SEC Risk Alert – Large Trader & Form 13H Obligations for Investment Advisers

December 29, 2020

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On December 16 2020, the Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) released a Risk Alert about its assessment of the compliance practices of SEC-registered investment advisers and broker dealers with regard to Rule 13h-1, which was adopted to help the SEC identify and obtain information on certain market participants (referred to as “Large Traders”) that conduct a substantial amount of trading activity as measured by volume or market value, in national market system (“NMS”) securities. In the Risk Alert, OCIE noted that some advisers and broker dealers it examined were unaware of the rule or its specific requirements and, consequently, is encouraging all SEC-registered investment advisers and broker-dealers to review and update their compliance policies and procedures, as needed, to ensure compliance with Rule 13h-1. Click here to read the SEC’s Risk Alert for Large Trader Obligations.

*Please note, this blog is intended to discuss Rule 13h-1 as it applies to SEC-registered investment advisers, and does not include an analysis or discussion of Rule 13h-1 with regard to broker-dealers.*

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SEC-Registered Investment Advisers & Rule 13h-1

A Large Trader is defined 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,” including persons that exercise investment discretion over trading in NMS securities.

An SEC-registered investment adviser that is a Large Trader must file and update Form 13H on an ongoing basis. The SEC uses Form 13H to collect general information about the investment adviser’s business, regulatory status, affiliates, governance, and broker-dealers where the investment adviser has an account. Upon initial filing of the Form 13H, the SEC assigns a large trader identification number (“LTID”), which the investment adviser is then responsible for disclosing to broker-dealers effecting transactions on its behalf, along with a list of all accounts at that broker-dealer to which the LTID applies.

Additional recordkeeping and compliance requirements apply to broker-dealers, including monitoring trading activity to identify persons who have not self-identified as a Large Trader under the rule but whose transactions effected through the broker-dealer equal or exceed the Large Trader identifying activity level. SEC-registered investment advisers who have been advised by a broker-dealer that they meet the definition of a large trader, but were unaware of such status, should immediately review their trading activity and compliance policies and procedures to ensure compliance with Rule 13h-1.

Staff Observations

As a result of its examinations and commonly observed deficiencies, OCIE is encouraging each investment adviser that transacts in NMS securities to review its compliance policies and procedures around:

– Identifying situations that could lead the investment adviser to become a Large Trader under the Rule.

– For example, if an investment adviser enters into a new discretionary client or customer agreement, the trading activity may meet the transaction thresholds of the Rule and result in the investment adviser being deemed a Large Trader.

– Timely filing of Form 13H, with respect to both the annual filing requirement and obligations to provide amended filings, where applicable.

– Promptly following the end of a calendar quarter amending Form 13H in the event that any of the information contained within the filing becomes inaccurate for any reason, including the list of broker-dealers effecting transactions in eligible securities by the investment adviser, or the investment adviser’s affiliates.

– Notifying any broker-dealers through which the investment adviser executes transactions of its Large Trader status. 

RIA Compliance Consultants encourages SEC-registered investment advisers to closely review the SEC’s Risk Alert on Large Traders in light of their current compliance policies and procedures as well as the investment adviser’s actual practices. RIA Compliance Consultants has developed a Sample WSP/CoE Section Update – Section 13 Filing which describes the various Section 13 filings under the Securities Exchange Act of 1934 and outlines the procedures for filing the Form 13F and Form 13H. This sample form is included with the Bronze, Silver, Gold and Platinum Packages or available a la carte here.

If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance in reviewing your policies and procedures relating to Form 13H, we encourage you to speak with your compliance consultant. Or, if you are not an existing client of RIA Compliance Consultants, click here to set up an introductory call with our Business Development Team.

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