ad- class or classes of persons, securities, ditional order data, information about quotations, or orders, if the Commis- additional securities or transactions, sion determines that such exemption is changes in regulatory requirements, necessary or appropriate in the public and other developments; interest, and is consistent with the (vi) The feasibility, benefits, and protection of investors. costs of broker-dealers reporting to the consolidated audit trail in a timely § 242.613 Consolidated audit trail. manner: (a) Creation of a national market sys- (A) The identity of all market par- tem plan governing a consolidated audit ticipants (including broker-dealers and trail. (1) Each national securities ex- customers) that are allocated NMS se- change and national securities associa- curities, directly or indirectly, in a pri- tion shall jointly file on or before 270 mary market transaction; days from the date of publication of (B) The number of such securities the Adopting Release in the FEDERAL each such market participant is allo- REGISTER a national market system cated; and plan to govern the creation, implemen- (C) The identity of the broker-dealer tation, and maintenance of a consoli- making each such allocation; dated audit trail and central repository (vii) The detailed estimated costs for as required by this section. The na- creating, implementing, and maintain- tional market system plan shall dis- ing the consolidated audit trail as con- cuss the following considerations: templated by the national market sys- (i) The method(s) by which data will tem plan, which estimated costs should be reported to the central repository specify: including, but not limited to, the (A) An estimate of the costs to the sources of such data and the manner in plan sponsors for establishing and which the central repository will re- maintaining the central repository; ceive, extract, transform, load, and re- (B) An estimate of the costs to mem- tain such data; and the basis for select- bers of the plan sponsors, initially and ing such method(s); on an ongoing basis, for reporting the (ii) The time and method by which data required by the national market the data in the central repository will system plan; be made available to regulators, in ac- (C) An estimate of the costs to the cordance with paragraph (e)(1) of this plan sponsors, initially and on an ongo- section, to perform surveillance or ing basis, for reporting the data re- analyses, or for other purposes as part quired by the national market system of their regulatory and oversight re- plan; and sponsibilities; (D) How the plan sponsors propose to (iii) The reliability and accuracy of fund the creation, implementation, and the data reported to and maintained by maintenance of the consolidated audit the central repository throughout its trail, including the proposed allocation lifecycle, including transmission and of such estimated costs among the plan receipt from market participants; data sponsors, and between the plan spon- extraction, transformation and loading sors and members of the plan sponsors; at the central repository; data mainte- (viii) An analysis of the impact on nance and management at the central competition, efficiency and capital for- repository; and data access by regu- mation of creating, implementing, and lators; maintaining of the national market (iv) The security and confidentiality system plan; of the information reported to the cen- (ix) A plan to eliminate existing tral repository; rules and systems (or components (v) The flexibility and scalability of thereof) that will be rendered duplica- the systems used by the central reposi- tive by the consolidated audit trail, in- tory to collect, consolidate and store cluding identification of such rules and

858

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00868 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.613

systems (or components thereof); to (3) The national market system plan the extent that any existing rules or submitted pursuant to this section systems related to monitoring quotes, shall require each national securities orders, and executions provide informa- exchange and national securities asso- tion that is not rendered duplicative by ciation to: the consolidated audit trail, an anal- (i) Within two months after effective- ysis of: ness of the national market system (A) Whether the collection of such in- plan jointly (or under the governance formation remains appropriate; structure described in the plan) select (B) If still appropriate, whether such a person to be the plan processor; information should continue to be sep- (ii) Within four months after effec- arately collected or should instead be tiveness of the national market system incorporated into the consolidated plan synchronize their business clocks audit trail; and and require members of each such ex- (C) If no longer appropriate, how the change and association to synchronize collection of such information could be their business clocks in accordance efficiently terminated; the steps the with paragraph (d) of this section; plan sponsors propose to take to seek (iii) Within one year after effective- Commission approval for the elimi- ness of the national market system nation of such rules and systems (or plan provide to the central repository components thereof); and a timetable the data specified in paragraph (c) of for such elimination, including a de- this section; scription of how the plan sponsors pro- (iv) Within fourteen months after ef- pose to phase in the consolidated audit fectiveness of the national market sys- trail and phase out such existing rules tem plan implement a new or enhanced and systems (or components thereof); surveillance system(s) as required by (x) Objective milestones to assess paragraph (f) of this section; progress toward the implementation of (v) Within two years after effective- the national market system plan; ness of the national market system (xi) The process by which the plan plan require members of each such ex- sponsors solicited views of their mem- change and association, except those bers and other appropriate parties re- members that qualify as small broker- garding the creation, implementation, dealers as defined in § 240.0–10(c) of this and maintenance of the consolidated chapter, to provide to the central re- audit trail, a summary of the views of pository the data specified in para- such members and other parties, and graph (c) of this section; and how the plan sponsors took such views (vi) Within three years after effec- into account in preparing the national tiveness of the national market system market system plan; and plan require members of each such ex- (xii) Any reasonable alternative ap- change and association that qualify as proaches to creating, implementing, small broker-dealers as defined in and maintaining a consolidated audit § 240.0–10(c) of this chapter to provide trail that the plan sponsors considered to the central repository the data spec- in developing the national market sys- ified in paragraph (c) of this section. tem plan including, but not limited to, (4) Each national securities exchange a description of any such alternative and national securities association approach; the relative advantages and shall be a sponsor of the national mar- disadvantages of each such alternative, ket system plan submitted pursuant to including an assessment of the alter- this section and approved by the Com- native’s costs and benefits; and the mission. basis upon which the plan sponsors se- (5) No national market system plan lected the approach reflected in the na- filed pursuant to this section, or any tional market system plan. amendment thereto, shall become ef- (2) The national market system plan, fective unless approved by the Commis- or any amendment thereto, filed pursu- sion or otherwise permitted in accord- ant to this section shall comply with ance with the procedures set forth in the requirements in § 242.608(a), if appli- § 242.608. In determining whether to ap- cable, and be filed with the Commis- prove the national market system sion pursuant to § 242.608. plan, or any amendment thereto, and

859

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00869 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.613 17 CFR Ch. II (4–1–20 Edition)

whether the national market system system plan, a written assessment of plan or any amendment thereto is in the operation of the consolidated audit the public interest under § 242.608(b)(2), trail. Such document shall include, at the Commission shall consider the im- a minimum: pact of the national market system (i) An evaluation of the performance plan or amendment, as applicable, on of the consolidated audit trail includ- efficiency, competition, and capital ing, at a minimum, with respect to formation. data accuracy (consistent with para- (b) Operation and administration of the graph (e)(6) of this section), timeliness national market system plan. (1) The na- of reporting, comprehensiveness of tional market system plan submitted data elements, efficiency of regulatory pursuant to this section shall include a access, system speed, system down- governance structure to ensure fair time, system security (consistent with representation of the plan sponsors, paragraph (e)(4) of this section), and and administration of the central re- other performance metrics to be deter- pository, including the selection of the mined by the Chief Compliance Officer, plan processor. along with a description of such (2) The national market system plan metrics; submitted pursuant to this section (ii) A detailed plan, based on such shall include a provision addressing the evaluation, for any potential improve- requirements for the admission of new ments to the performance of the con- sponsors of the plan and the with- solidated audit trail with respect to drawal of existing sponsors from the any of the following: improving data plan. accuracy; shortening reporting time- (3) The national market system plan frames; expanding data elements; add- submitted pursuant to this section ing granularity and details regarding shall include a provision addressing the the scope and nature of Customer-IDs; percentage of votes required by the expanding the scope of the national plan sponsors to effectuate amend- market system plan to include new in- ments to the plan. struments and new types of trading and (4) The national market system plan order activities; improving the effi- submitted pursuant to this section ciency of regulatory access; increasing shall include a provision addressing the system speed; reducing system down- manner in which the costs of operating time; and improving performance the central repository will be allocated under other metrics to be determined among the national securities ex- by the Chief Compliance Officer; changes and national securities associations that are sponsors of the plan, (iii) An estimate of the costs associ- including a provision addressing the ated with any such potential improve- manner in which costs will be allocated ments to the performance of the con- to new sponsors to the plan. solidated audit trail, including an as- (5) The national market system plan sessment of the potential impact on submitted pursuant to this section competition, efficiency, and capital shall require the appointment of a formation; and Chief Compliance Officer to regularly (iv) An estimated implementation review the operation of the central re- timeline for any such potential im- pository to assure its continued effec- provements, if applicable. tiveness in light of market and techno- (7) The national market system plan logical developments, and make any submitted pursuant to this section appropriate recommendations for en- shall include an Advisory Committee hancements to the nature of the infor- which shall function in accordance mation collected and the manner in with the provisions set forth in this which it is processed. paragraph (b)(7). The purpose of the (6) The national market system plan Advisory Committee shall be to advise submitted pursuant to this section the plan sponsors on the implementa- shall include a provision requiring the tion, operation, and administration of plan sponsors to provide to the Com- the central repository. mission, at least every two years after (i) The national market system plan effectiveness of the national market submitted pursuant to this section

860

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00870 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.613

shall set forth the term and composi- change, national securities association, tion of the Advisory Committee, which or member. The national market sys- composition shall include representa- tem plan may accommodate voluntary tives of the member firms of the plan reporting prior to 8:00 a.m. Eastern sponsors. Time, but shall not impose an earlier (ii) Members of the Advisory Com- reporting deadline on the reporting mittee shall have the right to attend parties. any meetings of the plan sponsors, to (4) The national market system plan receive information concerning the op- submitted pursuant to this section eration of the central repository, and shall require each member of a na- to provide their views to the plan spon- tional securities exchange or national sors; provided, however, that the plan securities association to record and re- sponsors may meet without the Advi- port to the central repository the in- sory Committee members in executive formation required by paragraphs session if, by affirmative vote of a ma- (c)(7)(vi) through (viii) of this section jority of the plan sponsors, the plan by 8:00 a.m. Eastern Time on the trad- sponsors determine that such an execu- ing day following the day the member tive session is required. receives such information. The na- (c) Data recording and reporting. (1) tional market system plan may accom- The national market system plan sub- modate voluntary reporting prior to mitted pursuant to this section shall 8:00 a.m. Eastern Time, but shall not provide for an accurate, time- impose an earlier reporting deadline on sequenced record of orders beginning the reporting parties. with the receipt or origination of an (5) The national market system plan order by a member of a national securi- submitted pursuant to this section ties exchange or national securities as- shall require each national securities sociation, and further documenting the exchange and its members to record life of the order through the process of and report to the central repository routing, modification, cancellation, the information required by paragraph and execution (in whole or in part) of (c)(7) of this section for each NMS se- the order. curity registered or listed for trading (2) The national market system plan on such exchange or admitted to un- submitted pursuant to this section listed trading privileges on such ex- shall require each national securities change. exchange, national securities associa- (6) The national market system plan tion, and member to report to the cen- submitted pursuant to this section tral repository the information re- shall require each national securities quired by paragraph (c)(7) of this sec- association and its members to record tion in a uniform electronic format, or and report to the central repository in a manner that would allow the cen- the information required by paragraph tral repository to convert the data to a (c)(7) of this section for each NMS se- uniform electronic format, for consoli- curity for which transaction reports dation and storage. are required to be submitted to the as- (3) The national market system plan sociation. submitted pursuant to this section (7) The national market system plan shall require each national securities submitted pursuant to this section exchange, national securities associa- shall require each national securities tion, and member to record the infor- exchange, national securities associa- mation required by paragraphs (c)(7)(i) tion, and any member of such exchange through (v) of this section contempora- or association to record and electroni- neously with the reportable event. The cally report to the central repository national market system plan shall re- details for each order and each report- quire that information recorded pursu- able event, including, but not limited ant to paragraphs (c)(7)(i) through (v) to, the following information: of this section must be reported to the (i) For original receipt or origination central repository by 8:00 a.m. Eastern of an order: Time on the trading day following the (A) Customer-ID(s) for each cus- day such information has been re- tomer; corded by the national securities ex- (B) The CAT–Order-ID;

