26 January 2021
Main Contributor: Katie Mogan, IACCP® Vice President, Senior Compliance Consultant
On December 16, 2020 the SEC released a risk alert addressing observations from examinations for adviser’s compliance with Rule 13h-1, also known as the Large Trader Rule.. This article will cover investment advisers’ obligations under Rule 13h-1 and helpful guidance to make it easier.
What is Rule 13h-1?
Rule 13h-1 of the Securities and Exchange Act requires registered investment advisers to file a report with the Commission, via the Edgar system, if the investment adviser effects transactions in National Market System (“NMS”) securities, equal to or exceeding 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. NMS securities are generally defined as exchange listed securities and standardized options, but do not include exchange-listed debt securities, securities futures, or open-ended mutual funds. Advisers who file Form 13H are referred to as “large traders” and are given a unique large trader identification number (“LTID”) upon their first 13H filing. Thereafter, Large Traders must provide their LTID to all broker-dealers effecting transactions on their behalf and must identify to each such broker-dealer all accounts at that broker-dealer to which the LTID applies.
There Are Six Types of 13H Filings:
- Initial Filing: required promptly after effecting aggregate transactions equal to or greater than the qualifying level.
- Annual Filing: required within 45 days after the end of each calendar year, unless inactive.
- Amended Filing: required promptly after the end of the calendar quarter in which information becomes stale.
- Inactive Status: may be filed for any large trader who has not effected aggregate transactions at any time during the previous full calendar year in an amount equal to or greater than the identifying activity level.
- Termination Filing: must be filed when an entity ceases doing business and will not seek to file as a large trader in the future.
- Reactivated Status: A person on Inactive Status who effects aggregate transactions that are equal to or greater than the identifying activity threshold must file a “Reactivated Status” Form 13H promptly after effecting such transactions.
Staff Exam Observations of Investment Advisers
In exams focusing on compliance with Rule 13h-1, the SEC found investment advisers failed to file Form 13H despite meeting the filing threshold and failed to file their annual Form 13H. The SEC had suggestions for advisers to stay compliant with the rule:
Identify Situations That Could Result in the Adviser Being a Large Trader
Often times the broker-dealer will notify your firm if you cross the threshold. However, train key staff on the basic filing thresholds and create a check to flag if you are close to the threshold. New clients with large account values could cause the firm to cross the threshold, so initiate a process to review trades when new, large accounts are traded.
Timely File Form 13H
Once you set the threshold, you must file your initial Form 13H promptly (usually within 10 business days). Set a calendar reminder for each quarter-end in the event you have to make amendments and to cover the required annual amendment that is due regardless of changes.
Notify Broker-Dealers of Large Trader Status
This is straight forward. Just remember to always send your LTID to your broker-dealer following your initial filing. Keep a record of your number, in the event it is requested again or from other broker-dealers.
Lastly, SCS suggests you review your policies and procedures to ensure they contain a policy and process for monitoring and filing Form 13H.
Luckily, compliance with Rule 13h-1 is not complicated and only requires an annual filing, unless you have information that needs to be updated or you no longer qualify as a large trader. Implement a quarterly and annual process to check the status of your 13h-1 eligibility and let us know if you need any help! SCS files Form 13H!