The SEC came out with a Risk Alert yesterday (12/17) regarding Observations from Examinations of Broker-Dealers and Investment Advisers (Large Trader Obligations).
Here are some expectations from this Risk Alert:
- Observations from the OCIE examining investment advisers and broker-dealers for compliance with Rule 13h-1
- Why the SEC adopted Rule 13h-1 to help assist the Commission in identifying and obtaining information on market participants that conduct a substantial amount of trading activity
- What the Larger Trader reporting requirements are designed to provide for the SEC
Rule 13h-1 helps identify a Larger Trader whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day.
Who does this rule apply to?
- This Rule applies to persons that exercise investment discretion over trading in NMS securities
- In order for an investment adviser to become a Large Trader they must exercise investment discretion directly or indirectly on behalf of itself or other, if the transaction meets the thresholds
It is crucial that Large Traders file and periodically update Form 13H as it helps provide the Commission with general information. It is also important to disclose the Large Trader ID (“LTID”) assigned from the Commission to all broker-dealers effecting transactions on its behalf.
There are important recordkeeping requirements in Rule 13h-1 for broker-dealers to be aware of:
- Maintain record for all transactions effected directly or indirectly
- Maintain the following record through an account such broker-dealer carries for a Large Trader or Unidentified Large Trader
- If the broker-dealer is a Large Trader then it can maintain the following record through any proprietary or other account over which such broker-dealer exercises investment discretion
- If the broker-dealer is an Unidentified Larger Trader then the broker-dealer should assign their own unique identifier to the applicable account(s)
- The rule also requests that broker-dealers report certain Large Trade information using the Electronic Blue Sheets infrastructure upon the request of the Commission
What did the OCIE Observe from Rule 13h-1?
The OCIE conducted numerous examinations focusing on broker-dealers and investment advisers compliance with Rule 13h-1. Potential non-compliance with the Rule including where Large Traders may not have self-identified with the SEC and/or may not have filed their annual Form 13H as required by the rule occurred on multiple instances during these examinations.
In response to the OCIE’s examinations, firms took steps to address these issues and improve their procedures, processes, and controls to help ensure compliance with the Rule.
In addition, this SEC Risk Alert provided advice for Investment Advisers and Broker-Dealers to review their compliance policies and procedures around.
Below will be the key recommendations for Investment Advisers and Broker-Dealers.
Key Recommendations for Investment Advisers:
- It is important to identify situations that could have the investment adviser become a Large Trader under the Rule
- Filing Form 13H in a timely manner
- When an investment adviser executes transactions of its Larger Trader status it is important to notify any broker-dealers
Key Recommendations for Broker-Dealers:
- Filing Form 13H in a timely manner for both the annual and any amended filings
- Make sure to report the requirements under the CAT and Electronic Blue Sheets
- Identify customers that may be Large Traders by monitoring the customer activity
- Making sure new accounts are identified and associated to existing Large Traders
Want to learn more about the Broker-Dealer Reporting Responsibilities?
Click HERE to see the full SEC Risk Alert.