861

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00871 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.613 17 CFR Ch. II (4–1–20 Edition)

(C) The CAT–Reporter-ID of the (F) The CAT-Reporter-ID of the broker-dealer receiving or originating broker-dealer or Customer-ID of the the order; person giving the modification or can- (D) Date of order receipt or origina- cellation instruction. tion; (v) If the order is executed, in whole (E) Time of order receipt or origina- or part, the following information: tion (using time stamps pursuant to (A) The CAT-Order-ID; paragraph (d)(3) of this section); and (B) Date of execution; (F) Material terms of the order. (C) Time of execution (using time (ii) For the routing of an order, the stamps pursuant to paragraph (d)(3) of following information: this section); (A) The CAT-Order-ID; (D) Execution capacity (principal, (B) Date on which the order is rout- agency, riskless principal); ed; (E) Execution price and size; (C) Time at which the order is routed (F) The CAT-Reporter-ID of the na- (using time stamps pursuant to para- tional securities exchange or broker- graph (d)(3) of this section); dealer executing the order; and (D) The CAT-Reporter-ID of the (G) Whether the execution was re- broker-dealer or national securities ex- ported pursuant to an effective trans- change routing the order; action reporting plan or the Plan for (E) The CAT-Reporter-ID of the Reporting of Consolidated Options Last broker-dealer, national securities ex- Sale Reports and Quotation Informa- change, or national securities association. tion to which the order is being routed; (vi) If the order is executed, in whole (F) If routed internally at the broker- or part, the following information: dealer, the identity and nature of the department or desk to which an order (A) The account number for any sub- is routed; and accounts to which the execution is al- (G) Material terms of the order. located (in whole or part); (iii) For the receipt of an order that (B) The CAT-Reporter-ID of the has been routed, the following informa- clearing broker or prime broker, if ap- tion: plicable; and (A) The CAT-Order-ID; (C) The CAT-Order-ID of any contra- (B) Date on which the order is re- side order(s). ceived; (vii) If the trade is cancelled, a can- (C) Time at which the order is re- celled trade indicator. ceived (using time stamps pursuant to (viii) For original receipt or origina- paragraph (d)(3) of this section); tion of an order, the following informa- (D) The CAT-Reporter-ID of the tion: broker-dealer, national securities ex- (A) Information of sufficient detail to change, or national securities associa- identify the customer; and tion receiving the order; (B) Customer account information. (E) The CAT-Reporter-ID of the (8) All plan sponsors and their mem- broker-dealer or national securities ex- bers shall use the same Customer-ID change routing the order; and and CAT-Reporter-ID for each cus- (F) Material terms of the order. tomer and broker-dealer. (iv) If the order is modified or can- (d) Clock synchronization and time celled, the following information: stamps. The national market system (A) The CAT-Order-ID; plan submitted pursuant to this sec- (B) Date the modification or can- tion shall require: cellation is received or originated; (1) Each national securities ex- (C) Time the modification or can- change, national securities association, cellation is received or originated and member of such exchange or asso- (using time stamps pursuant to para- ciation to synchronize its business graph (d)(3) of this section); clocks that are used for the purposes of (D) Price and remaining size of the recording the date and time of any re- order, if modified; portable event that must be reported (E) Other changes in material terms pursuant to this section to the time of the order, if modified; and maintained by the National Institute

862

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00872 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.613

of Standards and Technology, con- tion for all reportable events for that sistent with industry standards; order. (2) Each national securities exchange (2) Each national securities ex- and national securities association to change, national securities association, evaluate annually the clock synchroni- and the Commission shall have access zation standard to determine whether to the central repository, including all it should be shortened, consistent with systems operated by the central reposi- changes in industry standards; and tory, and access to and use of the data (3) Each national securities ex- reported to and consolidated by the change, national securities association, central repository under paragraph (c) and member of such exchange or asso- of this section, for the purpose of per- ciation to utilize the time stamps re- forming its respective regulatory and quired by paragraph (c)(7) of this sec- oversight responsibilities pursuant to tion, with at minimum the granularity the federal securities laws, rules, and set forth in the national market sys- regulations. The national market system plan submitted pursuant to this tem plan submitted pursuant to this section, which shall reflect current in- section shall provide that such access dustry standards and be at least to the to and use of such data by each na- millisecond. To the extent that the rel- tional securities exchange, national se- evant order handling and execution curities association, and the Commis- systems of any national securities ex- sion for the purpose of performing its change, national securities association, regulatory and oversight responsibil- or member of such exchange or associa- ities pursuant to the federal securities tion utilize time stamps in increments laws, rules, and regulations shall not finer than the minimum required by be limited. the national market system plan, the (3) The national market system plan plan shall require such national securi- submitted pursuant to this section ties exchange, national securities asso- shall include a provision requiring the ciation, or member to utilize time creation and maintenance by the plan stamps in such finer increments when processor of a method of access to the providing data to the central reposi- consolidated data stored in the central tory, so that all reportable events re- repository that includes the ability to ported to the central repository by any run searches and generate reports. national securities exchange, national (4) The national market system plan securities association, or member can submitted pursuant to this section be accurately sequenced. The national shall include policies and procedures, market system plan shall require the including standards, to be used by the sponsors of the national market sys- plan processor to: tem plan to annually evaluate whether (i) Ensure the security and confiden- industry standards have evolved such tiality of all information reported to that the required time stamp standard the central repository by requiring should be in finer increments. that: (e) Central repository. (1) The national (A) All plan sponsors and their em- market system plan submitted pursu- ployees, as well as all employees of the ant to this section shall provide for the central repository, agree to use appro- creation and maintenance of a central priate safeguards to ensure the con- repository. Such central repository fidentiality of such data and agree not shall be responsible for the receipt, to use such data for any purpose other consolidation, and retention of all in- than surveillance and regulatory pur- formation reported pursuant to para- poses, provided that nothing in this graph (c)(7) of this section. The central paragraph (e)(4)(i)(A) shall be con- repository shall store and make avail- strued to prevent a plan sponsor from able to regulators data in a uniform using the data that it reports to the electronic format, and in a form in central repository for regulatory, sur- which all events pertaining to the same veillance, commercial, or other pur- originating order are linked together poses as otherwise permitted by appli- in a manner that ensures timely and cable law, rule, or regulation; accurate retrieval of the information (B) Each plan sponsor adopt and en- required by paragraph (c)(7) of this sec- force rules that:

863

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00873 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.613 17 CFR Ch. II (4–1–20 Edition)

(1) Require information barriers be- compliance with such maximum error tween regulatory staff and non-regu- rate and, in the event of noncompli- latory staff with regard to access and ance, will promptly remedy the causes use of data in the central repository; thereof; and (ii) Require the central repository to (2) Permit only persons designated by measure the error rate each business plan sponsors to have access to the day and promptly take appropriate re- data in the central repository; medial action, at a minimum, if the (C) The plan processor: error rate exceeds the maximum error (1) Develop and maintain a com- rate specified in the plan; prehensive information security pro- (iii) Specify a process for identifying gram for the central repository, with and correcting errors in the data re- dedicated staff, that is subject to reg- ported to the central repository pursu- ular reviews by the Chief Compliance ant to paragraphs (c)(3) and (c)(4) of Officer; (2) Have a mechanism to confirm the this section, including the process for identity of all persons permitted to ac- notifying the national securities excess the data; and changes, national securities associa- (3) Maintain a record of all instances tion, and members who reported erro- where such persons access the data; neous data to the central repository of and such errors, to help ensure that such (D) The plan sponsors adopt penalties errors are promptly corrected by the for non-compliance with any policies reporting entity, and for disciplining and procedures of the plan sponsors or those who repeatedly report erroneous central repository with respect to in- data; and formation security. (iv) Specify the time by which data (ii) Ensure the timeliness, accuracy, that has been corrected will be made integrity, and completeness of the data available to regulators. provided to the central repository pur- (7) The national market system plan suant to paragraph (c) of this section; submitted pursuant to this section and shall require the central repository to (iii) Ensure the accuracy of the con- collect and retain on a current and solidation by the plan processor of the continuing basis and in a format com- data provided to the central repository patible with the information consoli- pursuant to paragraph (c) of this sec- dated and stored pursuant to paragraph tion. (c)(7) of this section: (5) The national market system plan (i) Information, including the size submitted pursuant to this section and quote condition, on the national shall address whether there will be an best bid and national best offer for annual independent evaluation of the each NMS security; security of the central repository and: (ii) Transaction reports reported pur- (i) If so, provide a description of the suant to an effective transaction re- scope of such planned evaluation; and porting plan filed with the Commission (ii) If not, provide a detailed expla- nation of the alternative measures for pursuant to, and meeting the require- evaluating the security of the central ments of, § 242.601; and repository that are planned instead. (iii) Last sale reports reported pursu- (6) The national market system plan ant to the Plan for Reporting of Con- submitted pursuant to this section solidated Options Last Sale Reports shall: and Quotation Information filed with (i) Specify a maximum error rate to the Commission pursuant to, and meet- be tolerated by the central repository ing the requirements of, § 242.608. for any data reported pursuant to para- (8) The national market system plan graphs (c)(3) and (c)(4) of this section; submitted pursuant to this section describe the basis for selecting such shall require the central repository to maximum error rate; explain how the retain the information collected pursu- plan sponsors will seek to reduce such ant to paragraphs (c)(7) and (e)(7) of maximum error rate over time; de- this section in a convenient and usable scribe how the plan will seek to ensure standard electronic data format that is

