The Securities and Exchange Commission (SEC) recently adopted new Rule 13h-1 and Form 13H. This new rule is of interest to investment advisers because it requires "large traders" to register by filing new Form 13H with the SEC. Upon receipt of Form 13H, the SEC will assign each large trader an identification number (LTID), which the large trader must then provide to its registered broker-dealers. Rule 13h-1 becomes effective October 3, 2011, and large traders will have until December 1, 2011, to file Form 13H.
The rule also requires broker-dealers to maintain certain records for all large traders and provide certain large-trader transaction information to the Commission upon request. This summary, however, focuses solely upon the obligations of large traders under Rule 13h-1, and does not address the new requirements imposed on broker-dealers.
"Large Trader" Defined
The definition of "large trader" includes any person who directly or indirectly exercises investment discretion over transactions in NMS securities (i.e,. exchange-listed securities) equal to or greater than either (i) 2 million shares or $20 million per calendar day; or (ii) 20 million shares or $200 million per calendar month ("Identifying Activity Level").
Investment Discretion. Under Rule13h-1, investment discretion is broadly defined to include the authority to determine what securities to buy or sell for an account, regardless of whether someone else may have responsibility for such investment decisions. Notably, it is the entity that exercises investment discretion over an account (e.g., the investment adviser) that is required to register as a large trader, and not the accountholder.
Calculating the Identifying Activity Level.
- Aggregating Transactions. Rule 13h-1 requires a "gross up" approach when calculating the Identifying Activity Level. As such, offsetting or netting transactions among or within accounts, including for hedged positions, is prohibited. The rule expressly prohibits disaggregating accounts for the purpose of avoiding identification as a large trader.
- Excluded Transactions: The following transactions are not counted for purposes of determining the Identifying Activity Level: (i) certain bookkeeping entries memorializing the settlement of a transaction; (ii) an offering of securities by or on behalf of an issuer, provided, however, that the exemption does not include an offering of securities effected through a national securities exchange; (iii) gifts; (iv) distributions of an estate; (v) court-ordered transactions; (vi) rollovers of qualified plan or trust assets; (vii) certain employer/employee transactions; (viii) certain business combinations, an issuer tender offer or other stock buyback by an issuer, and a stock loan or equity repurchase agreement; (ix) exercises or assignment of option contracts; and (x) ETF creations or redemptions.
- Accounts of Controlled Entities: In determining the Identifying Activity Level, a person must aggregate the accounts over which it has investment discretion with those accounts over which any controlled entity exercises investment direction. Under the rule, control is presumed upon ownership of 25% or more of another entity.
A large trader must self-identify by filing Form 13H electronically with the SEC through its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System. Large traders that do not already have EDGAR access codes must obtain them by filing a Form ID (Uniform Application for Access Codes to File on EDGAR) via the EDGAR Filer Management website.
Parent Company/Controlled Entity Registration. Organizations with more than one large trader may register either at the parent company level, or at the controlled entity level. A parent company need not register if each controlled entity that is a large trader independently complies with Rule 13h-1.
Form 13H. Form 13H collects basic identifying data about large traders, as well as information regarding the large trader's affiliates. Certain items in the form request information regarding all affiliates, while other items specifically request information regarding affiliates that exercise investment discretion over NMS securities ("Securities Affiliates"). In general, Form 13H requires the following disclosures: (i) the type of business of the large trader and its affiliates; (ii) the nature of business of the large trader and each of its Securities Affiliates (including a general description of trading strategies); (iii) a list of forms filed with the SEC by the large trader and its Securities Affiliates; (iii) information regarding CFTC registration of the large trader and its affiliates; (iv) information regarding foreign regulator registration of the large trader and its affiliates; (v) an organizational chart identifying the large trader, its parent company (if applicable), all Securities Affiliates and any affiliates registered with the CFTC; (vi) the name and suffix of any affiliate that has been assigned an LTID suffix; (vii) the LTID and suffix of any affiliate that registers separately; (viii) the type of legal entity of the large trader; (ix) the name of each general partner of the large trader, and in the case of limited partnerships, each limited partner that owns more than a 10% financial interests in the accounts of the large trader; (x) the executive officers, directors or trustees of a large trader corporation or trust; (xi) the jurisdiction in which the large trader is organized; and (xii) a list of broker-dealers at which the large trader or its Securities Affiliates has an account and the type of services provided (e.g., prime broker, executing broker or clearing broker).
Confidentiality. Form 13H will be confidential and is exempt from Freedom of Information Act requests. The SEC is only permitted to disclose Form 13H information to Congress or other federal departments and agencies, and pursuant to a court order.
Voluntary Registration. Persons are permitted to voluntarily register as large traders. Any persons that elect to voluntarily register will be treated as large traders for purposes of the rule, and will be subject to all of the obligations of a large trader, notwithstanding the fact that they had not met the identifying activity level at the time they registered as large traders.
Timing and Types of 13H Filings. Form 13H provides for six types of filings:
- Initial Filing: A person must "promptly" file an initial Form 13H after its transactions reach the identifying activity level. The SEC states that under normal circumstances, "promptly" means 10 days. A person approaching the identifying activity level may elect to register as a larger trader by voluntarily filing a Form 13H.
- Annual Filing: After its initial filing, large traders must file an annual Form 13H within 45 days after the end of each full calendar year.
- Amended Filing: In the event any of the information in its Form 13H becomes inaccurate for any reason, large traders must file an amended 13H following the end of the calendar quarter.
- Inactive/Reactivated Filing: A large trader that ceases to meet the identifying activity level during the previous full calendar year may file an inactive status Form 13H, which permits such trader to cease both filing a Form 13H and disclosing its large trader status. In the event such trader's transactions once again meet the identifying activity level, it must submit a reactivated status Form 13H.
- Termination Filing: A large trader than ceases operations or, in some cases, is acquired, may file a termination Form 13H terminating its large trader status.
Upon receipt of the initial Form 13H, the SEC will issue the large trader a unique LTID. Large traders must disclose to the registered broker-dealers effecting transactions on its behalf its LTID and each account to which it applies. Upon request, a large trader must promptly provide additional descriptive 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 permits a large trader to assign LTID suffixes to identify various sub-groups under its control, the use of which may diminish the need for the SEC to contact large traders for assistance in further identifying the accounts for which they exercise control.