SEC's OCIE Addresses Broker-Dealer & Adviser Large Trader Obligations - 21 December 2020

The SEC’s Office of Compliance Inspections and Examinations (OCIE) addressed broker-dealer and adviser large trader obligations in a recent annoucement.

Individuals and entities should remain vigilant in assessing circumstances and meeting filing obligations in connection with "large trader" status.

The SEC’s OCIE recently discussed examinations focused on broker-dealers’ and investment advisers’ compliance with Exchange Act Rule 13h-1. OCIE noted that, during examinations, staff observed numerous instances of potential non-compliance with the rule, including where large traders failed to self-identify and/or failed to file annual Forms 13H as required. The Risk Alert is intended to assist advisers and broker-dealers in reviewing and enhancing their compliance programs with respect to "large trader" obligations.

Rule 13h-1. Rule 13h-1 requires investment advisers whose transactions in national market system (NMS) securities meet or exceed identified thresholds to self-identify to the SEC on Form 13H and also mandates certain reporting and monitoring responsibilities for broker-dealers. The SEC adopted Rule 13h-1 to assist the Commission in identifying and obtaining information on market participants that conduct a substantial amount of trading activity, as measured by volume or market value in NMS securities (large traders). Rule 13h-1defines a "large trader" as a person whose transactions in NMS securities equals or exceeds 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.

A large trader must file and periodically update Form 13H, which provides the SEC with information about its business, status, affiliates, governance, and broker-dealers. Under the recordkeeping requirements in Rule 13h-1, broker-dealers must maintain records for all transactions and assign their own unique identifiers to applicable accounts.

The rule has a safe harbor for those who eventually detect and identify large traders when they did not have actual knowledge that they met the status requirements.

Staff observations. OCIE notes that it conducted many examinations focused on compliance with Rule 13h-1 and found instances of potential non-compliance. However, OCIE also states that firms were responsive and improved their procedures and processes. Firms that may have missed filing obligations took steps to address the issues, the alert explains.

The risk alert encourages any investment adviser that transacts in NMS securities to review its compliance policies and procedures regarding: (1) identifying situations that could lead to becoming a large trader; (2) timely filing Form 13H; (3) providing amendments as a result of inaccuracy as promptly as possible; and (4) notifying any broker-dealers through which it executes transactions of large trader status.

Broker-dealers. As to broker-dealers, OCIE staff observed that firms had potential compliance issues regarding recordkeeping, monitoring, and reporting to Electronic Blue Sheets. Again, the staff urged broker-dealers that transact in NMS securities to assess and make necessary changes to its supervisory and compliance policies and procedures in connection with the applicability of Rule 13h-2, timely filing of Form 13H, and reporting requirements under Electronic Blue Sheets and the CAT, as well as FINRA rules. Information to uniformly identify large traders across markets is necessary for the SEC to accurately track and analyze activity, the alert notes.

Consolidated Audit Trail. Reporting of customer identifying information relating to large traders begins in April 2021, and broker-dealers must report to the CAT certain account information regarding account holders. Firms may have to change their current onboarding activities to verify whether information exists and should be recorded and reported in connection with reportable events.

In conclusion, OCIE reiterated its position that investment advisers and broker-dealers should review their practices and written policies and procedures to address inconsistencies and inadequacies and to review applicable reporting obligations.

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