Taking Stock of Threshold-Based Filing Obligations

JAN 17, 2021 | PRACTUS LLP

Taking Stock of Threshold-Based Filing Obligations

Authored by Karen A. Aspinall


SEC Issues Risk Alert On Larger Trader Obligations

Recently, the Division of Examinations (formerly, the Office of Compliance Inspections and Examinations) issued a Risk Alert detailing certain examination observations relating to large trader obligations.  In particular, the SEC staff (the “Staff”) observed that some investment advisers and broker-dealers were not aware of Rule 13h-1 under the Securities Exchange Act of 1934 (the “Large Trader Rule”) or were not otherwise familiar with certain of the rule’s requirements.  The Risk Alert serves as a reminder of the requirements under the Large Trader Rule and encourages investment advisers and broker-dealers to review and enhance their compliance programs accordingly.


The SEC adopted the Large Trader Rule in 2011 to assist it in identifying and obtaining information about market participants that conduct a substantial amount of trading activity, as measured by volume or market value, in national market system (“NMS”) securities (such persons are referred to as “Large Traders”).  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 Large Trader Rule applies to anyone who exercises discretion, such as an investment adviser, that directly or indirectly, for itself or for others, meets any of the transaction thresholds.

A Large Trader must file Form 13H (and update it as applicable), which provides the SEC with general information about the Large Trader’s regulatory status, affiliates, governance, and broker-dealers where the Large Trader has an account(s).  Large Traders are assigned a unique identification number (“LTID”), which must be disclosed to all broker-dealers who effect transactions for the Large Trader and the Large Trader must identify each account at a broker-dealer that is subject to the LTID.  

Broker-dealers also play an important role with respect to reporting Large Trader information to the SEC.  Once a Large Trader has provided its LTID and the accounts to which that LTID applies, broker-dealers are then responsible for reporting applicable trading information to the SEC upon request, so that the SEC can monitor such activity.

Application to Investment Advisers

Given the Staff’s observations regarding these requirements, the Risk Alert encourages investment advisers who transact in NMS securities to review their compliance policies and procedures with respect to:

  • Identifying situations that could lead to the investment adviser becoming a Large Trader
  • Timely filing of Form 13H 
  • Promptly amending Form 13H following the end of a calendar quarter if any of the information contained in the filing becomes materially inaccurate, including the list of broker-dealers that effect transactions in eligible securities (“Covered Transactions”) by the investment adviser or the adviser’s affiliates
  • Notifying any broker-dealer through which the investment adviser executes transactions of its Large Trader status


 PRACTUS NOTE: While this Risk Alert focuses on obligations relating to Large Traders and Form 13H, there are other threshold-based reporting obligations that may be required of a U.S. investment adviser.  Some of these requirements come from the SEC, such as those required under Section 13(f) of the Securities Exchange Act of 1934, which requires “institutional investment managers” to file Form 13F if it has investment discretion over $100 million or more in equity securities traded on securities exchanges or NASDAQ.  Other threshold- based reporting requirements can come from various other regulators, such as the U.S. Treasury Department, which has a number of forms that may be applicable to an adviser’s business or other forms and requests for information from the Bureau of Economic Analysis.  Accordingly, any comprehensive compliance program should identify relevant requirements that pertain to the adviser’s business and importantly, as an adviser’s business changes or expands, regulatory filing obligations should be reconsidered.


Application to Broker-Dealers

The Risk Alert also seeks to remind broker-dealers of their obligations related to the reporting of Large Trader information in Electronic Blue Sheets and the upcoming reporting obligations with respect to the Consolidated Audit Trail (“CAT”) beginning on April 26, 2021.1  Under the Large Trader Rule, broker-dealers are required to keep records of all transactions that are effected directly or indirectly by or through (i) an account the broker-dealer carries for a Large Trader or any trader that the broker-dealer “knows or has reason to know” that such person is a Large Trader but has not identified itself as such to the broker-dealer – so called “Unidentified Large Traders” or (ii) if the broker-dealer is a Large Trader, any proprietary or other account over which such broker-dealer exercises investment discretion.  If a broker-dealer effects Covered Transactions for an account(s) that is attributable to an Unidentified Large Trader, the broker-dealer must assign its own unique identifier to the account(s).2    

The Staff observed that broker-dealer firms had potential compliance issues in the following areas when effecting Covered Transactions for those who are Large Traders or Unidentified Large Traders: (1) recordkeeping, (2) monitoring, and (3) reporting to the Electronic Blue Sheets.  

For a broker-dealer that engages in Covered Transactions for its own account(s), the Staff noted similar observations regarding the review of supervisory and compliance policies and procedures with respect to understanding the applicability of the rule and timely filing of Form 13H and any amendments thereto.  The Risk Alert also highlights that broker-dealers should be mindful of applicable reporting requirements under Electronic Blue Sheets and the CAT, as well as applicable FINRA rules.  Accordingly, any firms that will be subject to these reporting requirements should consider whether any enhancements to their current practices are necessary.  Finally, broker-dealers should (i) monitor customer activity to identify customers that may be Large Traders, but have not provided their LTIDs (i.e., Unidentified Large Traders), (ii) ensure there is an adequate process for contacting such customers and (iii) identifying and associating new accounts for existing Large Traders.

Please contact Karen Aspinall or the Practus attorney who usually advises you with any questions you may have or if you would like additional information.

Article Footnotes

  1. Electronic Blue Sheets are trading records requested by the SEC and self-regulatory organizations from clearing broker-dealers, whereas reporting into the CAT will apply to all broker-dealers.  
  2.  The Rule has a safe harbor for broker-dealers to detect and identify persons that may be Large Traders. A broker-dealer is deemed not to know or have reason to know that a person is a Large Trader if it does not have actual knowledge that the person is a Large Trader and it establishes policies and procedures that (1) identify persons who have not identified as a Large Trader under the rule but whose Covered Transactions effected through the broker-dealer equal or exceed the Large Trader identifying activity level; (2) treat any person identified in (1) as an Unidentified Large Trader; and (3) inform any person who is categorized as an Unidentified Large Trader of its potential obligations under the Rule.

The Authors
Karen A. Aspinall
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Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

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