On July 27, 2011, the U.S. Securities and Exchange Commission ("SEC") issued a final rule release adopting new Rule 13h-1 and Form 13H under the Securities Exchange Act of 1934 to assist the SEC in identifying, and obtaining trading information on, "large traders." The new rule is intended to provide a basic set of tools for the SEC to monitor more readily and efficiently the impact of large traders on the U.S. securities markets.
Rule 13h-1 has two primary components. First, it imposes identification and reporting requirements on large traders. Second, it imposes recordkeeping, reporting, and monitoring requirements on registered-brokers that serve large trader customers.
In general, a "larger trader" is any person (U.S. or foreign) who, directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts and effects transactions in U.S. exchange-listed securities for such accounts in an aggregate amount that equals or exceeds (i) two million shares or $20 million during any calendar day or (ii) 20 million shares or $200 million during any calendar month (the "identifying activity level"). The SEC anticipates that the types of entities that would identify as large traders would include, for example, broker-dealers, financial holding companies, investment advisers, and firms that trade for their own account.
Rule 13h-1 requires large traders to:
- register with the SEC electronically by filing and periodically updating through EDGAR Form 13H, on which they will provide contact information and report general information concerning their business, regulatory status, affiliates, governance, and broker-dealers;
- disclose their unique large trader identification number ("LTID") (assigned by the SEC) to the registered broker-dealers effecting transactions on their behalf and identify for them each account to which it applies; and
- respond to requests from the SEC for additional information that would allow the SEC to further identify the large trader and all accounts through which the large trader effects transactions.
A large trader must file an initial Form 13H "promptly" (i.e., according to the SEC, within 10 days under normal circumstances) after effecting aggregate transactions in an amount equal to or greater than the identifying activity level. A person may also voluntarily register as a larger trader by filing a Form 13H in order to reduce its need to actively monitor its trading levels. In complex organizations where more than one related entity qualifies as a large trader, Rule 13h-1 allows the identification and reporting requirements to be pushed up the corporate hierarchy to the parent entity. Although they will be processed through the SEC's EDGAR system, Form 13H filings, once filed, will not be accessible through the SEC's website or otherwise publicly available.
As for registered broker-dealers, Rule 13h-1 requires a broker-dealer to:
- maintain specified records of transactions effected by or through accounts of large traders and "unidentified large traders" (i.e., a person who has not complied with the identification requirements of the rule that the broker-dealer knows or has reason to know is a large trader);
- electronically report all transactions by such persons to the SEC upon request utilizing the SEC's Electronic Blue Sheets ("EBS") system; and
- monitor their customers' activity for volume (based on transactions handled at the broker-dealer) that triggers the identification and reporting requirements applicable to large traders.
The transaction data required to be maintained must be available for reporting on the morning after the date the transactions were effected (including Saturdays and holidays). The rule contains a safe harbor designed to reduce the broker-dealer's burdens in connection with monitoring its customers' trading for purposes of identifying possible large traders. The rule also does not require a broker-dealer to stop doing business with an unidentified large trader.
The SEC already requires registered broker-dealers to keep records of most of the information required to be captured by Rule 13h-1. The only additional items that broker-dealers will be required to maintain and report are the LTID and the time a transaction occurs.
Rule 13h-1 will take effect on October 3, 2011. Large traders will have to comply with the identification and reporting requirements of the rule starting December 1, 2011. Registered broker-dealers will have to comply with the recordkeeping, reporting, and monitoring requirements of the rule beginning on April 30, 2012.