864

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00874 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.613

directly available and searchable elec- be considered a violation of this sec- tronically without any manual inter- tion. vention for a period of not less than (3) The national market system plan five years. submitted pursuant to this section (f) Surveillance. Every national secu- shall include a mechanism to ensure rities exchange and national securities compliance by the sponsors of the plan association subject to this section shall with the requirements of any approved develop and implement a surveillance plan. Such enforcement mechanism system, or enhance existing surveil- may include penalties where appro- lance systems, reasonably designed to priate. make use of the consolidated informa- (i) Other securities and other types of tion contained in the consolidated transactions. The national market sys- audit trail. tem plan submitted pursuant to this (g) Compliance by members. (1) Each section shall include a provision re- national securities exchange and na- quiring each national securities ex- tional securities association shall file change and national securities associa- with the Commission pursuant to section to jointly provide to the Commis- tion 19(b)(2) of the Act (15 U.S.C. sion within six months after effective- 78s(b)(2)) and § 240.19b–4 of this chapter ness of the national market system on or before 60 days from approval of plan a document outlining how such the national market system plan a pro- exchanges and associations could in- posed rule change to require its mem- corporate into the consolidated audit bers to comply with the requirements trail information with respect to eq- of this section and the national market uity securities that are not NMS secu- system plan approved by the Commis- rities, debt securities, primary market sion. transactions in equity securities that (2) Each member of a national securi- are not NMS securities, and primary ties exchange or national securities as- market transactions in debt securities, sociation shall comply with all the pro- including details for each order and revisions of any approved national mar- portable event that may be required to ket system plan applicable to mem- be provided, which market participants bers. may be required to provide the data, an (3) The national market system plan implementation timeline, and a cost submitted pursuant to this section estimate. shall include a provision requiring each national securities exchange and na- (j) Definitions. As used in this section: tional securities association to agree (1) The term CAT–Order-ID shall to enforce compliance by its members mean a unique order identifier or series with the provisions of any approved of unique order identifiers that allows plan. the central repository to efficiently (4) The national market system plan and accurately link all reportable submitted pursuant to this section events for an order, and all orders that shall include a mechanism to ensure result from the aggregation or compliance with the requirements of disaggregation of such order. any approved plan by the members of a (2) The term CAT–Reporter-ID shall national securities exchange or na- mean, with respect to each national se- tional securities association. curities exchange, national securities (h) Compliance by national securities association, and member of a national exchanges and national securities associa- securities exchange or national securi- tions. (1) Each national securities ex- ties association, a code that uniquely change and national securities associa- and consistently identifies such person tion shall comply with the provisions for purposes of providing data to the of the national market system plan ap- central repository. proved by the Commission. (3) The term customer shall mean: (2) Any failure by a national securi- (i) The account holder(s) of the ac- ties exchange or national securities as- count at a registered broker-dealer sociation to comply with the provi- originating the order; and sions of the national market system (ii) Any person from whom the plan approved by the Commission shall broker-dealer is authorized to accept

865

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00875 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.900 17 CFR Ch. II (4–1–20 Edition)

trading instructions for such account, Exchange Act (15 U.S.C. 78c) have the if different from the account holder(s). same meaning as in Section 3 of the (4) The term customer account infor- Exchange Act and the rules or regula- mation shall include, but not be limited tions thereunder. In addition, for pur- to, account number, account type, cus- poses of Regulation SBSR (§§ 242.900 tomer type, date account opened, and through 242.909), the following defini- large trader identifier (if applicable). tions shall apply: (5) The term Customer-ID shall mean, (a) Affiliate means any person that, with respect to a customer, a code that directly or indirectly, controls, is con- uniquely and consistently identifies trolled by, or is under common control such customer for purposes of pro- with, a person. viding data to the central repository. (b) Asset class means those security- (6) The term error rate shall mean the based swaps in a particular broad cat- percentage of reportable events col- egory, including, but not limited to, lected by the central repository in credit derivatives and equity deriva- which the data reported does not fully tives. and accurately reflect the order event that occurred in the market. (c) [Reserved]. (7) The term material terms of the order (d) Branch ID means the UIC assigned shall include, but not be limited to, the to a branch or other unincorporated of- NMS security symbol; security type; fice of a participant. price (if applicable); size (displayed and (e) Broker ID means the UIC assigned non-displayed); side (buy/sell); order to a person acting as a broker for a type; if a sell order, whether the order participant. is long, short, short exempt; open/close (f) Business day means a day, based indicator; time in force (if applicable); on U.S. Eastern Time, other than a if the order is for a listed option, op- Saturday, Sunday, or a U.S. federal tion type (put/call), option symbol or holiday. root symbol, underlying symbol, strike (g) Clearing transaction means a secu- price, expiration date, and open/close; rity-based swap that has a registered and any special handling instructions. clearing agency as a direct (8) The term order shall include: counterparty. (i) Any order received by a member of (h) Control means, for purposes of a national securities exchange or na- §§ 242.900 through 242.909, the posses- tional securities association from any sion, direct or indirect, of the power to person; direct or cause the direction of the (ii) Any order originated by a mem- management and policies of a person, ber of a national securities exchange or whether through the ownership of vot- national securities association; or ing securities, by contract, or other- (iii) Any bid or offer. wise. A person is presumed to control (9) The term reportable event shall include, but not be limited to, the origi- another person if the person: nal receipt or origination, modifica- (1) Is a director, general partner or tion, cancellation, routing, and execu- officer exercising executive responsi- tion (in whole or in part) of an order, bility (or having similar status or func- and receipt of a routed order. tions); (2) Directly or indirectly has the [77 FR 45808, Aug. 1, 2012] right to vote 25 percent or more of a REGULATION SBSR—REGULATORY RE- class of voting securities or has the PORTING AND PUBLIC DISSEMINATION power to sell or direct the sale of 25 OF SECURITY-BASED SWAP INFORMA- percent or more of a class of voting se- TION curities; or (3) In the case of a partnership, has SOURCE: 80 FR 14728, Mar. 19, 2015, unless the right to receive, upon dissolution, otherwise noted. or has contributed, 25 percent or more of the capital. § 242.900 Definitions. (i) Counterparty means a person that Terms used in §§ 242.900 through is a direct counterparty or indirect 242.909 that appear in Section 3 of the counterparty of a security-based swap.

866

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00876 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.900

(j) Counterparty ID means the UIC as- event shall not include the scheduled signed to a counterparty to a security- expiration of the security-based swap, based swap. a previously described and anticipated (k) Direct counterparty means a per- interest rate adjustment (such as a son that is a primary obligor on a secu- quarterly interest rate adjustment), or rity-based swap. other event that does not result in any (l) Direct electronic access has the change to the contractual terms of the same meaning as in § 240.13n–4(a)(5) of security-based swap. this chapter. (r) Non-mandatory report means any (m) Exchange Act means the Securi- information provided to a registered ties Exchange Act of 1934 (15 U.S.C. 78a security-based swap data repository by et seq.), as amended. or on behalf of a counterparty other (n) Execution agent ID means the UIC than as required by §§ 242.900 through assigned to any person other than a 242.909. broker or trader that facilitates the (s) Non-U.S. person means a person execution of a security-based swap on that is not a U.S. person. behalf of a direct counterparty. (t) Parent means a legal person that (o) Foreign branch has the same controls a participant. meaning as in § 240.3a71–3(a)(1) of this (u) Participant, with respect to a reg- chapter. istered security-based swap data repos- (p) Indirect counterparty means a itory, means: guarantor of a direct counterparty’s (1) A counterparty, that meets the performance of any obligation under a criteria of § 242.908(b), of a security- security-based swap such that the di- based swap that is reported to that reg- rect counterparty on the other side can istered security-based swap data repos- exercise rights of recourse against the itory to satisfy an obligation under indirect counterparty in connection § 242.901(a); with the security-based swap; for these (2) A platform that reports a secu- purposes a direct counterparty has rity-based swap to that registered secu- rights of recourse against a guarantor rity-based swap data repository to sat- on the other side if the direct isfy an obligation under § 242.901(a); counterparty has a conditional or un- (3) A registered clearing agency that conditional legally enforceable right, is required to report to that registered in whole or in part, to receive pay- security-based swap data repository ments from, or otherwise collect from, whether or not it has accepted a secu- the guarantor in connection with the rity-based swap for clearing pursuant security-based swap. to § 242.901(e)(1)(ii); or (q) Life cycle event means, with re- (4) A registered broker-dealer (in- spect to a security-based swap, any cluding a registered security-based event that would result in a change in swap execution facility) that is re- the information reported to a reg- quired to report a security-based swap istered security-based swap data repos- to that registered security-based swap itory under § 242.901(c), (d), or (i), in- data repository by § 242.901(a). cluding: An assignment or novation of (v) Platform means a national securi- the security-based swap; a partial or ties exchange or security-based swap full termination of the security-based execution facility that is registered or swap; a change in the cash flows origi- exempt from registration. nally reported; for a security-based (w) Platform ID means the UIC as- swap that is not a clearing transaction, signed to a platform on which a secu- any change to the title or date of any rity-based swap is executed. master agreement, collateral agree- (x) Post-trade processor means any ment, margin agreement, or any other person that provides affirmation, con- agreement incorporated by reference firmation, matching, reporting, or into the security-based swap contract; clearing services for a security-based or a corporate action affecting a secu- swap transaction. rity or securities on which the secu- (y) Pre-enactment security-based swap rity-based swap is based (e.g., a merger, means any security-based swap exe- dividend, stock split, or bankruptcy). cuted before July 21, 2010 (the date of Notwithstanding the above, a life cycle enactment of the Dodd-Frank Act

867

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00877 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.901 17 CFR Ch. II (4–1–20 Edition)

(Pub. L. 111–203, H.R. 4173)), the terms (mm) Transaction ID means the UIC of which had not expired as of that assigned to a specific security-based date. swap transaction. (z) Price means the price of a secu- (nn) Transitional security-based swap rity-based swap transaction, expressed means a security-based swap executed in terms of the commercial conven- on or after July 21, 2010, and before the tions used in that asset class. first date on which trade-by-trade re- (aa) Product means a group of secu- porting of security-based swaps in that rity-based swap contracts each having asset class to a registered security- the same material economic terms ex- based swap data repository is required cept those relating to price and size. pursuant to §§ 242.900 through 242.909. (bb) Product ID means the UIC as- (oo) Ultimate parent means a legal signed to a product. person that controls a participant and that itself has no parent. (cc) Publicly disseminate means to (pp) Ultimate parent ID means the UIC make available through the Internet or assigned to an ultimate parent of a other electronic data feed that is wide- participant. ly accessible and in machine-readable (qq) Unique Identification Code or UIC electronic format. means a unique identification code as- (dd) [Reserved]. signed to a person, unit of a person, (ee) Registered clearing agency means product, or transaction. a person that is registered with the (rr) United States has the same mean- Commission as a clearing agency pur- ing as in § 240.3a71–3(a)(5) of this chap- suant to section 17A of the Exchange ter. Act (15 U.S.C. 78q–1) and any rules or (ss) U.S. person has the same meaning regulations thereunder. as in § 240.3a71–3(a)(4) of this chapter. (ff) Registered security-based swap data (tt) Widely accessible, as used in para- repository means a person that is reg- graph (cc) of this section, means widely istered with the Commission as a secu- available to users of the information rity-based swap data repository pursu- on a non-fee basis. ant to section 13(n) of the Exchange Act (15 U.S.C. 78m(n)) and any rules or [80 FR 14728, Mar. 19, 2015, as amended at 81 FR 53653, Aug. 12, 2016] regulations thereunder. (gg) Reporting side means the side of a § 242.901 Reporting obligations. security-based swap identified by (a) Assigning reporting duties. A secu- § 242.901(a)(2). rity-based swap, including a security- (hh) Side means a direct counterparty based swap that results from the allo- and any guarantor of that direct cation, termination, novation, or as- counterparty’s performance who meets signment of another security-based the definition of indirect counterparty swap, shall be reported as follows: in connection with the security-based (1) Platform-executed security-based swap. swaps that will be submitted to clearing. (ii) Time of execution means the point If a security-based swap is executed on at which the counterparties to a secu- a platform and will be submitted to rity-based swap become irrevocably clearing, the platform on which the bound under applicable law. transaction was executed shall report (jj) Trader ID means the UIC assigned to a registered security-based swap to a natural person who executes one data repository the counterparty ID or or more security-based swaps on behalf the execution agent ID of each direct of a direct counterparty. counterparty, as applicable, and the in- (kk) Trading desk means, with respect formation set forth in paragraph (c) of to a counterparty, the smallest dis- this section (except that, with respect crete unit of organization of the partic- to paragraph (c)(5) of this section, the ipant that purchases or sells security- platform need indicate only if both di- based swaps for the account of the par- rect counterparties are registered secu- ticipant or an affiliate thereof. rity-based swap dealers) and para- (ll) Trading desk ID means the UIC as- graphs (d)(9) and (10) of this section. signed to the trading desk of a partici- (2) All other security-based swaps. For pant. all security-based swaps other than

