On July 26, 2011, the Securities and Exchange Commission (“SEC”) adopted new Rule 13h-1 (“Rule”) and Form 13H under Section 13(h) of the Securities Exchange Act of 1934 (the “Exchange Act”).1 The Rule requires large traders to identify themselves to the SEC and broker-dealers executing their transactions and requires registered broker-dealers to maintain records of the large traders’ transactions and report them to the SEC upon request.
Who is a Large Trader?
A “large trader” is any person that directly or indirectly exercises investment discretion over transactions in NMS securities2 that equal or exceed (i) 2 million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month (“Identifying Activity Level”). In determining large trader status, a person must aggregate the accounts over which it has investment discretion with those accounts over which anyone controlled by such person (e.g., a subsidiary) exercises investment discretion. For this purpose, 25% ownership of another entity is presumed to be control.
Filing the Form 13H
A large trader must self-identify by filing electronically Form 13H with the SEC. The large trader will then be assigned an identification number (“LTID”), which the large trader must disclose to the registered broker-dealers effecting transactions on its behalf. The initial filing of Form 13H must be made “promptly” after reaching the Identifying Activity Level. The SEC provided guidance that it would be appropriate for initial filings to be made within 10 days of reaching the threshold. The Form 13H must disclose the nature of the business of the large trader, all of its securities affiliates, and all of its brokers. Amendments to Form 13H must be filed within 45 days after the end of each full calendar year and promptly following the end of a calendar quarter if any information on the Form 13H becomes inaccurate. A large trader that has not effected transactions at any time during the previous full calendar year in an amount equal to or greater than the Identifying Activity Level may file for inactive status and reactivate its status promptly after reaching the threshold again.
Requirements for Broker-Dealers
An SEC registered broker-dealer that receives LTID disclosures from large traders must maintain records of all such traders’ transactions. In addition, a broker-dealer must monitor persons that have not complied with the self-identification requirements but that the broker-dealer knows or has reason to know are large traders (“Unidentified Large Traders”) and maintain records of all their transactions as well. Under a safe harbor provided by the Rule, a broker-dealer that has no actual knowledge would be deemed not to know or have reason to know that a person is a large trader if it establishes policies and procedures reasonably designed to (i) identify customers whose transactions at the broker-dealer equal or exceed the Identifying Activity Level and (ii) treat such persons as Unidentified Large Traders and notify them of their potential reporting obligations under the Rule. Upon request of the SEC, broker-dealers must submit transaction records of large traders and Unidentified Large Traders.
Information provided to the SEC pursuant to the large trader reporting requirements will be kept confidential from the public and will be exempt from disclosure under the Freedom of Information Act; provided that the SEC is permitted to disclose such information to Congress, federal departments and agencies acting within the scope of their jurisdictions, and when compelled by a court order.
Effective and Compliance Dates
The new Rule is effective 60 days after publication in the Federal Register. The deadline for large traders to comply with the self-identification requirements is 60 days after the effective date. The deadline for broker-dealers to comply with the recordkeeping, reporting, and monitoring requirements is 210 days after the effective date.
The Rule, which the SEC describes as being “designed to provide … a valuable source of useful data to support its investigative and enforcement activities,” may be especially significant for banks, broker-dealers and hedge funds, particularly those that engage in high frequency trading. The SEC referred to the market events of May 6, 2010 as highlighting the need for an efficient and effective mechanism for gathering data on the most active market participants. In particular, the SEC noted that high frequency traders are typically estimated to account for 50% or higher of the total trading volume.