OCIE Risk Alert – Large Trader Obligations

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert concerning SEC-registered investment advisers (“investment advisers”) and broker-dealers (“broker-dealers”) for compliance with Rule 13h-1, which requires those meeting certain thresholds to file Form 13H as well as other recordkeeping, reporting, and, for broker dealers, certain monitoring responsibilities.

What is a Large Trader?

Rule 13h-1 defines a Large Trader as a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. The Rule also applies to persons that exercise investment discretion over trading in NMS securities. An investment adviser that exercises investment discretion directly or indirectly on behalf of itself or others, for example, will become a Large Trader if it meets the transaction thresholds in the definition.

Upon receipt of Form 13H, the SEC will assign to each Large Trader a unique identification number (“LTID”). A Large Trader must then disclose its LTID to all broker-dealers effecting transactions on its behalf and must identify to each such broker-dealer all accounts at that broker-dealer to which the LTID applies.

13H concerns both investment advisers and broker dealers

The SEC’s observations for investment advisers encouraged firms to review their policies and procedures concerning:

1. Identifying situation when the investment adviser may become a Large Trader;

2. Timely filing of Form 13H;

3. Ensure their 13H remains accurate after each calendar quarter; and

4. Notifying their executing broker dealers of the Large Trader status

The SEC’s observations for broker dealers encouraged firms to review their policies and procedures concerning:

1. Record keeping – including timely filing of annual Form 13H filings and amendments;

2. Reporting requirements – including to Electronic Blue Sheets, the CAT, and applicable FINRA rules; and

3. Monitoring – including existing customers who may be large traders, but have not provided the broker with a LTID; and identifying and associating new accounts for existing Large Traders.

Upcoming connection to the Consolidated Audit Trail (“CAT”)

The Risk Alert also touches on broker dealers’ upcoming responsibility with respect to LTIDs and the CAT. The reporting of customer identifying information to the CAT, as it relates to Large Traders, will begin on April 26, 2021. On that date, large broker-dealers are required to report to the CAT certain account information regarding account holders with a LTID or an Unidentified Large Trader Identification number (collectively called “LTID Account Information”). Thus, broker-dealers will be required to obtain and report LTIDs to the CAT for accounts with Reportable Events. Given that this requirement extends beyond clearing broker-dealers, the number of firms required to report LTIDs will increase. This may be a new requirement for some, so those firms may have to change their current onboarding activities to verify whether an LTID exists, and is recorded and reported to the CAT, for any account with Reportable Events.

Note that large trader reporting is also a noteworthy topic on FINRA’s “2021 Report on FINRA’s Examination and Risk Monitoring Program,” so it is highly likely to be an exam item this year.