868

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00878 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.901

platform-executed security-based swap is effected by or through a reg- swaps that will be submitted to clear- istered broker-dealer (including a reg- ing, the reporting side shall provide the istered security-based swap execution information required by §§ 242.900 facility), the registered broker-dealer through 242.909 to a registered secu- (including a registered security-based rity-based swap data repository. The swap execution facility) shall report reporting side shall be determined as the counterparty ID or the execution follows: agent ID of each direct counterparty, (i) Clearing transactions. For a clear- as applicable, and the information set ing transaction, the reporting side is forth in paragraph (c) of this section the registered clearing agency that is a (except that, with respect to paragraph counterparty to the transaction. (c)(5) of this section, the registered (ii) Security-based swaps other than broker-dealer (including a registered clearing transactions. (A) If both sides of security-based swap execution facility) the security-based swap include a reg- need indicate only if both direct istered security-based swap dealer, the counterparties are registered security- sides shall select the reporting side. based swap dealers) and paragraphs (B) If only one side of the security- (d)(9) and (10) of this section. based swap includes a registered secu- (3) Notification to registered clearing rity-based swap dealer, that side shall agency. A person who, under paragraph be the reporting side. (a)(1) or (a)(2)(ii) of this section, has a (C) If both sides of the security-based duty to report a security-based swap swap include a registered major secu- that has been submitted to clearing at rity-based swap participant, the sides a registered clearing agency shall shall select the reporting side. promptly provide that registered clear- (D) If one side of the security-based ing agency with the transaction ID of swap includes a registered major secu- the submitted security-based swap and rity-based swap participant and the the identity of the registered security- other side includes neither a registered based swap data repository to which security-based swap dealer nor a reg- the transaction will be reported or has istered major security-based swap par- been reported. ticipant, the side including the reg- (b) Alternate recipient of security-based istered major security-based swap par- swap information. If there is no reg- ticipant shall be the reporting side. istered security-based swap data repos- (E) If neither side of the security- itory that will accept the report re- based swap includes a registered secu- quired by § 242.901(a), the person re- rity-based swap dealer or registered quired to make such report shall in- major security-based swap participant: stead provide the required information (1) If both sides include a U.S. person, to the Commission. the sides shall select the reporting (c) Primary trade information. The re- side. porting side shall report the following (2) If one side includes a non-U.S. per- information within the timeframe son that falls within § 242.908(b)(5) or a specified in paragraph (j) of this sec- U.S. person and the other side includes tion: a non-U.S. person that falls within (1) The product ID, if available. If the § 242.908(b)(5), the sides shall select the security-based swap has no product ID, reporting side. or if the product ID does not include (3) If one side includes only non-U.S. the following information, the report- persons that do not fall within ing side shall report: § 242.908(b)(5) and the other side in- (i) Information that identifies the se- cludes a non-U.S. person that falls curity-based swap, including the asset within § 242.908(b)(5) or a U.S. person, class of the security-based swap and the side including a non-U.S. person the specific underlying reference that falls within § 242.908(b)(5) or a U.S. asset(s), reference issuer(s), or ref- person shall be the reporting side. erence index; (4) If neither side includes a U.S. per- (ii) The effective date; son and neither side includes a non- (iii) The scheduled termination date; U.S. person that falls within (iv) The terms of any standardized § 242.908(b)(5) but the security-based fixed or floating rate payments, and

869

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00879 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.901 17 CFR Ch. II (4–1–20 Edition)

the frequency of any such payments; will not be allocated after execution, and the title and date of any master agree- (v) If the security-based swap is cus- ment, collateral agreement, margin tomized to the extent that the infor- agreement, or any other agreement in- mation provided in paragraphs (c)(1)(i) corporated by reference into the secu- through (iv) of this section does not rity-based swap contract; provide all of the material information (5) To the extent not provided pursu- necessary to identify such customized ant to paragraph (c) of this section or security-based swap or does not con- other provisions of this paragraph (d), tain the data elements necessary to any additional data elements included calculate the price, a flag to that ef- in the agreement between the counter- fect; parties that are necessary for a person (2) The date and time, to the second, to determine the market value of the of execution, expressed using Coordi- transaction; nated Universal Time (UTC); (6) If applicable, and to the extent (3) The price, including the currency not provided pursuant to paragraph (c) in which the price is expressed and the of this section, the name of the clear- amount(s) and currenc(ies) of any up- ing agency to which the security-based front payments; swap will be submitted for clearing; (4) The notional amount(s) and the (7) If the direct counterparties do not currenc(ies) in which the notional intend to submit the security-based amount(s) is expressed; swap to clearing, whether they have in- (5) If both sides of the security-based voked the exception in Section 3C(g) of swap include a registered security- the Exchange Act (15 U.S.C. 78c–3(g)); based swap dealer, an indication to that effect; (8) To the extent not provided pursu- (6) Whether the direct counterparties ant to the other provisions of this intend that the security-based swap paragraph (d), if the direct counterpar- will be submitted to clearing; and ties do not submit the security-based (7) If applicable, any flags pertaining swap to clearing, a description of the to the transaction that are specified in settlement terms, including whether the policies and procedures of the reg- the security-based swap is cash-settled istered security-based swap data repos- or physically settled, and the method itory to which the transaction will be for determining the settlement value; reported. (9) The platform ID, if applicable, or (d) Secondary trade information. In ad- if a registered broker-dealer (including dition to the information required a registered security-based swap execu- under paragraph (c) of this section, for tion facility) is required to report the each security-based swap for which it security-based swap by is the reporting side, the reporting side § 242.901(a)(2)(ii)(E)(4), the broker ID of shall report the following information that registered broker-dealer (includ- within the timeframe specified in para- ing a registered security-based swap graph (j) of this section: execution facility); and (1) The counterparty ID or the execu- (10) If the security-based swap arises tion agent ID of each counterparty, as from the allocation, termination, nova- applicable; tion, or assignment of one or more ex- (2) As applicable, the branch ID, isting security-based swaps, the trans- broker ID, execution agent ID, trader action ID of the allocated, terminated, ID, and trading desk ID of the direct assigned, or novated security-based counterparty on the reporting side; swap(s), except in the case of a clearing (3) To the extent not provided pursu- transaction that results from the net- ant to paragraph (c)(1) of this section, ting or compression of other clearing the terms of any fixed or floating rate transactions. payments, or otherwise customized or (e) Reporting of life cycle events. (1)(i) non-standard payment streams, includ- Generally. A life cycle event, and any ing the frequency and contingencies of adjustment due to a life cycle event, any such payments; that results in a change to information (4) For a security-based swap that is previously reported pursuant to para- not a clearing transaction and that graph (c), (d), or (i) of this section shall

870

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00880 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.901

be reported by the reporting side, ex- tion solely by operation of cept that the reporting side shall not § 242.908(a)(1)(ii)), or, if 24 hours after report whether or not a security-based the time of execution or acceptance, as swap has been accepted for clearing. applicable, would fall on a day that is (ii) Acceptance for clearing. A reg- not a business day, by the same time istered clearing agency shall report on the next day that is a business day. whether or not it has accepted a secu- The reporting timeframe for paragraph rity-based swap for clearing. (e) of this section shall be 24 hours (2) All reports of life cycle events and after the occurrence of the life cycle adjustments due to life cycle events event or the adjustment due to the life shall, within the timeframe specified in cycle event. paragraph (j) of this section, be re- APPENDIX TO 17 CFR 242.901 REPORTS RE- ported to the entity to which the origi- GARDING THE ESTABLISHMENT OF BLOCK nal security-based swap transaction THRESHOLDS AND REPORTING DELAYS FOR will be reported or has been reported REGULATORY REPORTING OF SECURITY- and shall include the transaction ID of BASED SWAP TRANSACTION DATA the original transaction. This appendix sets forth guidelines appli- (f) Time stamping incoming information. cable to reports that the Commission has di- A registered security-based swap data rected its staff to make in connection with repository shall time stamp, to the sec- the determination of block thresholds and ond, its receipt of any information sub- reporting delays for security-based swap mitted to it pursuant to paragraph (c), transaction data. The Commission intends to (d), (e), or (i) of this section. use these reports to inform its specification (g) Assigning transaction ID. A reg- of the criteria for determining what constitutes a large notional security-based swap istered security-based swap data repos- transaction (block trade) for particular mar- itory shall assign a transaction ID to kets and contracts; and the appropriate time each security-based swap, or establish delay for reporting large notional security- or endorse a methodology for trans- based swap transactions (block trades) to the action IDs to be assigned by third par- public in order to implement regulatory re- ties. quirements under Section 13 of the Act (15 (h) Format of reported information. A U.S.C. 78m). In producing these reports, the person having a duty to report shall staff shall consider security-based swap data collected by the Commission pursuant to electronically transmit the informa- other Title VII rules, as well as any other ap- tion required under this section in a plicable information as the staff may deter- format required by the registered secu- mine to be appropriate for its analysis. rity-based swap data repository to (a) Report topics. As appropriate, based on which it reports. the availability of data and information, the (i) Reporting of pre-enactment and reports should address the following topics transitional security-based swaps. With for each asset class: (1) Price impact. In connection with the respect to any pre-enactment security- Commission’s obligation to specify criteria based swap or transitional security- for determining what constitutes a block based swap in a particular asset class, trade and the appropriate reporting delay for and to the extent that information block trades, the report generally should as- about such transaction is available, the sess the effect of notional amount and ob- reporting side shall report all of the in- served reporting delay on price impact of formation required by paragraphs (c) trades in the security-based swap market. and (d) of this section to a registered (2) Hedging. In connection with the Com- mission’s obligation to specify criteria for security-based swap data repository determining what constitutes a block trade that accepts security-based swaps in and the appropriate reporting delay for block that asset class and indicate whether trades, the report generally should consider the security-based swap was open as of potential relationships between observed re- the date of such report. porting delays and the incidence and cost of (j) Interim timeframe for reporting. The hedging large trades in the security-based reporting timeframe for paragraphs (c) swap market, and whether these relation- and (d) of this section shall be 24 hours ships differ for interdealer trades and dealer to customer trades. after the time of execution (or accept- (3) Price efficiency. In connection with the ance for clearing in the case of a secu- Commission’s obligation to specify criteria rity-based swap that is subject to regu- for determining what constitutes a block latory reporting and public dissemina- trade and the appropriate reporting delay for

