The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert to provide observations from its examinations of SEC-registered investment advisers (“Advisers”) and broker-dealers (“Broker-Dealers”) for compliance with Rule 13h-1 (the “Rule”) under the Securities Exchange Act of 1934. The Rule was adopted to assist the SEC in identifying and obtaining information on market participants that conduct a substantial amount of trading activity.¹  Such market participants are referred to as “Large Traders.”

OCIE Staff Observations 

Investment Advisers. In the Risk Alert, the OCIE staff (“Staff”) encouraged Advisers that transact in NMS securities to review their compliance policies and procedures regarding:

1. Identifying situations, such as an increase in trading activity due to a new discretionary client agreement, that could lead to the Adviser becoming a Large Trader.
2. Timely annual Form 13H filings and prompt quarterly amendments to Form 13H in the event that any information in the filing, such as the list of Broker-Dealers effecting transactions in eligible securities by the Adviser, becomes inaccurate for any reason.²
3. Notifying any Broker-Dealers through which the Adviser executes transactions of its Large Trader status.

Broker-Dealers. The Staff observed potential compliance issues related to the Rule for Broker-Dealers regarding: (1) recordkeeping; (2) monitoring; and (3) reporting to Electronic Blue Sheets. The Staff encouraged Broker-Dealers that transact in NMS securities to assess and revise their supervisory and compliance policies and procedures as necessary regarding:

1. Applicability of the Rule to the Broker-Dealer and its affiliates.
2. Timely filing of the annual Form 13H and any required amendments.
3. Reporting requirements under the Electronic Blue Sheets and the Consolidated Audit Trail (“CAT”) reporting obligations, as well as applicable FINRA rules.
4. Monitoring customer activity to identify customers that may be Large Traders and contacting those customers to obtain their Large Trade identification number (“LTID”) or advising such customers that they must obtain an LTID.
5. Identifying and associating new accounts for existing Large Traders.³

Broker-Dealer Reporting Responsibilities

A Broker-Dealer that is itself a Large Trader must adhere to the Form 13H filing requirements outlined above.

Electronic Blue Sheet Reporting

The Rule requires that, upon a request from the SEC, a Broker-Dealer that is itself a Large Trader or carries an account for a Large Trader or an Unidentified Large Trader must report transaction data to the SEC. The requirements that a Large Trader provide its LTID to all Broker-Dealers who effect transactions on its behalf, and identify each account to which it applies, are ongoing responsibilities that must be discharged promptly by each Large Trader.

Additionally, where a non-Broker-Dealer carries an account for a Large Trader or an Unidentified Large Trader, the Broker-Dealer effecting such transactions (directly or indirectly) must electronically report transaction data to the SEC through the Electronic Blue Sheets system for such transactions equal to or greater than the reporting activity level.

Consolidated Audit Trail Reporting

Rule 613 under Regulation NMS requires self-regulatory organizations to submit plans to create, implement and maintain CAT reporting plans. Reporting into the CAT applies to all Broker-Dealers,⁴ and Rule 613 specifies the type of data to be collected, and when the collection will occur. Reporting of customer identifying information as it relates to Large Traders begins on April 26, 2021. On that date, large Broker-Dealers will be required to report to the CAT certain account information regarding account holders with an LTID or an Unidentified Large Trader Identification number.

The reporting requirements and guidance for such reporting are set forth in the CAT Reporting Customer and Account Information Technical Specifications for Industry Members.⁵ Broker-Dealers will be required to obtain and report LTIDs to the CAT for accounts with Reportable Events.⁶ Given that this requirement extends beyond clearing Broker-Dealers, the number of firms required to report LTIDs will increase. Firms for which this is a new requirement may have to change their current onboarding activities to verify whether an LTID exists, and to ensure any account with a Reportable Event is recorded and reported to the CAT.

Additionally, the Staff recommended that Broker-Dealers review the new reporting obligation requirements under the CAT plan related to Large Traders to ensure they are ready to meet these reporting requirements by April 26, 2021.

S&K Observations

The Risk Alert highlights the Staff’s focus on Advisers’ and Broker-Dealers’ compliance with the filing and reporting obligations under the Rule. Advisers and Broker-Dealers should review and, where appropriate, amend their policies and procedures with respect to compliance with the Rule with particular emphasis on the areas identified in the Risk Alert.

Seward & Kissel LLP, and our compliance consulting service SKRC (Seward & Kissel Regulatory Compliance), are available to assist firms in their compliance with the Rule, including preparation of Form 13H filings and amendments, and the design and implementation of written policies and procedures related to the Rule.