The SEC voted unanimously to adopt new Rule 13h-1 under the Securities Exchange Act of 1934 (the “Exchange Act”), which imposes reporting obligations on “large traders” and certain registered broker-dealers that execute their trades. (The adopting release is available here.) The Rule has two primary components: (i) it requires “large traders” to register with, and provide periodic updates to, the SEC on new Form 13H and (ii) it imposes recordkeeping, reporting and limited monitoring requirements on certain registered broker‑dealers through whom large traders execute their transactions. Citing the May 6, 2010 “flash crash” as a demonstration of the need to enhance the SEC’s ability to quickly analyze market events, the SEC press release announcing the adoption of Rule 13h‑1 explained that the rule is designed to allow the SEC to identify market participants engaged in substantial trading activity, obtain information needed to monitor more efficiently the impact of those trades on the markets and analyze such market participants’ trading activity.
Rule 13h-1(a)(1) under the Exchange Act defines a “large trader” as any person that directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security (e.g., any exchange-listed security) for or on behalf of such accounts, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than (a) two million shares or $20 million of fair market value during any calendar day or (b) twenty million shares or $200 million of fair market value during any calendar month (the “identifying activity level”). In determining whether the identifying activity level threshold has been met, the SEC expects a parent company to aggregate and consider daily and monthly share volume and dollar value of certain transactions in NMS securities effected by the persons it controls. The identifying activity level threshold includes all transactions in NMS securities, excluding exercise or assignment of option contracts and certain other limited exceptions.
The definition of large trader also includes any person who voluntarily registers as a large trader by filing Form 13H with the SEC. Voluntary registrants are subject to all of the obligations of Rule 13h-1.
Form 13H. Form 13H requires a large trader to disclose, among other things: (i) the type of business engaged in by the large trader or any of its affiliates; (ii) whether it or any of its affiliates file any forms with the SEC, and if so, the identity of each filing entity, the form(s) filed and the filing entity’s CIK number; (iii) whether it or any of its affiliates is registered with the CFTC or regulated by a foreign regulator, and if so, the identity of each entity and the CFTC registration number or primary foreign regulator, as applicable; (iv) information (including an organizational chart and narrative description) about any affiliates of the large trader that exercise investment discretion over NMS securities (the SEC did not adopt proposals that would have required large traders to identify affiliates that merely beneficially own NMS securities); (v) governance information about the large trader, including identification of its business form and each partner (if a partnership), executive officer, director or trustee; and (vi) the identity of registered broker-dealers at which the large trader or any of its affiliates has an account and the type of brokerage services provided by the broker-dealer.
Timing of Filings. Upon effecting aggregate transactions equal to or greater than the identifying activity level, a large trader must promptly (ordinarily within 10 days) file Form 13H with the SEC identifying itself as a large trader. Upon filing with the SEC, a large trader will be assigned a unique LTID. Annual filings are due within 45 days after the end of the calendar year. An amendment to a Form 13H filing is due no later than the end of the calendar quarter in which any of the information in a filer’s Form 13H becomes inaccurate for any reason. A large trader that has not met the identifying activity level any time during the previous calendar year may suspend its disclosure obligations by filing for “Inactive Status” and request that its broker-dealers stop maintaining records of its transactions by LTID. However, if a person on “Inactive Status” attains the identifying activity level, it must promptly file a “Reactivated Status” Form 13H. Under certain circumstances, i.e., termination of operations, a large trader may permanently end its status by submitting a “Termination Filing.”
Obligations of Broker-Dealers
A large trader must disclose its LTID to registered broker-dealers effecting transactions on its behalf and each account to which it applies. A broker-dealer has recordkeeping and reporting obligations under the Rule with respect to a large trader and with respect to any Unidentified Large Trader for which it maintains an account or accounts. An Unidentified Large Trader is a person that has not complied with the identification requirements of Rule 13h-1 that a registered broker-dealer knows or has reason to know is a large trader. For purposes of determining whether it has reason to know that a person is a large trader, a registered broker-dealer need take into account only transactions in NMS securities effected by or through such broker-dealer. A broker-dealer is not required to proactively make further inquiries for the purpose of determining its customer’s status (e.g., by seeking to determine the customer’s trading activity at other broker-dealers), but if it has actual knowledge that a person that has not provided the broker-dealer with an LTID is a large trader, then the broker-dealer must treat the person as an Unidentified Large Trader.
Recordkeeping. A registered broker-dealer must maintain records for all transactions effected directly or indirectly by or through (i) an account the broker-dealer carries for a large trader or an Unidentified Large Trader or (ii) if the broker-dealer is a large trader, any proprietary or other account over which such broker-dealer exercises investment discretion. If a non‑broker-dealer carries an account for a large trader or an Unidentified Large Trader, the broker-dealer effecting transactions directly or indirectly for such large trader or Unidentified Large Trader must maintain the required records. A broker-dealer is not required to maintain records of transactions by an inactive large trader after receiving notice from the large trader that the trader has filed for inactive status.
Reporting. Upon receiving a request from the SEC, a registered broker‑dealer must electronically report specific information, in accordance with SEC instructions, related to all transactions effected directly or indirectly by or through accounts carried by such broker‑dealer for large traders and Unidentified Large Traders, equal to or greater than the reporting activity level, including, among other things: the broker‑dealer’s clearing house number, the security’s trading symbol, the date of execution of the transaction, number of shares or option contracts and the type of transaction, transaction price, account number and the exchange where the transaction was executed. With respect to Unidentified Large Traders, a registered broker-dealer must report the trader’s name, address, date the account was opened and tax identification number(s).
Safe Harbor Regarding Unidentified Large Traders. The Rule provides a safe harbor under which a registered broker-dealer would be deemed not to know or have reason to know that a person is a large trader if the broker‑dealer does not have actual knowledge that a person is a large trader and the broker-dealer establishes policies and procedures reasonably designed to (i) identify any customer whose transactions through the broker‑dealer equal or exceed the identifying activity level and (ii) treat any person so identified as an Unidentified Large Trader and notify that person of the person’s potential reporting obligations under Rule 13h-1.
Foreign entities that satisfy the definition of a large trader are subject to the reporting obligations of Rule 13h-1. A U.S.-registered broker-dealer is obligated to keep records for and report on and monitor transactions of foreign customers for which it executes transactions. A broker‑dealer that is not U.S.–registered is not required to comply with the Rule’s recordkeeping, reporting and monitoring requirements.
In the adopting release, the SEC states that it is committed to maintaining the information collected pursuant to Rule 13h-1 in a manner consistent with Section 13(h)(7) of the Exchange Act, which specifies that the SEC will not be compelled to disclose information collected from large traders and registered broker-dealers under a large trader reporting system, subject to limited exceptions. Under the exceptions in Section 13(h)(7), Congress and other federal departments and agencies (provided they are acting within the scope of their respective jurisdictions) may obtain access to information collected pursuant to the Rule; in addition, the SEC may provide information collected under the Rule in order to comply with certain federal court orders. The information provided in Form 13H filings, although filed electronically on the SEC’s EDGAR system, will not be accessible to the public through the SEC’s public website or otherwise. Information disclosed by a large trader on Form 13H or provided in response to an SEC request, and any transaction information that a registered broker-dealer reports to the SEC under the Rule, is exempt from disclosure under FOIA.
Effective and Compliance Dates
The Rule becomes effective 60 days after its publication in the Federal Register. Large traders will have 60 days after the effective date to comply with the Rule’s identification requirements. Broker-dealers will have 210 days after the Rule’s effective date to comply with the requirements to maintain records, report transaction data when requested, and monitor large trader activity.