871

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00881 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.902 17 CFR Ch. II (4–1–20 Edition)

block trades, the report generally should as- the business transactions and market sess the relationship between reporting positions of any person; delays and the speed with which transaction (3) Any information regarding a secu- information is impounded into market rity-based swap reported pursuant to prices, estimating this relationship for trades of different notional amounts. § 242.901(i); (4) Other topics. Any other analysis of secu- (4) Any non-mandatory report; rity-based swap data and information, such (5) Any information regarding a secu- as security-based swap market liquidity and rity-based swap that is required to be price volatility, that the Commission or the reported pursuant to §§ 242.901 and staff deem relevant to the specification of: 242.908(a)(1) but is not required to be (i) The criteria for determining what con- publicly disseminated pursuant to stitutes a large notional security-based swap § 242.908(a)(2); transaction (block trade) for particular mar- (6) Any information regarding a kets and contracts; and clearing transaction that arises from (ii) The appropriate time delay for report- the acceptance of a security-based ing large notional security-based swap trans- swap for clearing by a registered clear- actions (block trades). (b) Timing of reports. Each report shall be ing agency or that results from netting complete no later than two years following other clearing transactions; the initiation of public dissemination of se- (7) Any information regarding the al- curity-based swap transaction data by the location of a security-based swap; or first registered SDR in that asset class. (8) Any information regarding a secu- (c) Public comment on the report. Following rity-based swap that has been rejected completion of the report, the report shall be from clearing or rejected by a prime published in the FEDERAL REGISTER for pub- broker if the original transaction re- lic comment. port has not yet been publicly dissemi- [80 FR 14728, Mar. 19, 2015, as amended at 81 nated. FR 53653, Aug. 12, 2016] (d) Temporary restriction on other market data sources. No person shall make § 242.902 Public dissemination of available to one or more persons (other transaction reports. than a counterparty or a post-trade (a) General. Except as provided in processor) transaction information re- paragraph (c) of this section, a reg- lating to a security-based swap before istered security-based swap data repos- the primary trade information about itory shall publicly disseminate a the security-based swap is sent to a transaction report of a security-based registered security-based swap data re- swap, or a life cycle event or adjust- pository. ment due to a life cycle event, imme- [80 FR 14728, Mar. 19, 2015, as amended at 81 diately upon receipt of information FR 53654, Aug. 12, 2016] about the security-based swap, or upon re-opening following a period when the § 242.903 Coded information. registered security-based swap data re- (a) If an internationally recognized pository was closed. The transaction standards-setting system that imposes report shall consist of all the informa- fees and usage restrictions on persons tion reported pursuant to § 242.901(c), that obtain UICs for their own usage plus any condition flags contemplated that are fair and reasonable and not by the registered security-based swap unreasonably discriminatory and that data repository’s policies and proce- meets the criteria of paragraph (b) of dures that are required by § 242.907. this section is recognized by the Com- (b) [Reserved]. mission and has assigned a UIC to a (c) Non-disseminated information. A person, unit of a person, or product (or registered security-based swap data re- has endorsed a methodology for assign- pository shall not disseminate: ing transaction IDs), the registered se- (1) The identity of any counterparty curity-based swap data repository shall to a security-based swap; employ that UIC (or methodology for (2) With respect to a security-based assigning transaction IDs). If no such swap that is not cleared at a registered system has been recognized by the clearing agency and that is reported to Commission, or a recognized system the registered security-based swap data has not assigned a UIC to a particular repository, any information disclosing person, unit of a person, or product (or

872

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00882 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.905

has not endorsed a methodology for as- istered security-based swap data repos- signing transaction IDs), the registered itory shall, to the extent reasonably security-based swap data repository possible under the circumstances, shall assign a UIC to that person, unit avoid scheduling special closing hours of person, or product using its own during periods when, in its estimation, methodology (or endorse a method- the U.S. market and major foreign ology for assigning transaction IDs). If markets are most active; and provide the Commission has recognized such a reasonable advance notice of its special system that assigns UICs to persons, closing hours to participants and to each participant of a registered secu- the public. rity-based swap data repository shall (c) During normal closing hours, and obtain a UIC from or through that sys- to the extent reasonably practicable tem for identifying itself, and each par- during special closing hours, a reg- ticipant that acts as a guarantor of a istered security-based swap data repos- direct counterparty’s performance of itory shall have the capability to re- any obligation under a security-based ceive and hold in queue information re- swap that is subject to § 242.908(a) shall, garding security-based swaps that has if the direct counterparty has not al- been reported pursuant to §§ 242.900 ready done so, obtain a UIC for identi- through 242.909. fying the direct counterparty from or (d) When a registered security-based through that system, if that system swap data repository re-opens fol- permits third-party registration with- lowing normal closing hours or special out a requirement to obtain prior per- closing hours, it shall disseminate mission of the direct counterparty. transaction reports of security-based (b) A registered security-based swap swaps held in queue, in accordance data repository may permit informa- with the requirements of § 242.902. tion to be reported pursuant to (e) If a registered security-based swap § 242.901, and may publicly disseminate data repository could not receive and that information pursuant to § 242.902, hold in queue transaction information using codes in place of certain data ele- that was required to be reported pursu- ments, provided that the information ant to §§ 242.900 through 242.909, it must necessary to interpret such codes is immediately upon re-opening send a widely available to users of the infor- message to all participants that it has mation on a non-fee basis. resumed normal operations. There- after, any participant that had an obli- § 242.904 Operating hours of reg- gation to report information to the istered security-based swap data re- registered security-based swap data repositories. pository pursuant to §§ 242.900 through A registered security-based swap 242.909, but could not do so because of data repository shall have systems in the registered security-based swap data place to continuously receive and dis- repository’s inability to receive and seminate information regarding secu- hold in queue data, must promptly re- rity-based swaps pursuant to §§ 242.900 port the information to the registered through 242.909, subject to the fol- security-based swap data repository. lowing exceptions: (a) A registered security-based swap § 242.905 Correction of errors in secu- data repository may establish normal rity-based swap information. closing hours during periods when, in (a) Duty to correct. Any counterparty its estimation, the U.S. market and or other person having a duty to report major foreign markets are inactive. A a security-based swap that discovers an registered security-based swap data re- error in information previously repository shall provide reasonable ad- ported pursuant to §§ 242.900 through vance notice to participants and to the 242.909 shall correct such error in ac- public of its normal closing hours. cordance with the following proce- (b) A registered security-based swap dures: data repository may declare, on an ad (1) If a person that was not the re- hoc basis, special closing hours to per- porting side for a security-based swap form system maintenance that cannot transaction discovers an error in the wait until normal closing hours. A reg- information reported with respect to

873

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00883 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.906 17 CFR Ch. II (4–1–20 Edition)

such security-based swap, that person ID, trading desk ID, and trader ID of shall promptly notify the person hav- each direct counterparty. Once a day, ing the duty to report the security- the registered security-based swap data based swap of the error; and repository shall send a report to each (2) If the person having the duty to participant of the registered security- report a security-based swap trans- based swap data repository or, if appli- action discovers an error in the infor- cable, an execution agent, identifying, mation reported with respect to a secu- for each security-based swap to which rity-based swap, or receives notifica- that participant is a counterparty, the tion from a counterparty of an error, security-based swap(s) for which the such person shall promptly submit to registered security-based swap data re- the entity to which the security-based pository lacks counterparty ID and (if swap was originally reported an applicable) broker ID, branch ID, exe- amended report pertaining to the origi- cution agent ID, trading desk ID, and nal transaction report. If the person trader ID. A participant of a registered having the duty to report reported the security-based swap data repository initial transaction to a registered secu- that receives such a report shall pro- rity-based swap data repository, such vide the missing information with re- person shall submit an amended report spect to its side of each security-based to the registered security-based swap swap referenced in the report to the data repository in a manner consistent registered security-based swap data re- with the policies and procedures con- pository within 24 hours. templated by § 242.907(a)(3). (b) Duty to provide ultimate parent and (b) Duty of security-based swap data re- affiliate information. Each participant of pository to correct. A registered secu- a registered security-based swap data rity-based swap data repository shall: repository that is not a platform, a (1) Upon discovery of an error or re- registered clearing agency, an exter- ceipt of a notice of an error, verify the nally managed investment vehicle, or a accuracy of the terms of the security- registered broker-dealer (including a based swap and, following such registered security-based swap execu- verification, promptly correct the erro- tion facility) that becomes a partici- neous information regarding such secu- pant solely as a result of making a re- rity-based swap contained in its sys- port to satisfy an obligation under tem; and § 242.901(a)(2)(ii)(E)(4) shall provide to (2) If such erroneous information re- the registered security-based swap data lates to a security-based swap that the repository information sufficient to registered security-based swap data re- identify its ultimate parent(s) and any pository previously disseminated and affiliate(s) of the participant that also falls into any of the categories of infor- are participants of the registered secu- mation enumerated in § 242.901(c), pub- rity-based swap data repository, using licly disseminate a corrected trans- ultimate parent IDs and counterparty action report of the security-based IDs. Any such participant shall swap promptly following verification of promptly notify the registered secu- the trade by the counterparties to the rity-based swap data repository of any security-based swap, with an indication changes to that information. that the report relates to a previously (c) Policies and procedures to support disseminated transaction. reporting compliance. Each participant [80 FR 14728, Mar. 19, 2015, as amended at 81 of a registered security-based swap FR 53654, Aug. 12, 2016] data repository that is a registered security-based swap dealer, registered § 242.906 Other duties of participants. major security-based swap participant, (a) Identifying missing UIC informa- registered clearing agency, platform, tion. A registered security-based swap or registered broker-dealer (including a data repository shall identify any secu- registered security-based swap execu- rity-based swap reported to it for tion facility) that becomes a partici- which the registered security-based pant solely as a result of making a re- swap data repository does not have the port to satisfy an obligation under counterparty ID and (if applicable) the § 242.901(a)(2)(ii)(E)(4) shall establish, broker ID, branch ID, execution agent maintain, and enforce written policies

