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A December 16, 2020 risk alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) cautions investment advisers and broker-dealers to review and, as necessary, enhance their compliance programs with respect to “Large Trader” obligations pursuant to Rule 13h-1 under the Securities Exchange Act of 1934. Compliance with Rule 13h-1 enables the SEC to identify and obtain information on market participants that conduct a substantial amount of trading activity, as measured by volume or market value, in national market system (NMS) securities—i.e., “Large Traders.”

Rule 13h-1 requires entities and individuals, such as investment advisers, whose transactions in NMS securities meet or exceed the daily or monthly thresholds identified by the rule to self-identify to the SEC on Form 13H, and also requires certain recordkeeping, reporting and monitoring responsibilities for broker-dealers.

During examinations, OCIE observed “numerous instances of potential non-compliance” with Rule 13h-1, including some firms that were either not aware of Rule 13h-1 or were not familiar with certain requirements. Consequently, OCIE encouraged firms to thoroughly review their written supervisory procedures to ensure compliance with the rule, and provided the following specific recommendations:

For Investment Advisers

  • Identify situations that could lead the firm to become a Large Trader (e.g., if an adviser enters into a new discretionary client agreement, trading activity may meet the transaction thresholds of the Rule resulting in the investment adviser being deemed a Large Trader).
  • Timely file Form 13H, with respect to both the annual filing requirement and obligations to provide amended filings, as applicable.
  • Promptly following the end of a calendar quarter, amend Form 13H if the information contained within the filing becomes inaccurate, including the list of broker-dealers effecting transactions in eligible securities by the adviser, or the adviser’s affiliates.
  • Notify any broker-dealers through which the adviser executes transactions of its Large Trader status.


For Broker-Dealers

  • Assess applicability of Rule 13h-1 to the firm and its affiliates and make any necessary changes to its supervisory and compliance policies and procedures.
  • Timely file Form 13H, with respect to both the annual filing requirement and amended filings, as applicable.
  • Assess compliance policies and procedures and address reporting requirements under Electronic Blue Sheets and upcoming requirements under the Consolidated Audit Trail, as well as applicable FINRA rules.
  • Monitor customer activity to identify customers that may be Large Traders but have not provided their Large Trader identification number, and ensure that compliance procedures include a process to contact such customers.
  • Ensure that compliance policies and procedures address how the firm identifies and associates new accounts for existing Large Traders.

The OCIE risk alert is available here.



Professionals



John S. Marten

Shareholder



Nathaniel Segal

Counsel



Jacob C. Tiedt

Shareholder



David W. Soden

Associate