On July 26, 2011, the Securities and Exchange Commission (“SEC”) adopted a large trader reporting system that will require “large traders” to identify themselves to the SEC and provide the SEC with information about their businesses and their affiliates. The new system also imposes recordkeeping, reporting and limited monitoring requirements on broker-dealers that hold accounts for large traders. The large trader system was adopted substantially as it was proposed in April 2010, though we have noted some key differences between the proposed and final rules below. Our more detailed alert on the proposed system, including Rule 13h-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and new Form 13H, can be found here. The adopting release for the large trader reporting system can be found here.
Very generally, a large trader is a person that “directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts” where the aggregate transactions in NMS securities across such accounts equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. The adopting release notes that the definition of large trader is designed to focus on the ultimate parent company of entities that employ or otherwise control the individuals that exercise investment discretion. As such, a parent company (to the extent it satisfies the definition of large trader based on the aggregate trading activity of its controlled entities) must comply with the requirements of the large trader reporting system on behalf of its controlled entities, unless its controlled entities collectively comply with the rule’s requirements with respect to all of the parent company’s direct or indirect accounts.
The rule prohibits a trader from disaggregating accounts and trading activity by effecting trades through multiple broker-dealers, accounts or transactions for purposes of avoiding the large trader identification and reporting requirements. In addition, if two or more traders engage in a coordinated trading strategy with the effect of exercising joint investment discretion over their individual accounts, the rule requires each trader to include all transactions in these joint accounts in their respective activity level calculations. Each large trader will be required to file Form 13H with the SEC at least annually, although updating amendments will be required to be filed no later than the end of any calendar quarter in which any of the information previously filed on the form becomes inaccurate for any reason.
Large traders will be assigned identification numbers by the SEC that must be provided to broker-dealers. Broker-dealers, in turn, generally will be required to maintain records regarding the purchases and sales of NMS securities by large traders and provide information to the SEC about transactions in NMS securities that exceed the minimum reporting activity level established in the rule (generally, any transaction involving 100 or more shares). In addition, although large traders are principally responsible for identifying themselves as large traders, broker-dealers have some responsibility to monitor their customers and identify any person that should have identified itself as a large trader and has not done so (an “Unidentified Large Trader”).
The following is a summary of the key differences between the proposed large trader reporting system and the adopted system:
- For the purpose of determining whether a person has engaged in sufficient trading activity to be classified as a large trader, the SEC clarified that the rule focuses on transactions involving investment decisions traditionally associated with trading in NMS securities and added transactions involving business combinations to the list of excluded transactions.
- In order to mitigate the need for traders to actively monitor their trading levels, the SEC will permit persons who expect to meet or exceed the large trader activity level in the future to voluntarily register as large traders on Form 13H.
- Changes were made to final Form 13H for the purpose of decreasing the burden of the filing. Most notably, instead of requiring large traders to provide information about each broker-dealer account through which it or certain of its affiliates trade, as was proposed, the final version of the Form solicits the identity of the broker-dealers at which the large trader (and certain affiliates) has accounts and whether each broker-dealer provides prime broker, executing broker and/or clearing broker services. The SEC indicated in the adopting release that if it needs more specific individual account-level information, the SEC will use the list of broker-dealers provided to make targeted requests for information from those entities. Among other changes from the proposed Form, large traders will be required to disclose only those affiliates who exercise investment discretion over NMS securities, and not affiliates who merely beneficially own NMS securities. Also, in place of the proposed requirement to disclose all affiliates, large traders will be required to attach an organizational chart to help the SEC understand the large trader’s corporate structure.
- The SEC clarified that broker-dealers generally will have until the opening of business on the day following a request from the SEC to submit transaction information, except in unusual circumstances where same-day information is requested.
- The SEC clarified that when monitoring for Unidentified Large Traders, as long as the broker-dealer does not have actual knowledge that a person is an Unidentified Large Trader, the broker-dealer need only consider transactions with such broker-dealer and it need not proactively investigate a person’s trading activity levels with other broker-dealers.
Large traders will have until December 1, 2011 to identify themselves to the SEC and broker-dealers will have until April 30, 2012 to comply with their recordkeeping, reporting and monitoring obligations under the rule.