874

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00884 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.907

and procedures that are reasonably de- (iii) Directing participants that re- signed to ensure that it complies with port security-based swaps to apply any obligations to report information such flags, as appropriate, in their re- to a registered security-based swap ports to the registered security-based data repository in a manner consistent swap data repository; and with §§ 242.900 through 242.909. Each (iv) Applying such flags: such participant shall review and up- (A) To disseminated reports to help date its policies and procedures at least to prevent a distorted view of the mar- annually. ket; or [81 FR 53654, Aug. 12, 2016] (B) In the case of a transaction referenced in § 242.902(c), to suppress the § 242.907 Policies and procedures of report from public dissemination en- registered security-based swap data tirely, as appropriate; repositories. (5) For assigning UICs in a manner (a) General policies and procedures. consistent with § 242.903; and With respect to the receipt, reporting, (6) For periodically obtaining from and dissemination of data pursuant to each participant other than a platform, §§ 242.900 through 242.909, a registered registered clearing agency, externally security-based swap data repository managed investment vehicle, or reg- shall establish and maintain written istered broker-dealer (including a reg- policies and procedures: istered security-based swap execution (1) That enumerate the specific data facility) that becomes a participant elements of a security-based swap that solely as a result of making a report to must be reported, which shall include, at a minimum, the data elements spec- satisfy an obligation under ified in § 242.901(c) and (d); § 242.901(a)(2)(ii)(E)(4) information that (2) That specify one or more accept- identifies the participant’s ultimate able data formats (each of which must parent(s) and any participant(s) with be an open-source structured data for- which the participant is affiliated, mat that is widely used by partici- using ultimate parent IDs and pants), connectivity requirements, and counterparty IDs. other protocols for submitting infor- (b) [Reserved]. mation; (c) Public availability of policies and (3) For specifying procedures for re- procedures. A registered security-based porting life cycle events and correc- swap data repository shall make the tions to previously submitted informa- policies and procedures required by tion, making corresponding updates or §§ 242.900 through 242.909 publicly avail- corrections to transaction records, and able on its Web site. applying an appropriate flag to the (d) Updating of policies and procedures. transaction report to indicate that the A registered security-based swap data report is an error correction required repository shall review, and update as to be disseminated by § 242.905(b)(2), or necessary, the policies and procedures is a life cycle event, or any adjustment required by §§ 242.900 through 242.909 at due to a life cycle event, required to be least annually. Such policies and pro- disseminated by § 242.902(a); cedures shall indicate the date on (4) For: which they were last reviewed. (i) Identifying characteristic(s) of a (e) A registered security-based swap security-based swap, or circumstances data repository shall provide to the associated with the execution or re- Commission, upon request, information porting of the security-based swap, or reports related to the timeliness, ac- that could, in the fair and reasonable curacy, and completeness of data re- estimation of the registered security- ported to it pursuant to §§ 242.900 based swap data repository, cause a through 242.909 and the registered secu- person without knowledge of these characteristic(s) or circumstance(s), to rity-based swap data repository’s poli- receive a distorted view of the market; cies and procedures thereunder. (ii) Establishing flags to denote such [80 FR 14728, Mar. 19, 2015, as amended at 81 characteristic(s) or circumstance(s); FR 53655, Aug. 12, 2016]

875

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00885 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.908 17 CFR Ch. II (4–1–20 Edition)

§ 242.908 Cross-border matters. (c) Substituted compliance—(1) General. (a) Application of Regulation SBSR to Compliance with the regulatory report- cross-border transactions. (1) A security- ing and public dissemination require- based swap shall be subject to regu- ments in sections 13(m) and 13A of the latory reporting and public dissemina- Act (15 U.S.C. 78m(m) and 78m–1), and tion if: the rules and regulations thereunder, (i) There is a direct or indirect may be satisfied by compliance with counterparty that is a U.S. person on the rules of a foreign jurisdiction that either or both sides of the transaction; is the subject of a Commission order (ii) The security-based swap is ac- described in paragraph (c)(2) of this cepted for clearing by a clearing agen- section, provided that at least one of cy having its principal place of busi- the direct counterparties to the secu- ness in the United States; rity-based swap is either a non-U.S. (iii) The security-based swap is exe- person or a foreign branch. cuted on a platform having its prin- (2) Procedure. (i) The Commission cipal place of business in the United may, conditionally or unconditionally, States; by order, make a substituted compli- (iv) The security-based swap is ef- ance determination regarding regu- fected by or through a registered latory reporting and public dissemina- broker-dealer (including a registered tion of security-based swaps with re- security-based swap execution facil- spect to a foreign jurisdiction if that ity); or jurisdiction’s requirements for the reg- (v) The transaction is connected with ulatory reporting and public dissemi- a non-U.S. person’s security-based nation of security-based swaps are swap dealing activity and is arranged, comparable to otherwise applicable re- negotiated, or executed by personnel of quirements. The Commission may, con- such non-U.S. person located in a U.S. ditionally or unconditionally, by order, branch or office, or by personnel of an make a substituted compliance deter- agent of such non-U.S. person located mination regarding regulatory report- in a U.S. branch or office. ing of security-based swaps that are (2) A security-based swap that is not subject to § 242.908(a)(2) with respect to included within paragraph (a)(1) of this a foreign jurisdiction if that jurisdic- section shall be subject to regulatory tion’s requirements for the regulatory reporting but not public dissemination reporting of security-based swaps are if there is a direct or indirect comparable to otherwise applicable re- counterparty on either or both sides of quirements. the transaction that is a registered security-based swap dealer or a reg- (ii) A party that potentially would istered major security-based swap par- comply with requirements under ticipant. §§ 242.900 through 242.909 pursuant to a (b) Limitation on obligations. Notwith- substituted compliance order or any standing any other provision of foreign financial regulatory authority §§ 242.900 through 242.909, a person shall or authorities supervising such a per- not incur any obligation under son’s security-based swap activities §§ 242.900 through 242.909 unless it is: may file an application, pursuant to (1) A U.S. person; the procedures set forth in § 240.0–13 of (2) A registered security-based swap this chapter, requesting that the Com- dealer or registered major security- mission make a substituted compliance based swap participant; determination regarding regulatory re- (3) A platform; porting and public dissemination with (4) A registered clearing agency; or respect to a foreign jurisdiction the (5) A non-U.S. person that, in connec- rules of which also would require re- tion with such person’s security-based porting and public dissemination of swap dealing activity, arranged, nego- those security-based swaps. tiated, or executed the security-based (iii) In making such a substituted swap using its personnel located in a compliance determination, the Com- U.S. branch or office, or using per- mission shall take into account such sonnel of an agent located in a U.S. factors as the Commission determines branch or office. are appropriate, such as the scope and

876

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00886 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.1000

objectives of the relevant foreign regu- pervisory and enforcement cooperation latory requirements, as well as the ef- and other matters arising under the fectiveness of the supervisory compli- substituted compliance determination. ance program administered, and the (v) The Commission may, on its own enforcement authority exercised, by initiative, modify or withdraw such the foreign financial regulatory au- order at any time, after appropriate thority to support oversight of its reg- notice and opportunity for comment. ulatory reporting and public dissemi- [80 FR 14728, Mar. 19, 2015, as amended at 81 nation system for security-based FR 53655, Aug. 12, 2016] swaps. The Commission shall not make such a substituted compliance deter- § 242.909 Registration of security- mination unless it finds that: based swap data repository as a se- (A) The data elements that are re- curities information processor. quired to be reported pursuant to the A registered security-based swap rules of the foreign jurisdiction are data repository shall also register with comparable to those required to be re- the Commission as a securities infor- ported pursuant to § 242.901; mation processor on Form SDR (B) The rules of the foreign jurisdic- (§ 249.1500 of this chapter). tion require the security-based swap to be reported and publicly disseminated in a manner and a timeframe com- Regulation SCI—Systems parable to those required by §§ 242.900 Compliance and Integrity through 242.909 (or, in the case of transactions that are subject to SOURCE: 79 FR 72436, Dec. 5, 2014, unless § 242.908(a)(2) but not to § 242.908(a)(1), otherwise noted. the rules of the foreign jurisdiction require the security-based swap to be re- § 242.1000 Definitions. ported in a manner and a timeframe For purposes of Regulation SCI comparable to those required by (§§ 242.1000 through 242.1007), the fol- §§ 242.900 through 242.909); lowing definitions shall apply: (C) The Commission has direct elec- Critical SCI systems means any SCI tronic access to the security-based systems of, or operated by or on behalf swap data held by a trade repository or of, an SCI entity that: foreign regulatory authority to which (1) Directly support functionality re- security-based swaps are reported pur- lating to: suant to the rules of that foreign juris- (i) Clearance and settlement systems diction; and of clearing agencies; (D) Any trade repository or foreign (ii) Openings, reopenings, and clos- regulatory authority in the foreign ju- ings on the primary listing market; risdiction that receives and maintains (iii) Trading halts; required transaction reports of secu- (iv) Initial public offerings; rity-based swaps pursuant to the laws (v) The provision of consolidated of that foreign jurisdiction is subject market data; or to requirements regarding data collec- (vi) Exclusively-listed securities; or tion and maintenance; systems capac- (2) Provide functionality to the secu- ity, integrity, resiliency, availability, rities markets for which the avail- and security; and recordkeeping that ability of alternatives is significantly are comparable to the requirements limited or nonexistent and without imposed on security-based swap data which there would be a material im- repositories by the Commission’s rules pact on fair and orderly markets. and regulations. Electronic signature has the meaning (iv) Before issuing a substituted com- set forth in § 240.19b–4(j) of this chapter. pliance order pursuant to this section, Exempt clearing agency subject to ARP the Commission shall have entered into means an entity that has received from memoranda of understanding and/or the Commission an exemption from other arrangements with the relevant registration as a clearing agency under foreign financial regulatory authority Section 17A of the Act, and whose ex- or authorities under such foreign finan- emption contains conditions that re- cial regulatory system addressing su- late to the Commission’s Automation

877

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00887 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.1000 17 CFR Ch. II (4–1–20 Edition)

Review Policies (ARP), or any Commis- SCI event means an event at an SCI sion regulation that supersedes or re- entity that constitutes: places such policies. (1) A systems disruption; Indirect SCI systems means any sys- (2) A systems compliance issue; or tems of, or operated by or on behalf of, (3) A systems intrusion. an SCI entity that, if breached, would SCI review means a review, following be reasonably likely to pose a security established procedures and standards, threat to SCI systems. that is performed by objective per- Major SCI event means an SCI event sonnel having appropriate experience that has had, or the SCI entity reason- to conduct reviews of SCI systems and ably estimates would have: indirect SCI systems, and which review (1) Any impact on a critical SCI sys- contains: tem; or (1) A risk assessment with respect to (2) A significant impact on the SCI such systems of an SCI entity; and entity’s operations or on market par- (2) An assessment of internal control ticipants. design and effectiveness of its SCI sys- Plan processor has the meaning set tems and indirect SCI systems to in- forth in § 242.600(b)(59). clude logical and physical security con- Responsible SCI personnel means, for a trols, development processes, and infor- particular SCI system or indirect SCI mation technology governance, con- system impacted by an SCI event, such sistent with industry standards. senior manager(s) of the SCI entity SCI self-regulatory organization or SCI having responsibility for such system, SRO means any national securities ex- and their designee(s). change, registered securities associa- SCI alternative trading system or SCI tion, or registered clearing agency, or ATS means an alternative trading sys- the Municipal Securities Rulemaking tem, as defined in § 242.300(a), which Board; provided however, that for pur- during at least four of the preceding six poses of this section, the term SCI self- calendar months: regulatory organization shall not in- (1) Had with respect to NMS stocks: clude an exchange that is notice reg- (i) Five percent (5%) or more in any istered with the Commission pursuant single NMS stock, and one-quarter per- to 15 U.S.C. 78f(g) or a limited purpose cent (0.25%) or more in all NMS stocks, national securities association reg- of the average daily dollar volume re- istered with the Commission pursuant ported by applicable transaction re- to 15 U.S.C. 78o–3(k). porting plans; or SCI systems means all computer, net- (ii) One percent (1%) or more in all work, electronic, technical, automated, NMS stocks of the average daily dollar or similar systems of, or operated by or volume reported by applicable trans- on behalf of, an SCI entity that, with action reporting plans; or respect to securities, directly support (2) Had with respect to equity securi- trading, clearance and settlement, ties that are not NMS stocks and for order routing, market data, market which transactions are reported to a regulation, or market surveillance. self-regulatory organization, five per- Senior management means, for pur- cent (5%) or more of the average daily poses of Rule 1003(b), an SCI entity’s dollar volume as calculated by the self- Chief Executive Officer, Chief Tech- regulatory organization to which such nology Officer, Chief Information Offi- transactions are reported; cer, General Counsel, and Chief Com- (3) Provided, however, that such SCI pliance Officer, or the equivalent of ATS shall not be required to comply such employees or officers of an SCI with the requirements of Regulation entity. SCI until six months after satisfying Systems compliance issue means an any of paragraphs (1) or (2) of this defi- event at an SCI entity that has caused nition, as applicable, for the first time. any SCI system of such entity to oper- SCI entity means an SCI self-regu- ate in a manner that does not comply latory organization, SCI alternative with the Act and the rules and regula- trading system, plan processor, or ex- tions thereunder or the entity’s rules empt clearing agency subject to ARP. or governing documents, as applicable.

