The SEC recently adopted large trader rules (Rule 13h-1 under the Securities Exchange Act), which will impact certain investment advisers. If an investment adviser meets the definition of a large trader, the investment adviser will need to file a Form 13H with the SEC by December 1, 2011 to identify itself as a large trader. Form 13H is filed electronically through the SEC's EDGAR system.
The information that large traders provide to the SEC is confidential, and is not subject to public disclosure. However, the information is subject to disclosure to Congress, other federal departments, and agencies acting within the scope of their jurisdictions, and pursuant to federal court orders in an action commenced by the U.S. government, including the SEC.
Definition of a “Large Trader.” The definition of a large trader is very technical, as it involves a number of different terms defined in the new rule. Initially, investment advisers need to understand the concept of “identifying activity level,” as this triggers the need for a person who exercises investment discretion over one or more client accounts to identify itself as a large trader.
The identifying activity level is essentially a measure of the level of trading in exchange-listed securities, including equities and options (referred to as NMS securities in the new rule), that the person is effecting on behalf of the client accounts over which the trader has investment discretion. If a person effects aggregate “transactions” in NMS securities of at least 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month, the trader must file a Form 13H to identify himself/herself as a large trader.
While the above summary of the definition of large trader may seem straightforward, the definition has a number of nuances that investment advisers should note:
- Employees of an investment adviser who exercise investment discretion within the scope of their employment are deemed to do so on behalf of the investment adviser.
- The term “transaction” is defined to exclude numerous types of transactions such as the purchase or sale of securities pursuant to exercises or assignments of options, securities purchased in most types of offerings by the issuer, and transactions to effect a business combination.
- All transactions in securities within all client accounts over which an investment adviser has investment discretion must be aggregated in order to determine whether the investment adviser is a large trader. In making this determination, an investment adviser is not allowed to offset or net transactions in client accounts against each other, whether for hedged positions or otherwise.
- An investment adviser has investment discretion if the adviser or its employees are authorized to determine what securities or other property are to be purchased or sold by or for the client account.
- The definition of a large trader is designed to focus on the ultimate parent company of an investment adviser or advisers that employ or otherwise control the individuals that exercise investment discretion, with the intention of easing the administrative burden of both the large trader, by allowing the parent company to comply with the registration requirement on behalf of its subsidiaries (or vice versa), as well as the SEC. So, a large trader need not comply with the new rule if a controlling person complies with the rule on its behalf. Similarly, a controlling person need not comply with the new rule's requirements if a large trader it controls complies with the rule on its behalf and on behalf of all others under common control who trade.
- A person is presumed to be in “control” of another person if it owns 25 percent or more of the voting securities of such other person.
Information Provided in Form 13H and Ongoing Filing Requirements for Large Traders. Form 13H requires that a large trader report a significant amount of information regarding itself and its affiliates, including, without limitation: contact information; general information concerning the business and the nature of the operations of both the large trader and any affiliate of the large trader that exercises investment discretion over NMS securities (referred to as securities affiliates in the new rule), including a general description of the securities affiliates' trading strategies; an organizational chart; a list of the broker-dealers at which the large trader and its securities affiliates have accounts; and other information regarding regulatory status, governance, and ownership of the large trader.
Upon receiving a large trader's Form 13H, the SEC will assign the large trader a unique large trader identification number. The large trader will be required to provide its large trader identification number to each of its broker-dealers and identify to the broker-dealers all of its accounts to which the large trader identification number applies.
After making its initial filing, a large trader is required to submit an annual filing on Form 13H within 45 days of the end of the calendar year. Furthermore, in any calendar quarter during which any of the information contained in the Form 13H becomes inaccurate for any reason, a large trader is required to submit an amended Form 13H promptly after the end of such calendar quarter.
Going In and Out of Status as a Large Trader. A person who does not meet the definition of large trader by December 1, 2011, but later effects aggregate transactions equal to or greater than the identifying activity level threshold, must file an initial Form 13H “promptly.” In normal circumstances, the SEC has interpreted promptly to mean that the filing must be made within 10 days of meeting or exceeding the identifying activity level threshold.
If during any full calendar year a large trader does not effect transactions meeting the identifying activity level threshold, the large trader may file for inactive status with the SEC in the following calendar year. During inactive status, a large trader is not required to submit Form 13H filings or disclose its large trader identification number to its broker-dealers. An inactive large trader must reactivate his/her status by filing a Form 13H if he/she again meets or exceeds the identifying activity level threshold, presumably within 10 days of meeting or exceeding identifying activity level threshold.