Large Trader Compliance Risks For Investment Advisers and Broker-Dealers

WHAT HAPPENED?

Recently, the Division of Enforcement of the U.S. Securities and Exchange Commission released a list of common compliance concerns noted during examinations of large traders, particularly with respect to Rule 13h-1. The Rule requires firms or individuals who exceed certain thresholds when trading national market securities (NMS) to file Form 13H and maintain specific books and records about these transactions.

The Division found that some large traders were not even aware of the Rule or were generally unfamiliar with its requirements. In the Division’s recent Risk Alert, SEC staff outlined the most common compliance concerns regarding the Rule; below are key takeaways from the Division’s findings:

WHO IS SUBJECT TO RULE 13H-1?

The Rule affects large traders, who are designated as a person that trades more than 2 million shares or $20 million in one day, or 20 million shares or $200 million in one month. Anyone acting in a discretionary capacity when trading NMS securities and meets the reporting threshold is also subject to the Rule.

KEY REQUIREMENTS OF THE RULE:

The Rule requires large traders to:

  • File Form 13H.
  • Be assigned a Large Trader Identification Number (LTID) by the SEC.
  • Disclose the LTID to every broker-dealer executing transactions on behalf of the large trader.
  • Meet certain recordkeeping requirements (for broker-dealers only).

RULE 13H-1 COMPLIANCE CONSIDERATIONS FOR INVESTMENT ADVISERS:

Investment advisers trading NMS securities should review policies and procedures for:

  • Determining whether the adviser is considered a large trader under the Rule, like when beginning a new discretionary client engagement.
  • When and how to file annual and amended Forms 13H.
  • Amending 13H filings quarterly to reconcile any inaccuracies.
  • When to notify broker-dealers effecting trades for the adviser of its large trader status.

RULE 13H-1 COMPLIANCE CONSIDERATIONS FOR BROKER-DEALERS:

Broker-Dealers transacting in NMS securities should review and update policies and procedures regarding:

  • How the Rule applies to the broker-dealer and any affiliated entities.
  • When and how to file annual and amended form 13H.
  • Electronic Blue Sheets reporting requirements, the consolidated audit trail (CAT), and any applicable FINRA rules.
  • The monitoring of customer activities that could classify them as large traders and then contacting them to obtain an LTID.
  • Determining and associating new accounts for customers who are existing large traders.

Broker-dealers also have additional reporting obligations under Rule 13h-1 and Regulation NMS, including:

  • Upon request, providing to the SEC transaction data about itself or other large traders holding accounts with the firm.
  • Tracking and updating data about large traders the broker-dealer works with, including LTIDs and all accounts to which the LTID applies.
  • Reporting transactions via Electronic Blue Sheets when a non-broker-dealer carries an account for a large trader that a broker-dealer effects transactions for.
  • Reporting of LTID account information for large trader affiliates via the CAT, beginning on April 26, 2021.

WHAT DOES THIS MEAN FOR ME?

If your advisory firm is classified as a large trader under Rule 13h-1, update policies and procedures to reflect the SEC’s current guidance and make annual Form 13H filings and quarterly amendments to the filings, as required. If your firm is a broker-dealer effecting trades for large traders, you should have policies and procedures in place to meet additional reporting requirements, including obtaining LTIDs during the onboarding process and tracking other required large trader information.

If your firm is not currently a large trader or does not have any large trader accounts, familiarize yourself with reportable events under the SEC’s regulations and develop policies and procedures to identify and respond to reportable events.

Fairview can assist your firm with its large trader obligations, including form filings and drafting appropriate policies and procedures. Contact us today with any questions about large trader obligations, broker-dealer reporting requirements, and Form 13H filings and amendments.

About the Author:

Fairview®
Founded in 2005 with the goal of developing streamlined solutions for investment advisers, Fairview® is now servicing investment advisers, foundations, and funds with nearly $300 billion in collective assets.