Introduction
The U.S. Securities and Exchange Commission (the “SEC”) recently adopted new Rule 13h-1 (the “Rule”) and Form 13H under Section 13(h) of the Securities Exchange Act of 1934, to establish a large trader reporting system. The Rule, which applies to U.S. and non-U.S. persons, is intended to help the SEC assess the impact of Large Trader (as defined below) trading activity on the securities markets, reconstruct trading activity after unusual market volatility, and analyze significant market events. The effective date of the Rule is October 3, 2011.
The Rule requires each Large Trader to identify itself to the SEC by electronically filing Form 13H through EDGAR and to disclose to registered broker-dealers effecting transactions on its behalf its Large Trader identification number (“LTID”) and each account to which the identification number applies.1 The Rule also requires registered broker-dealers to maintain certain information and records with respect to transactions effected by or through an account carried by the broker-dealer for the Large Trader and to provide such information and records to the SEC upon its request.
Definition of a Large Trader
A “Large Trader” is defined in the Rule as any person that, directly or indirectly, including through other persons controlled by such person, exercises investment discretion over transactions in NMS securities, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than the “identifying activity level.” The identifying activity level is triggered if aggregate transactions in NMS securities are equal to or greater than: (i) during a calendar day, either two million shares or shares with a fair market value of $20 million; or (ii) during a calendar month, either twenty million shares or shares with a fair market value of $200 million. NMS Securities refer generally to U.S. exchange-listed securities, including equities and options. For the purpose of calculating whether a person meets the definition of a Large Trader, the Rule excludes a limited set of transactions.2
Parent Company Level Registration
The Large Trader filing obligations are imposed on the ultimate parent company of an entity or entities that employ or otherwise control individuals that exercise investment discretion over transactions in NMS securities in an aggregate amount equal to or greater than the identifying activity level. Control is defined to mean the power to direct management through the direct or indirect right to vote 25% or more of a voting class of securities or the power to sell the same or the contribution of 25% or more of the entity’s capital. To the extent that an entity employs a natural person who individually meets the definition of a Large Trader, the entity that controls that person would be a Large Trader.3 A typical private fund manager who acts as the investment manager for one or more pooled investment vehicles or separately managed accounts, or the entity that controls the private fund manager, will have the Form 13H filing obligation.
Filing Requirements
Transition/Initial Filing Requirements: Entities meeting the definition of Large Trader after the effective date will have to make the initial SEC filing to be assigned a LTID and to disclose the LTID to registered broker-dealers effecting transactions on their behalf by December 1, 2011. Broker-dealers will have to comply with the requirements to maintain records, report transaction data when requested, and monitor Large Trader activity by April 30, 2012. Entities meeting the definition of Large Trader after December 1, 2011 must file an initial Form 13H with the SEC promptly4 after first effecting aggregate transactions equal to or greater than the identifying activity level.
Annual Filing: After filing an initial Form 13H, Large Traders must file Form 13H with the SEC within 45 days after the end of each full calendar year.
Amended Filing: In the event that any information contained in a filed Form 13H becomes inaccurate, Large Traders must file an amended Form 13H with the SEC no later than the end of the calendar quarter in which such information becomes inaccurate.
Inactive Status and Termination Filings: A Large Trader who has previously filed a Form 13H and who has not effected aggregate transactions at any time during the previous calendar year in an amount equal to or greater than the identifying activity level may file for “inactive status” on its annual Form 13H filing. Such status relieves the Large Trader of additional filing obligations under the Rule.5 In limited circumstances, a Large Trader may terminate its Large Trader reporting status by filing a “Termination Filing” on Form 13H.
Reporting, Recordkeeping and Monitoring Obligations for Registered Broker-Dealers
Registered broker-dealers will be required to report Large Trader transaction information to the SEC upon request.
Confidentiality
The SEC will not be compelled to disclose information collected from Form 13H or from registered broker-dealers under the Rule, subject to limited exceptions (e.g., compliance with requests for information from Congress or orders of the Supreme Court).
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If you have any questions about the Rule or Form 13H, please contact your primary attorney in the Investment Management Group at Seward & Kissel LLP.
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1 Form 13H will require, among other things, a Large Trader to disclose information related to its business, organizational structure, regulatory status, certain affiliates and governance, SEC filings by certain affiliates, as well as contact information and the names of the broker-dealers where the Large Trader has an account.
2 For purposes of calculating the identifying activity level, the following transactions are excluded: (i) 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; (ii) 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; (iii) any transaction that constitutes a gift; (iv) any transaction effected by a court-appointed executor, administrator, or fiduciary pursuant to the distribution of a decedent’s estate; (v) any transaction effected pursuant to a court order or judgment; (vi) any transaction effected pursuant to a rollover of qualified plan or trust assets subject to Section 402(c)(1) of the Internal Revenue Code; and (vii) any transaction between an employer and its employees effected pursuant to the award, allocation, sale, grant or exercise of a 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.
3 The Rule specifies that a “person’s employees who exercise investment discretion within the scope of their employment are deemed to do so on behalf of such person.”
4 The SEC stated it would be appropriate for initial filings to be filed within 10 days after a Large Trader effects aggregate transactions equal to or greater than the identifying activity level.
5 During inactive status, a Large Trader may request that its broker-dealers cease tagging its transactions with its LTID. Promptly after effecting transactions in an amount that equals or exceeds the identifying activity level, an inactive Large Trader would be required to reactivate its Large Trader status by filing a Form 13H.
