I. Introduction and Overview

Recently, the Securities and Exchange Commission ("SEC") adopted its proposed Large Trader reporting rule, Rule 13h-1,1 along with Form 13H, a reporting form designed to enhance the ability of the SEC to identify large market participants, collect information on their trading, and analyze their trading activity.2 The Adopted Rule has two primary components: (i) Large Traders, as defined below, must register with the SEC on Form 13H and (ii) recordkeeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom Large Traders execute their transactions.

Under the new Adopted Rule, Large Traders will identify themselves to the SEC and will be issued a Large Trader Identification Number ("LTID"). A Large Trader is required to provide its LTID to registered broker-dealers with which it does business; the registered broker-dealers are then required to maintain certain records relating to the Large Trader's trades.

A "Large Trader" is generally defined as a person, including a firm or individual, whose transactions in exchange-listed securities equal or exceed (i) two million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month.3 The definition of Large Trader is designed to focus on the ultimate parent company of an entity or entities that employ or otherwise control the individuals that exercise investment discretion.

In Section II, we have provided a list of certain key dates and requirements. In Section III, we have provided a summary of the Adopted Rule. Section IV contains a summary of the new Form 13H.

II. Key Dates and Requirements

2.1 Implementation Dates

The Adopted Rule became effective on October 3, 2011 ("Effective Date").

Based on this Effective Date, the following are key dates:

  • On or before December 1, 2011: Persons whose trading qualifies them Large Traders must self-identify on Form 13H pursuant to Adopted Rule 13h-1(b).
  • On or before February 14, 2012: Deadline for annual filing of Form 13H.
  • April 30, 2012: Deadline for U.S.-registered broker-dealers to implement the recordkeeping and reporting requirements applicable pursuant to Adopted Rules 13h-1(d), (e), and (f).
  • Within 10 days after the end of any calendar quarter: Large Traders are required to amend any inaccurate or changed information promptly following the end of the calendar quarter (in no event later than January 10, 2012).4
  • If a person becomes a Large Trader after December 1, 2011, that person must "promptly" file Form 13H with the SEC identifying itself as a Large Trader. The SEC states that what constitutes "prompt" filing will differ in different contexts, but that it would be "appropriate" for such filings to be made within 10 days after the Large Trader effects aggregate transactions at or above the trigger levels noted below.

III. Summary of the Adopted Rule

3.1 Definition of a "Large Trader"

Under the Adopted Rule, the SEC defines Large Traders as persons that trade "directly or indirectly, including through other persons controlled5 by such person, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security (generally speaking, listed equity securities and listed options) for or on behalf of such accounts, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than the identifying activity level."6

As further described below, all Large Traders will be required to identify themselves to the SEC as such by filing Form 13H and will be required to update their Form 13H from time to time.

3.1.1 Certain Transactions are not counted towards the determination of whether someone is a "Large Trader"

As noted above, a Large Trader is defined as a specified person or group of persons that effect transactions in excess of the identifying activity level. Under the Adopted Rule, "transactions" means all transactions in NMS securities, excluding exercises or assignments of option contracts except for certain specifically enumerated transactions, which are set out below.7

In exempting certain transactions, the SEC is seeking to exclude from Large Trader status persons that effect transactions for reasons "other than those commonly associated with the arm's-length trading of securities in the secondary market and the associated exercise of investment discretion."8 The following types of transactions would be excluded from the definition of transaction for purposes of determining whether a person is a Large Trader:

  • any journal or bookkeeping entry made to an account to record or memorialize the receipt or delivery of funds or securities pursuant to the settlement of a transaction;
  • any transaction that is part of an offering of securities by or on behalf of an issuer, or by an underwriter on behalf of an issuer, or an agent for an issuer, whether or not such offering is subject to registration under the Securities Act of 1933, provided, however, that this exemption shall not include an offering of securities effected through the facilities of a national securities exchange;
  • any transaction that constitutes a gift;
  • any transaction effected by a court-appointed executor, administrator, or fiduciary pursuant to the distribution of a decedent's estate;
  • any transaction effected pursuant to a court order or judgment;
  • any transaction effected pursuant to a rollover of qualified plan or trust assets subject to Section 402(c)(1) of the Internal Revenue Code;
  • any transaction between an employer and its employees effected pursuant to the award, allocation, sale, grant or exercise of an NMS security, option or other right to acquire securities at a pre-established price pursuant to a plan which is primarily for the purpose of an issuer benefit plan or compensatory arrangement; and
  • any transaction to effect a business combination, including a reclassification, merger, consolidation, or tender offer subject to Section 14(d) of the Securities Exchange Act; an issuer tender offer or other stock buyback by an issuer; or a stock loan or equity repurchase agreement.

