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.