878

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00888 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.1001

Systems disruption means an event in (vii) Monitoring of such systems to an SCI entity’s SCI systems that dis- identify potential SCI events. rupts, or significantly degrades, the (3) Each SCI entity shall periodically normal operation of an SCI system. review the effectiveness of the policies Systems intrusion means any unau- and procedures required by this para- thorized entry into the SCI systems or graph (a), and take prompt action to indirect SCI systems of an SCI entity. remedy deficiencies in such policies [79 FR 72436, Dec. 5, 2014, as amended at 80 and procedures. FR 81454, Dec. 30, 2015; 83 FR 58429, Nov. 19, (4) For purposes of this paragraph (a), 2018] such policies and procedures shall be deemed to be reasonably designed if § 242.1001 Obligations related to poli- they are consistent with current SCI cies and procedures of SCI entities. industry standards, which shall be (a) Capacity, integrity, resiliency, avail- comprised of information technology ability, and security. (1) Each SCI entity practices that are widely available to shall establish, maintain, and enforce information technology professionals written policies and procedures reason- in the financial sector and issued by an ably designed to ensure that its SCI authoritative body that is a U.S. gov- systems and, for purposes of security ernmental entity or agency, associa- standards, indirect SCI systems, have tion of U.S. governmental entities or levels of capacity, integrity, resiliency, agencies, or widely recognized organi- availability, and security, adequate to zation. Compliance with such current maintain the SCI entity’s operational SCI industry standards, however, shall capability and promote the mainte- not be the exclusive means to comply nance of fair and orderly markets. with the requirements of this para- (2) Policies and procedures required graph (a). by paragraph (a)(1) of this section shall (b) Systems compliance. (1) Each SCI include, at a minimum: entity shall establish, maintain, and (i) The establishment of reasonable enforce written policies and procedures current and future technological infra- reasonably designed to ensure that its structure capacity planning estimates; SCI systems operate in a manner that (ii) Periodic capacity stress tests of complies with the Act and the rules such systems to determine their ability and regulations thereunder and the en- to process transactions in an accurate, tity’s rules and governing documents, timely, and efficient manner; as applicable. (iii) A program to review and keep (2) Policies and procedures required current systems development and test- by paragraph (b)(1) of this section shall ing methodology for such systems; include, at a minimum: (iv) Regular reviews and testing, as (i) Testing of all SCI systems and any applicable, of such systems, including changes to SCI systems prior to imple- backup systems, to identify mentation; vulnerabilities pertaining to internal (ii) A system of internal controls and external threats, physical hazards, over changes to SCI systems; and natural or manmade disasters; (iii) A plan for assessments of the (v) Business continuity and disaster functionality of SCI systems designed recovery plans that include maintain- to detect systems compliance issues, ing backup and recovery capabilities including by responsible SCI personnel sufficiently resilient and geographi- and by personnel familiar with applica- cally diverse and that are reasonably ble provisions of the Act and the rules designed to achieve next business day and regulations thereunder and the SCI resumption of trading and two-hour re- entity’s rules and governing docu- sumption of critical SCI systems fol- ments; and lowing a wide-scale disruption; (iv) A plan of coordination and com- (vi) Standards that result in such munication between regulatory and systems being designed, developed, other personnel of the SCI entity, in- tested, maintained, operated, and cluding by responsible SCI personnel, surveilled in a manner that facilitates regarding SCI systems design, changes, the successful collection, processing, testing, and controls designed to detect and dissemination of market data; and and prevent systems compliance issues.

879

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00889 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.1002 17 CFR Ch. II (4–1–20 Edition)

(3) Each SCI entity shall periodically (1) Upon any responsible SCI per- review the effectiveness of the policies sonnel having a reasonable basis to and procedures required by this para- conclude that an SCI event has oc- graph (b), and take prompt action to curred, notify the Commission of such remedy deficiencies in such policies SCI event immediately; and procedures. (2) Within 24 hours of any responsible (4) Safe harbor from liability for indi- SCI personnel having a reasonable viduals. Personnel of an SCI entity basis to conclude that the SCI event shall be deemed not to have aided, has occurred, submit a written notifi- abetted, counseled, commanded, cation pertaining to such SCI event to caused, induced, or procured the viola- the Commission, which shall be made tion by an SCI entity of this paragraph on a good faith, best efforts basis and (b) if the person: include: (i) Has reasonably discharged the du- (i) A description of the SCI event, in- ties and obligations incumbent upon cluding the system(s) affected; and such person by the SCI entity’s policies (ii) To the extent available as of the and procedures; and time of the notification: The SCI enti- (ii) Was without reasonable cause to ty’s current assessment of the types believe that the policies and proce- and number of market participants po- dures relating to an SCI system for tentially affected by the SCI event; the which such person was responsible, or potential impact of the SCI event on had supervisory responsibility, were the market; a description of the steps not established, maintained, or en- the SCI entity has taken, is taking, or forced in accordance with this para- plans to take, with respect to the SCI graph (b) in any material respect. event; the time the SCI event was re- (c) Responsible SCI personnel. (1) Each solved or timeframe within which the SCI entity shall establish, maintain, SCI event is expected to be resolved; and enforce reasonably designed writ- and any other pertinent information ten policies and procedures that in- known by the SCI entity about the SCI clude the criteria for identifying re- event; sponsible SCI personnel, the designa- (3) Until such time as the SCI event tion and documentation of responsible is resolved and the SCI entity’s inves- SCI personnel, and escalation proce- tigation of the SCI event is closed, pro- dures to quickly inform responsible vide updates pertaining to such SCI SCI personnel of potential SCI events. event to the Commission on a regular (2) Each SCI entity shall periodically basis, or at such frequency as reason- review the effectiveness of the policies ably requested by a representative of and procedures required by paragraph the Commission, to correct any materi- (c)(1) of this section, and take prompt ally incorrect information previously action to remedy deficiencies in such provided, or when new material infor- policies and procedures. mation is discovered, including but not limited to, any of the information list- § 242.1002 Obligations related to SCI ed in paragraph (b)(2)(ii) of this sec- events. tion; (a) Corrective action. Upon any respon- (4)(i)(A) If an SCI event is resolved sible SCI personnel having a reasonable and the SCI entity’s investigation of basis to conclude that an SCI event has the SCI event is closed within 30 cal- occurred, each SCI entity shall begin endar days of the occurrence of the SCI to take appropriate corrective action event, then within five business days which shall include, at a minimum, after the resolution of the SCI event mitigating potential harm to investors and closure of the investigation regard- and market integrity resulting from ing the SCI event, submit a final writ- the SCI event and devoting adequate ten notification pertaining to such SCI resources to remedy the SCI event as event to the Commission containing soon as reasonably practicable. the information required in paragraph (b) Commission notification and record- (b)(4)(ii) of this section. keeping of SCI events. Each SCI entity (B)(1) If an SCI event is not resolved shall: or the SCI entity’s investigation of the

880

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00890 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.1002

SCI event is not closed within 30 cal- taining a summary description of such endar days of the occurrence of the SCI systems disruptions and systems intru- event, then submit an interim written sions, including the SCI systems and, notification pertaining to such SCI for systems intrusions, indirect SCI event to the Commission within 30 cal- systems, affected by such systems dis- endar days after the occurrence of the ruptions and systems intrusions during SCI event containing the information the applicable calendar quarter. required in paragraph (b)(4)(ii) of this (c) Dissemination of SCI events. (1) section, to the extent known at the Each SCI entity shall: time. (i) Promptly after any responsible (2) Within five business days after the SCI personnel has a reasonable basis to resolution of such SCI event and clo- conclude that an SCI event that is a sure of the investigation regarding systems disruption or systems compli- such SCI event, submit a final written ance issue has occurred, disseminate notification pertaining to such SCI the following information about such event to the Commission containing SCI event: the information required in paragraph (A) The system(s) affected by the SCI (b)(4)(ii) of this section. event; and (ii) Written notifications required by (B) A summary description of the SCI paragraph (b)(4)(i) of this section shall event; and include: (ii) When known, promptly further (A) A detailed description of: The SCI disseminate the following information entity’s assessment of the types and about such SCI event: number of market participants affected (A) A detailed description of the SCI by the SCI event; the SCI entity’s as- event; sessment of the impact of the SCI (B) The SCI entity’s current assess- event on the market; the steps the SCI ment of the types and number of mar- entity has taken, is taking, or plans to ket participants potentially affected take, with respect to the SCI event; the by the SCI event; and time the SCI event was resolved; the (C) A description of the progress of SCI entity’s rule(s) and/or governing its corrective action for the SCI event document(s), as applicable, that relate and when the SCI event has been or is to the SCI event; and any other perti- expected to be resolved; and nent information known by the SCI en- (iii) Until resolved, provide regular tity about the SCI event; updates of any information required to (B) A copy of any information dis- be disseminated under paragraphs seminated pursuant to paragraph (c) of (c)(1)(i) and (ii) of this section. this section by the SCI entity to date (2) Each SCI entity shall, promptly regarding the SCI event to any of its after any responsible SCI personnel has members or participants; and a reasonable basis to conclude that a (C) An analysis of parties that may SCI event that is a systems intrusion have experienced a loss, whether mone- has occurred, disseminate a summary tary or otherwise, due to the SCI description of the systems intrusion, event, the number of such parties, and including a description of the correc- an estimate of the aggregate amount of tive action taken by the SCI entity and such loss. when the systems intrusion has been or (5) The requirements of paragraphs is expected to be resolved, unless the (b)(1) through (4) of this section shall SCI entity determines that dissemina- not apply to any SCI event that has tion of such information would likely had, or the SCI entity reasonably esti- compromise the security of the SCI en- mates would have, no or a de minimis tity’s SCI systems or indirect SCI sys- impact on the SCI entity’s operations tems, or an investigation of the sys- or on market participants. For such tems intrusion, and documents the rea- events, each SCI entity shall: sons for such determination. (i) Make, keep, and preserve records (3) The information required to be relating to all such SCI events; and disseminated under paragraphs (c)(1) (ii) Submit to the Commission a re- and (2) of this section promptly after port, within 30 calendar days after the any responsible SCI personnel has a end of each calendar quarter, con- reasonable basis to conclude that an

