On July 26, 2011, the Securities and Exchange Commission (the “Commission”) adopted Rule 13h‑1 under the Securities Exchange Act of 1934 to require certain “large traders” to identify themselves to the Commission using new Form 13H. The rule further requires large traders to identify themselves as such to the broker-dealers that execute their transactions. Finally, the rule requires the broker-dealers for large traders to maintain records of those traders’ transactions and to provide those records to the Commission upon request.
The rule will become effective on October 3, 2011, and large traders will have to begin reporting on Form 13H on or after December 1, 2011. Registered broker-dealers have until April 30, 2012 to comply with their reporting and monitoring obligations under the rule.
The full text of the adopting release and the final rule is available here.
Who Qualifies as a Large Trader under the Rule?
A "large trader" is any person that, directly or indirectly (including through other controlled persons), "exercises investment discretion over one or more accounts" and executes on behalf of those accounts transactions for the purchase or sale of any "NMS security" through one or more registered broker-dealers in an amount, in the aggregate, exceeding either:
- 2 million shares or shares with a fair market value of $20 million on any calendar day; or
- 20 million shares or shares with a fair market value of $200 million during any calendar month.1
The foregoing thresholds are referred to in the rule (and below) as “identifying activity levels.” The term “NMS security” generally refers to exchange-listed equities and options.
For purposes of the rule, “control” is defined as the “possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person.” Moreover, a person is presumed to control an entity if it possesses the right to vote (or direct the voting of) 25% or more of the securities of an entity or the right to sell (or direct the sale of) 25% or more of the securities of an entity. In the case of a partnership, a person is presumed to control the partnership if the person contributed, or has the right to receive upon dissolution, 25% or more of the capital of the partnership. Although the use of the word “presumed” is somewhat imprecise, it does not appear that the Commission intends that a would-be control person can rebut the presumption of control. Finally, a person might be deemed to control another person based on other facts even where the foregoing thresholds are not satisfied.
How Long Will a Person Remain a Large Trader?
Any person that has registered as a large trader will remain a large trader and be subject to the requirements of the large trader rule unless and until (1) a full calendar year has passed in which it has not effected transactions above the identifying activity levels, and (2) the person files a Form 13H electing “inactive status.” Inactive status then will be effective upon making such filing. Under certain narrow circumstances (i.e., the trader dissolves, ceases business or, in certain instances, is acquired), the trader can permanently end its large trader status.
What Obligations are Imposed on Large Traders?
The rule requires that each large trader electronically file an initial Form 13H “promptly after” effecting transactions meeting one of the identifying activity levels. In response to calls for further guidance on what constitutes “promptly,” the Commission stated in the adopting release that “under normal circumstances, it would be appropriate for Initial Filings … to be filed within 10 days after the large trader effects aggregate transactions equal to or greater than the identifying activity level.”2 Upon making an initial filing, the large trader will be issued a large trader identification number (“LTID”).
Each large trader (other than one that is inactive) must also amend any Form 13H that becomes inaccurate for any reason promptly following the end of the calendar quarter in which the information has become stale, and submit an annual Form 13H filing no later than 45 days after the end of each full calendar year.
The Form 13H mandates that a large trader supply information in six separate categories, including a general description of the business and trading strategies of the large trader and all “securities affiliates,” an organizational chart, certain governance information and identification of the broker-dealers used by the large trader and its securities affiliates. The term “securities affiliate” means an affiliate of the large trader that exercises investment discretion over NMS securities. The information gathered on Form 13H is intended to be confidential and exempt from disclosure under the Freedom of Information Act.
Finally, each large trader is required to disclose its LTID to each of the registered broker-dealers effecting transactions on its behalf and the account(s) to which that LTID applies.
What Obligations are Imposed on Broker-Dealers Effecting Transactions on Behalf of Large Traders?
Registered broker-dealers are required to maintain certain transaction information associated with large traders (e.g., date and time of execution, security, quantity, price, account number, identity of exchange and LTID), and to provide that information to the Commission upon request. The Commission may request that the large trader’s broker provide transactional information concerning all transactions by that large trader (including any transactions would not be included in determining whether a trader met the identifying activity level).