23 March 2018
On July 26, 2011, US Securities and Exchange Commission (the “SEC”) adopted a new rule that will require “large traders” to register with the SEC and obtain a unique identifying number that must be provided to their US-registered broker-dealers. Parent companies must aggregate the trading activities of all entities under their control in determining whether the affiliated group reaches the reporting threshold.
The new rule will become effective on or about October 1, 2011.
Rule 13h-1 defines “large trader” as a person who “directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of US-listed stocks and options for or on behalf of such accounts, by or through one or more US-registered broker-dealers, in an aggregate amount equal to or greater than the identifying activity level.”
“Identifying activity level” is defined as transactions in US-listed stocks and options that equal or exceed:
- 2 million shares or $20 million during any calendar day; or
- 20 million shares or $200 million during any calendar month.
Purchases and sales are aggregated, without offsetting or netting transactions among or within accounts, including for hedged positions. As noted above, all transactions for or on behalf of affiliated entities must generally be aggregated. Certain transactions such as estate settlements, gifts and business combinations are excluded from the calculation.
As a general rule, every large trader must register with the SEC unless someone else in an affiliated group is aggregating that individual or entities trades and complying with the requirements of the rule.
Large traders must register with the SEC “promptly” upon reaching the reporting threshold. For those near the reporting threshold, it may be possible to voluntarily register in order to avoid the potential difficulties in monitoring trading activity on an ongoing basis. Registration is accomplished by filing Form 13H via EDGAR. The adopting release for Rule 13h-1 indicates that “promptly” will generally be interpreted by the SEC as requiring registration within ten days after the large trader crosses the reporting threshold.
Upon registration, the SEC will issue each large trader a unique identification number that the large trader is required to provide the US-registered broker-dealers that effect transactions on its behalf. The large trader must advise the US-registered broker-dealer of all accounts held at that broker-dealer to which the ID applies. Large traders may assign suffixes to the ID to sub-identify persons, affiliates, departments or units that directly control an account.
Large traders who are registered with the SEC must promptly respond to requests from the SEC for additional identifying or clarifying information that would allow the SEC to further identify the large trader and all accounts through which the large trader effects transactions.
Form 13H requires a significant amount of identifying information regarding large traders, including, among other things:
- the type of business conducted by the large trader and any of its affiliates (defined as “Securities Affiliates”);
- a general description of the operations and trading strategies of the large trader and any “Securities Affiliates”;
- a list of any forms that the large trader and its Securities Affiliates file with the SEC;
- a list of affiliates that are registered under the Commodity Exchange Act or otherwise registered with the CFTC, and a list of their registration numbers;
- whether the large trader or any of its Securities Affiliates are regulated by a foreign regulator and, if so, a list of such entities and their regulators;
- an organizational chart that identifies the large trader, its parent, all Securities Affiliates and all entities that are registered with the CFTC, as well as a description of the business of each such entity;
- the name and suffix of any affiliate that has been assigned a suffix;
- the large trader ID and suffix of any affiliate that registers separately;
- if a natural person, whether the large trader is self-employed;
- the name of each general or limited partner that is the owner of more than 10% of the financial interests in the accounts of the large trader;
- the executive officers, directors or trustees of the large trader corporation or trust;
- the jurisdiction in which the large trader is organized and its principal place of business; and
- a list of the broker-dealers at which the large trader or any of its Securities Affiliates has an account and the services provided (e.g., prime broker, executing broker or clearing broker).
US-registered broker-dealers are required to adopt procedures designed to identify “non-compliant” large traders.
Rule 13h-1 applies to large traders who “use the U.S. jurisdictional means” to effect transactions. Therefore certain foreign large traders will be required to register with the SEC. The obligations of foreign large traders that use foreign intermediaries with accounts at US-registered broker-dealers are not entirely clear at this point. Some foreign large traders may not have any accounts or direct relationships with a US-registered broker-dealer. Thus, it is unclear how such foreign large traders would disclose their IDs to US-registered broker-dealers. Additional clarification will be needed from the SEC on the application of Rule 13h-1 to foreign large traders that do not have direct relationships with US-registered broker-dealers. A foreign entity that that is prohibited by local privacy laws from completing and filing the Form 13H may seek an exemption pursuant to Section 36 of the Exchange Act. However, the SEC has said it considers it unlikely that a foreign country’s laws would prohibit the completion and filing of Form 13H.
Only US-registered broker-dealers are subject to the rule’s monitoring, recordkeeping and reporting requirements. Foreign intermediaries who carry accounts for foreign entities do not have a duty to obtain or disclose the identity of their ultimate customers to registered broker-dealers, nor do registered broker-dealers have a duty to identify the ultimate customers of such foreign intermediaries.
As you can see, this is yet another example of the extensive disclosure requirements being imposed by the SEC.