3.1.2 In a corporate group, who reports as a Large Trader?

The Adopted Rule is designed to focus on the ultimate parent entity that controls the persons making investment decisions. In this regard, the SEC notes that an ownership level of 25% would generally give rise to "control" for purposes of the Large Trader designation.9

Multiple persons within a corporate group may, however, qualify as Large Traders. If a natural person or a subsidiary entity within a large organization independently qualifies as a Large Trader, a parent company of that Large Trader is permitted to file on Form 13H and identify itself as the Large Trader on behalf of the group, thus removing the requirement of the subsidiary to separately identify itself as a Large Trader, file Form 13H, or be subject to the other requirements that would apply to Large Traders. Similarly, a parent entity may avoid the filing requirement if one or more Large Traders controlled by that parent company comply with the rule and the filing requirement.10

3.2 Non-U.S. Entities that are Large Traders do not enjoy any specific exemption from the Adopted Rule

The Adopted Rule requires a non-U.S. entity that is a Large Trader to comply with the identification requirements of Form 13H. With respect to the recordkeeping and reporting requirements, however, the SEC notes that recordkeeping and reporting requirements of the Adopted Rule explicitly apply only to U.S.-registered broker-dealers.

In the Adopting Release, the SEC provides guidance regarding dealing with non-U.S. intermediaries. The SEC states that when a U.S.-registered broker-dealer deals directly with a non-U.S. entity that is an intermediary, it would treat that intermediary like any other customer: it must collect the information specified by Adopted Rule 13h-1(d)(2) about the non- U.S. intermediary's transactions if it is a Large Trader and, if it is an Unidentified Large Trader, the broker-dealer must also collect the information specified by Adopted Rule 13h-1(d)(3).11 The Adopted Rule does not require a registered brokerdealer to collect identifying information for the non-U.S. intermediary's customers.

3.3 Broker-Dealer Requirements

The Adopted Rule imposes the following obligations on registered broker-dealers: (1) maintain records of transactions effected in accounts identified to it as Large Trader accounts12; (2) electronically report Large Trader transaction information to the SEC upon request13; and (3) monitor compliance with the Adopted Rule14.

3.3.1 What information the broker-dealer must maintain

Every registered broker-dealer must maintain records for all transactions effected directly or indirectly by or through (i) an account such registered broker-dealer carries for a Large Trader or an Unidentified Large Trader15 or (ii) if the registered broker-dealer is a Large Trader, any proprietary or other account over which such registered broker-dealer exercises investment discretion.16 In addition, where a non-broker-dealer carries an account for a Large Trader or an Unidentified Large Trader, the registered broker-dealer effecting transactions directly or indirectly for such Large Trader or Unidentified Large Trader shall maintain records of all of the same information.

In particular, the Adopted Rule requires registered broker-dealers to maintain the following information:17

  • date the transaction was executed;
  • account number;
  • identifying symbol assigned to the security;
  • transaction price;
  • number of shares or option contracts traded in each specific transaction; whether each transaction was a purchase, sale, or short sale; and, if an option contract, whether the transaction was a call or put option, an opening purchase or sale, a closing purchase or sale, or an exercise or assignment;
  • clearinghouse number of the entity maintaining the information and the clearinghouse numbers of the entities on the opposite side of the transaction;
  • designation of whether the transaction was effected or caused to be effected for the account of a customer of such registered broker-dealer, or was a proprietary transaction effected or caused to be effected for the account of such registered broker-dealer;
  • identity of the exchange or other market center where the transaction was executed;
  • time the transaction was executed;
  • LTID(s) associated with the account, unless the account is for an Unidentified Large Trader;
  • prime broker identifier;
  • average price account identifier; and
  • if the transaction was processed by a depository institution, the identifier assigned to the account by the depository institution.

