SEC Proposes New “Large Trader” Reporting Rules

On April 14, 2010, the Securities and Exchange Commission (the “Commission”) proposed new Rule 13h-1 (the “Proposed Rule”) and related Form 13H, which would impose new reporting requirements on “large traders.”1 The avowed purpose of the rule is to “provide the Commission with information about traders conducting a substantial amount of trading activity.”2

The Proposed Rule responds to the Commission’s view that the current market surveillance infrastructure, the electronic blue sheets (“EBS”) system,

is subject to lengthy delays, particularly with respect to files involving a large number of transactions over an extended time period. Commission staff often must make multiple requests to broker-dealers to obtain sufficient order information about the purchase or sale of a specific security to be able to adequately analyze the trading.3

In addition, the Commission states in the proposing release accompanying the Proposed Rule that “large traders appear to be playing an increasingly prominent role in the securities markets” and “market observers have offered a wide range of estimates for the percentage of overall volume . . . attributed to one potential subcategory . . . — high frequency traders — which are typically estimated at 50% of total volume or higher.”4

The Proposed Rule defines “large traders” as “persons” who directly or indirectly, including through the “control” of other persons:

(1) exercise “investment discretion” for the purchase or sale of NMS securities5, and

(2) conduct transactions in NMS securities equal to or exceeding (i) two million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month.6

Large traders would be required to file Form 13H with the Commission promptly following the completion of transactions that satisfy either of the two transactional tests. Form 13H filings would have to be amended at the end of each quarter if prior filings became inaccurate. Rule 13h-1 would also require large traders to file a Form 13H at least annually, even if there was no need to amend a prior filing. However, the Proposed Rule contemplates a ‘sunset provision’ for persons who no longer qualify as large traders.

In addition to transactional information, Form 13H requires information regarding the reporting person’s affiliates, business, and scope of investment discretion, as well as certain other items described in the Commission’s proposing release. Upon making its first Form 13H filing, each reporting large trader would receive a unique Large Trader Identification Number (“LTID”). In addition to the Form 13H requirements, the Proposed Rule would require large traders to provide additional information about itself and the identity of all accounts through which it effects transactions to the Commission upon request.

Rule 13h-1 also imposes requirements upon broker-dealers. These requirements include maintaining records regarding large trader transactions effected by such broker-dealers and the provision of such records to the Commission electronically upon request. Because each large trader would have a unique LTID, the Commission would have the ability to receive information about the trader’s activity across multiple brokers, information which the current EBS does not readily provide.7

Data provided to the Commission by large traders and by broker-dealers pursuant to Rule 13h-1 would be exempt from disclosure to third parties under the Freedom of Information Act.

The proposing release and the full text of the Proposed Rule can be viewed here.

The Proposed Rule will be open for public comment for 60 days after publication in the Federal Register.

Please do not hesitate to contact us with any questions or comments regarding the Proposed Rule. This Update may be freely distributed in whole.

1 This is the Commission’s third proposed rule relating to large traders. The first two proposals were issued in 1991 and 1994, but were not ultimately adopted.
2 Congress passed the Market Reform Act in 1990, which provides the Commission with the statutory authority pursuant to which the rule is promulgated. The proposing release notes that the passage of the Market Reform Act was motivated in part by Congressional concern that the Commission’s ability to analyze the causes of market crises in 1987 and 1989 “was impeded by its lack of authority to gather trading information.” Exchange Act Release No. 34-61908 (April 14, 2010) at 6 & n. 9.
3 Id. at 11.
4 Id. at 13.
5 Rule 600(b)(46) of Regulation NMS (or National Market System) defines an NMS security as “any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.” In other words, NMS securities include most publicly-traded equity securities.
6 Each of the terms quoted above is defined in the proposing release, either directly or by reference. The choices embedded in the definitions are in many instances quite significant, but a lengthy discussion of these matters is beyond the scope of this update.