Investment Management Legal and Regulatory Update - November 2011November 15, 2011
SEC Adopts Large Trader Reporting System
On July 26, 2011, the SEC adopted new Rule 13h-1 and Form 13H. The Rule imposes registration and reporting requirements on persons or entities that qualify as "Large Traders" and recordkeeping, reporting and monitoring duties on broker-dealers that hold the accounts or carry out transactions on behalf of "Large Traders." The effective date of the Rule was October 3, 2011 and the relevant compliance dates are described below.
Who is a Large Trader? A Large Trader is any person (including individuals managing their own accounts) whose aggregate transactions in NMS securities (generally exchange-listed securities, including equities and options) during any calendar day exceed either 2,000,000 shares or a fair market value of $20 million, or whose transactions in NMS securities exceed either 20,000,000 shares or a fair market value of $200 million during a calendar month. Transactions for which a person exercises direct or indirect investment discretion are aggregated for purposes of determining whether the Rule's triggering levels have been exceeded. For purposes of the Rule, the definition of "investment discretion" found in Section 3(a)(35) of the Securities Exchange Act of 1934 is used. Generally, "investment discretion" encompasses a person who is "authorized to determine what securities or other property shall be purchased or sold by or for the account" as well as a person that "makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions." Large Trader status is assigned to the adviser, agent or broker exercising investment discretion over an account, not to the account or its record owner.
Form 13H. A Large Trader must register with the SEC by filing Form 13H, a short, relatively simple form that is accessible on-line and must be filed on-line through EDGAR (a person must have or apply for and obtain EDGAR access codes to make the filing). Form 13H filings are confidential (exempt from disclosure under FOIA) and will not be accessible to the public through the SEC's website or otherwise. A person that qualified as a Large Trader on October 3, 2011 or before December 1, 2011 must file its Form 13H with the SEC by December 1, 2011. Thereafter, a person who crosses the triggering thresholds of the Rule must file its Form 13H within ten days of crossing the threshold. Companies with multiple subsidiaries or affiliates that qualify as Large Traders may file a single Form 13H for the parent company covering all Large Trader affiliates (the SEC's preferred approach) or individual Forms 13H for each Large Trader subsidiary or affiliate. A person who has not crossed the registration thresholds may nevertheless voluntarily file a Form 13H to register as a Large Trader. By so doing, such person is relieved of the burden of monitoring its transactions to ascertain when and if it crosses a registration threshold (and perhaps failing to make a timely filing of Form 13H) while incurring minimal burdens as a Large Trader. Following the filing of the Form 13H, the SEC will assign each Large Trader a unique Large Trader Identification Number (LTIN).
Large Trader Responsibilities. A Large Trader must provide its LTIN to each broker-dealer that effects transactions on its behalf as well as information sufficient to identify each account to which it applies. A Large Trader must annually update its Form 13H within 45 days of the end of each calendar year. In addition, if any of the information in a Form 13H filing becomes inaccurate (regardless of whether the inaccuracy is material), the Large Trader must file an amended Form 13H by the end of the calendar quarter in which the information in the then current Form 13H became inaccurate. "Inactive status" is available to any Large Trader that has not effected transactions greater than the triggering levels during the prior calendar year. Once inactive, a person is no longer obligated to update its Form 13H and may instruct its broker-dealers to cease maintaining records of its transactions. Large Trader status can be reactivated subsequently if trading thresholds are exceeded.
Broker-Dealer Requirements. Rule 13h-1 also imposes recordkeeping, reporting and monitoring duties on broker-dealers. Broker-dealers are required to monitor transactions if they are Large Traders themselves, if they carry accounts for Large Traders or if they effect transactions on behalf of Large Traders. These monitoring duties, as well as the recordkeeping and reporting duties described below, also extend to an "Unidentified Large Trader" who is a trader who has not identified itself to the broker-dealer as a Large Trader (by providing an LTIN), but who the broker-dealer knows, or has reason to know, is a Large Trader. Broker-dealers are required to keep records for all transactions in NMS securities effected directly or indirectly through an account the broker-dealer carries for a Large Trader or Unidentified Large Trader if the transactions on a given day exceed 100 shares. If the SEC requests information on the activities of a Large Trader or Unidentified Large Trader, the broker-dealer must generally provide that information by the morning of the business day after the SEC makes the request (unless in unusual circumstances the same-day submission of information is requested). Broker-dealers must comply with the monitoring, recordkeeping requirements of Rule 13h-1 beginning April 30, 2012.
Please contact any member of our investment management team if you have questions regarding Rule 13h-1 or Form 13H.
Source: Large Trader Reporting Final Rule, SEC Release No. 34-64976, July 27, 2011.