3.3.2 Safe Harbor

Under Adopted Rule 13h-1(f), a registered broker-dealer is deemed not to know or have reason to know that a person is a Large Trader if it does not have actual knowledge that a person is a Large Trader and it establishes policies and procedures reasonably designed to:

1. Identify persons who have not complied with the identification requirements of the Adopted Rule but whose transactions effected through an account or a group of accounts carried by such registered broker-dealer or through which such registered broker-dealer executes transactions, as applicable (and considering account name, tax identification number, or other identifying information available on the books and records of such registered broker-dealer) equal or exceed the identifying activity level;

2. Treat any persons identified above in 3.3.2(1) as an Unidentified Large Trader; and

3. Inform any person identified in Adopted Rule 13h-1(f)(1) of its potential obligations under the Adopted Rule.

An Unidentified Large Trader is a person who has not complied with the Form 13H reporting requirements and that a registered broker-dealer knows or has reason to know is a Large Trader. When considering whether a market participant's trading activity has exceeded the identifying activity level, the registered broker-dealer is only required to consider the customer's activity effected through an account or a group of accounts at that registered broker-dealer. If that activity increases beyond the identifying activity level, the registered broker-dealer would be required to treat the customer as an Unidentified Large Trader. Broker-dealers would be required to report information about Unidentified Large Traders upon request from the SEC.

III. Form 13H

Any trader that meets the Large Trader definition is required to file Form 13H, and to update their Form 13H at least annually and more frequently as necessary. Upon receiving an initial Form 13H, the SEC would issue to each Large Trader a LTID. The Large Trader is required to provide this number to each registered broker-dealer with which it does business, and identify each of the accounts held by that registered broker-dealer through which it trades. In addition, the Adopted Rule requires Large Traders to identify accounts over which persons they control exercise investment discretion.

Note that under one adopted exception, if a natural person or a subsidiary entity within a large organization independently qualifies as a Large Trader, but the parent company files Form 13H and identifies itself as the Large Trader, then the natural person or subsidiary entity would not be required to separately identify itself as a Large Trader, file Form 13H, or be subject to the other requirements that would apply to Large Traders.

3.1 Types of filings

There are six types of Form 13H filings:

  1. Initial Filing – The Initial Filing is made to identify the Large Trader to the SEC. The requirement for Initial Filings due by the compliance date, December 1, 2011, is described above. Beginning November 21, 2011, the Initial Filing is due promptly (within 10 days) after the Large Trader meets or exceeds the identifying activity level.
  2. Annual Filing – All Large Traders must submit an Annual Filing of Form 13H within 45 days after the end of each full calendar year.
  3. Amended Filing – If any inaccuracy is found in a filing, an Amended Filing must be filed promptly following the end of the calendar quarter in which any of the information contained in a Form 13H filing becomes inaccurate for any reason. For example, changes to the name, business address, organization type, or organizational chart would require an amended filing.
  4. Inactive Status – If a trader or other person does not meet or exceed the identifying activity level, it would not be required to file Form 13H. In addition, if a person does not anticipate meeting the identifying activity level again (and has not met it during the previous full calendar year) it may file for "Inactive Status". This filing permits a Large Trader who has not effected aggregated transactions over the threshold during the previous full calendar year to obtain Inactive Status through the submission of Form 13H. Inactive Status is designed to reduce the burden on infrequent traders who may trip the threshold in a limited on-off situation. Filers on Inactive Status do not need to file Amended Filings or Annual Filings and can instruct their registered broker-dealers to cease maintaining records. A Large Trader on Inactive Status does not need to file any amendments.
  5. Reactivated Status – If an adviser on Inactive Status meets or exceeds the identifying activity level, it must file for Reactivated Status promptly (within 10 days).
  6. Termination Filing – Persons can terminate their status as Large Traders by submitting a Termination Filing. For example, if the person ceases operations, dissolves, or is acquired, the Large Trader may be able to file a Termination Filing.

3.2 Mechanics of filing Form 13H with the SEC

Form 13H is filed electronically through the SEC's EDGAR system: https://www.edgarfiling.sec.gov /. To complete a filing, a Large Trader needs EDGAR access codes. If the Large Trader does not make EDGAR filings and has never made EDGAR filings, it would need to obtain access codes at the following website: https://www.filermanagement.edgarfiling.sec.gov /.

To preserve confidentiality, the SEC has announced that Form 13H filings will be not be accessible through the SEC's EDGAR web site or otherwise be made publicly available. In addition, the LTID number will not be made publicly available. The Form 13H requires the following six items:

  1. Item 1 – requires the Large Trader to disclose descriptive information about the types of businesses in which the Large Trader or its affiliates engage, nature of operations, and trading strategy.
  2. Item 2 – requires the Large Trader to disclose whether it or any of its affiliates that exercises investment discretion over NMS securities files any other forms with the SEC.
  3. Item 3 – requires the Large Trader to disclose whether it or any of its affiliates is registered with the CFTC and whether it or any of its securities affiliates is regulated by a foreign regulator.
  4. Item 4 – requires information on affiliates of the Large Trader that exercise investment discretion, an organizational chart, and their LTIDs. The Release states that "at a minimum, the organizational chart must depict the Large Trader, its parent company (if applicable), all of its securities affiliates, and all entities identified in Item 3(a)."18 If the Large Trader does not have a parent company, securities affiliates or entities identified in Item 3(a), then the Large Trader should attach an organizational chart that includes one box with the Large Trader's name. Item 4(d) of Form 13H permits a Large Trader to assign LTID suffixes to sub-identify persons, divisions, groups, and entities under its control. 5.
  5. Item 5 – requires information about the corporate form of the Large Trader (e.g., partnership, LLP, LLC, etc.). Item 5 also requires the identification of each partner in a Large Trader partnership (over 10% interests) and identification of each executive officer, director, or trustee of a Large Trader corporation. If the Large Trader is not a limited partnership or partnership, there is no need to fill out Item 5(b).
  6. Item 6 – requires Large Traders to identify the registered broker-dealers at which the Large Trader has an account and whether each broker‐dealer provides prime broker, executing broker, and/or clearing broker services. (Large Traders do not have to disclose the account numbers of registered broker-dealers on Form 13H; this differs from the Proposing Release). Foreign broker-dealers should not be included in response to Item 6.

If a Large Trader meets or exceeds the identifying activity level after the Effective Date, and plans to file its Form 13H prior to the compliance date of December 1, 2011, the Large Trader would not be voluntarily filing. The Large Trader should enter the date it exceeded the identifying activity level after the Effective Date.

A copy of Form 13H and the instructions are attached hereto.

3.3 Exemption from filing Form 13H

Under Adopted Rule 13h-1(g), the SEC may by order exempt, upon specified terms and conditions or for stated periods, any person or class of persons or any transaction or class of transactions from the provisions of Form 13H reporting to the extent that such exemption is consistent with the purposes of the Exchange Act.

IV. Conclusion

The new Adopted Rule represents an important change to the reporting obligations for Large Traders and for registered broker-dealers that facilitate secondary market trading. Given the broad scope of the Adopted Rule and the absence of categorical exclusions in the definition of "Large Trader", many companies that do not consider themselves regular market participants may find themselves subject to the Adopted Rule during periods when they conduct nonexempt transactions.

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Footnotes

1 The new rule ("Adopted Rule") is described in "Large Trader Reporting" SEC Release 34-64976 (Jul. 27, 2011), 75 Fed. Reg. 46960 (Aug. 3, 2010), currently available at: http://www.sec.gov/rules/final/2011/34-64976.pdf (the "Adopting Release").

2 Longer term, the SEC expects the consolidated audit trail proposal, if adopted, to further enhance access by the Commission and self-regulatory organizations to order and trade data from all market participants. See SEC's release, "Consolidated Audit Trail," SEC Release No. 34-62174 (May 26, 2010), 75 FR 32556 (June 8, 2010).

3 See Adopted Rule 13h-1(a)(1).

4 Note that an amended filing of Form 13H must be filed promptly following the end of the calendar quarter in which any of the information contained in a Form 13H filing becomes inaccurate for any reason. As noted below, the SEC has provided interpretive guidance that in the context of Form 13H, a filing required to be made "promptly" would be made within 10 days of the applicable deadline.

5 Under Adopted Rule 13h-1(a)(3), control means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of securities, by contract, or otherwise. For purposes of this rule only, any person that directly or indirectly has the right to vote or direct the vote of 25% or more of a class of voting securities of an entity or has the power to sell or direct the sale of 25% or more of a class of voting securities of such entity, or in the case of a partnership, has the right to receive, upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that entity.

6 See Adopted Rule 13h-1(a)(1). Generally, the identified activity level is either (i) two million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month.

7 See Adopted Rule 13h-1(a)(6).

8 See the Adopting Release at page 32.

9 See the Adopting Release at page 23.

10 See Adopted Rule 13h-1(b)(3)(ii).

11 Adopted Rule 13h-1(d)(3) requires a broker-dealer to maintain the following additional information for an Unidentified Large Trader: name, address, date the account was opened, and tax identification number(s). If an Unidentified Large Trader is a non-U.S. entity and does not have a U.S.-issued tax identification number, then the broker-dealer would only need to maintain the entity's name, address, and date the account was opened.

12 See Adopted Rule 13h-1(d).

13 See Adopted Rule 13h-1(e).

14 See Adopted Rule 13h-1(f).

15 See Adopted Rule 13h-1(a)(9).

16 See Adopted Rule 13h-1(d).

17 See Adopted Rule 13h-1(d)(2).

18 See the Adopting Release at page 177.

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