881

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00891 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB § 242.1003 17 CFR Ch. II (4–1–20 Edition)

SCI event has occurred, shall be SCI not less than once each calendar promptly disseminated by the SCI enti- year; provided, however, that: ty to those members or participants of (i) Penetration test reviews of the the SCI entity that any responsible SCI network, firewalls, and production sys- personnel has reasonably estimated tems shall be conducted at a frequency may have been affected by the SCI of not less than once every three years; event, and promptly disseminated to and any additional members or partici- (ii) Assessments of SCI systems di- pants that any responsible SCI per- rectly supporting market regulation or sonnel subsequently reasonably esti- market surveillance shall be conducted mates may have been affected by the at a frequency based upon the risk as- SCI event; provided, however, that for sessment conducted as part of the SCI major SCI events, the information re- review, but in no case less than once quired to be disseminated under para- every three years; and graphs (c)(1) and (2) of this section (2) Submit a report of the SCI review shall be promptly disseminated by the required by paragraph (b)(1) of this sec- SCI entity to all of its members or par- tion to senior management of the SCI ticipants. entity for review no more than 30 cal- (4) The requirements of paragraphs endar days after completion of such (c)(1) through (3) of this section shall SCI review; and not apply to: (3) Submit to the Commission, and to (i) SCI events to the extent they re- the board of directors of the SCI entity late to market regulation or market surveillance systems; or or the equivalent of such board, a report of the SCI review required by (ii) Any SCI event that has had, or the SCI entity reasonably estimates paragraph (b)(1) of this section, to- would have, no or a de minimis impact gether with any response by senior on the SCI entity’s operations or on management, within 60 calendar days market participants. after its submission to senior management of the SCI entity. § 242.1003 Obligations related to systems changes; SCI review. § 242.1004 SCI entity business continuity and disaster recovery plans (a) Systems changes. Each SCI entity testing requirements for members shall: or participants. (1) Within 30 calendar days after the With respect to an SCI entity’s busi- end of each calendar quarter, submit to ness continuity and disaster recovery the Commission a report describing plans, including its backup systems, completed, ongoing, and planned material changes to its SCI systems and the each SCI entity shall: security of indirect SCI systems, dur- (a) Establish standards for the des- ing the prior, current, and subsequent ignation of those members or partici- calendar quarters, including the dates pants that the SCI entity reasonably or expected dates of commencement determines are, taken as a whole, the and completion. An SCI entity shall es- minimum necessary for the mainte- tablish reasonable written criteria for nance of fair and orderly markets in identifying a change to its SCI systems the event of the activation of such and the security of indirect SCI sys- plans; tems as material and report such (b) Designate members or partici- changes in accordance with such cri- pants pursuant to the standards estab- teria. lished in paragraph (a) of this section (2) Promptly submit a supplemental and require participation by such des- report notifying the Commission of a ignated members or participants in material error in or material omission scheduled functional and performance from a report previously submitted testing of the operation of such plans, under this paragraph (a). in the manner and frequency specified (b) SCI review. Each SCI entity shall: by the SCI entity, provided that such (1) Conduct an SCI review of the SCI frequency shall not be less than once entity’s compliance with Regulation every 12 months; and

882

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00892 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Securities and Exchange Commission § 242.1007

(c) Coordinate the testing of such (§ 249.1900 of this chapter), include all plans on an industry- or sector-wide information as prescribed in Form SCI basis with other SCI entities. and the instructions thereto, and contain an electronic signature; and § 242.1005 Recordkeeping require- (b) The signatory to an electronically ments related to compliance with Regulation SCI. filed Form SCI shall manually sign a signature page or document, in the (a) An SCI SRO shall make, keep, and manner prescribed by Form SCI, au- preserve all documents relating to its thenticating, acknowledging, or other- compliance with Regulation SCI as wise adopting his or her signature that prescribed in § 240.17a–1 of this chapter. appears in typed form within the elec- (b) An SCI entity that is not an SCI SRO shall: tronic filing. Such document shall be (1) Make, keep, and preserve at least executed before or at the time Form one copy of all documents, including SCI is electronically filed and shall be correspondence, memoranda, papers, retained by the SCI entity in accord- books, notices, accounts, and other ance with § 242.1005. such records, relating to its compliance with Regulation SCI, including, but § 242.1007 Requirements for service not limited to, records relating to any bureaus. changes to its SCI systems and indirect If records required to be filed or kept SCI systems; by an SCI entity under Regulation SCI (2) Keep all such documents for a pe- are prepared or maintained by a service riod of not less than five years, the bureau or other recordkeeping service first two years in a place that is read- on behalf of the SCI entity, the SCI en- ily accessible to the Commission or its tity shall ensure that the records are representatives for inspection and ex- available for review by the Commission amination; and and its representatives by submitting a (3) Upon request of any representa- written undertaking, in a form accept- tive of the Commission, promptly fur- able to the Commission, by such serv- nish to the possession of such rep- ice bureau or other recordkeeping serv- resentative copies of any documents re- ice, signed by a duly authorized person quired to be kept and preserved by it at such service bureau or other record- pursuant to paragraphs (b)(1) and (2) of keeping service. Such a written under- this section. (c) Upon or immediately prior to taking shall include an agreement by ceasing to do business or ceasing to be the service bureau to permit the Com- registered under the Securities Ex- mission and its representatives to exchange Act of 1934, an SCI entity shall amine such records at any time or from take all necessary action to ensure time to time during business hours, that the records required to be made, and to promptly furnish to the Com- kept, and preserved by this section mission and its representatives true, shall be accessible to the Commission correct, and current electronic files in and its representatives in the manner a form acceptable to the Commission required by this section and for the re- or its representatives or hard copies of mainder of the period required by this any or all or any part of such records, section. upon request, periodically, or continuously and, in any case, within the same § 242.1006 Electronic filing and sub- time periods as would apply to the SCI mission. entity for such records. The prepara- (a) Except with respect to notification or maintenance of records by a tions to the Commission made pursu- service bureau or other recordkeeping ant to § 242.1002(b)(1) or updates to the service shall not relieve an SCI entity Commission made pursuant to para- from its obligation to prepare, main- graph § 242.1002(b)(3), any notification, tain, and provide the Commission and review, description, analysis, or report its representatives access to such to the Commission required to be sub- records. mitted under Regulation SCI shall be filed electronically on Form SCI

883

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00893 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB Pt. 243 17 CFR Ch. II (4–1–20 Edition)

PART 243—REGULATION FD vestment manager is an investment adviser; Sec. (iii) Who is an investment company, 243.100 General rule regarding selective dis- as defined in Section 3 of the Invest- closure. ment Company Act of 1940 (15 U.S.C. 243.101 Definitions. 80a–3), or who would be an investment 243.102 No effect on antifraud liability. company but for Section 3(c)(1) (15 243.103 No effect on Exchange Act reporting status. U.S.C. 80a–3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a–3(c)(7)) thereof, or an affili- AUTHORITY: 15 U.S.C. 78c, 78i, 78j, 78m, 78o, ated person of either of the foregoing. 78w, 78mm, and 80a–29, unless otherwise noted. For purposes of this paragraph, ‘‘affiliated person’’ means only those persons SOURCE: 65 FR 51738, Aug. 24, 2000, unless described in Section 2(a)(3)(C), (D), (E), otherwise noted. and (F) of the Investment Company § 243.100 General rule regarding selec- Act of 1940 (15 U.S.C. 80a–2(a)(3)(C), (D), tive disclosure. (E), and (F)), assuming for these pur- (a) Whenever an issuer, or any person poses that a person who would be an in- acting on its behalf, discloses any ma- vestment company but for Section terial nonpublic information regarding 3(c)(1) (15 U.S.C. 80a–3(c)(1)) or Section that issuer or its securities to any per- 3(c)(7) (15 U.S.C. 80a–3(c)(7)) of the In- son described in paragraph (b)(1) of this vestment Company Act of 1940 is an in- section, the issuer shall make public vestment company; or disclosure of that information as pro- (iv) Who is a holder of the issuer’s se- vided in § 243.101(e): curities, under circumstances in which (1) Simultaneously, in the case of an it is reasonably foreseeable that the intentional disclosure; and person will purchase or sell the issuer’s (2) Promptly, in the case of a non-in- securities on the basis of the informa- tentional disclosure. tion. (b)(1) Except as provided in para- (2) Paragraph (a) of this section shall graph (b)(2) of this section, paragraph not apply to a disclosure made: (a) of this section shall apply to a dis- (i) To a person who owes a duty of closure made to any person outside the trust or confidence to the issuer (such issuer: as an attorney, investment banker, or (i) Who is a broker or dealer, or a per- accountant); son associated with a broker or dealer, (ii) To a person who expressly agrees as those terms are defined in Section to maintain the disclosed information 3(a) of the Securities Exchange Act of in confidence; 1934 (15 U.S.C. 78c(a)); (iii) In connection with a securities (ii) Who is an investment adviser, as offering registered under the Securities that term is defined in Section 202(a)(11) of the Investment Advisers Act, other than an offering of the type Act of 1940 (15 U.S.C. 80b–2(a)(11)); an described in any of Rule 415(a)(1)(i) institutional investment manager, as through (vi) under the Securities Act that term is defined in Section 13(f)(6) (§ 230.415(a)(1)(i) through (vi) of this of the Securities Exchange Act of 1934 chapter) (except an offering of the type (15 U.S.C. 78m(f)(6)), that filed a report described in Rule 415(a)(1)(i) under the on Form 13F (17 CFR 249.325) with the Securities Act (§ 230.415(a)(1)(i) of this Commission for the most recent quar- chapter) also involving a registered of- ter ended prior to the date of the dis- fering, whether or not underwritten, closure; or a person associated with ei- for capital formation purposes for the ther of the foregoing. For purposes of account of the issuer (unless the this paragraph, a ‘‘person associated issuer’s offering is being registered for with an investment adviser or institu- the purpose of evading the require- tional investment manager’’ has the ments of this section)), if the disclo- meaning set forth in Section 202(a)(17) sure is by any of the following means: of the Investment Advisers Act of 1940 (A) A registration statement filed (15 U.S.C. 80b–2(a)(17)), assuming for under the Securities Act, including a these purposes that an institutional in- prospectus contained therein;

884

VerDate Sep<11>2014 14:28 Jun 18, 2020 Jkt 250060 PO 00000 Frm 00894 Fmt 8010 Sfmt 8010 Q:\17\17V4.TXT PC31 kpayne on VMOFRWIN702 with $$_JOB