Broker-Dealers Compliance


4 Takeaways From the SEC's Risk Alert On Large Traders

Aug 8, 2023




5 min read

On December 16, 2020, The Securities Exchange Commission (SEC) released a Risk Alert on Rule 13h-1 (Large Trader Rule) and the rules about Consolidated Audit Trails which went into effect in April 2021.

Unlike many recent regulations adopted by the SEC, the Large Trader Rule is not an outcome of the Dodd-Frank Act but rather has been adopted pursuant to the SEC’s authority under the Market Reform Act of 1990 given the increasingly prominent role of high frequency traders in securities markets.

In general, the Large Trader Rule covers identification of and information on traders who conduct a substantial amount of trading activity on the National Market System (NMS). The Consolidated Audit Trail (CAT) tracks such activity. This allows the SEC to gather information critical to its investigations, such as time of the trade and the trader identity, which helps the Commission reconstruct a trading history and identify patterns including those which may indicate illegal conduct.

In the Risk Alert, the SEC noted that some advisers and broker dealers it examined were unaware of the Large Trader Rule and, consequently, is encouraging all SEC-registered investment advisers and broker-dealers to review and update their compliance policies and procedures to ensure compliance with its requirements.

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What is Large Trader Reporting? Key Compliance Observations and Impact

The Large Trader Rule entails a number of important compliance requirements and provisions for broker-dealers.

1. Large Trader Rule

Rule 13h-1 defines Large Traders as

  1. entities or individuals who trade NMS securities equal to or in excess of 2 million shares for $20 million per day, or

  2. persons or entities who trade NMS securities equal to or in excess of 20 million shares or $200 million per month.

The Rule applies to investment advisers based upon the number of shares or values of assets over which they have investment discretion. So, if the adviser has trading discretion over a number of shares that meets the definitional thresholds it will be deemed a Large Trader if the defined trigger levels are met.

In addition, the Rule applies when broker-dealers who know or have reason to know that a person or entity that trades at a volume (number of shares or dollar amount) that exceeds the Large Trader thresholds but has not self-identified. These traders are to be treated as an Unidentified Large Trader.

Form 13H provides the SEC with the following details specific to the Large Trader:

  • Nature of business

  • Regulatory status

  • Identity of affiliates

  • Governance structure

  • Broker-dealers with which the Large Trader has accounts

Upon the initial 13H filing, Large Traders Advisers are given a unique Large Trader Identification Number (“LTID”) which needs to be provided to all broker-dealers effecting transactions on their behalf for identification and registration purposes.

2. Large Trader Reporting

SEC members who work with Large Traders must maintain Form 13H on each of its qualified customers.

  • SEC Form 13H is the Security Exchange Commission’s record which contains both trading and account holder information, and provides regulatory agencies with the ability to analyze a firm’s trading activity. It is applicable for registering an Unidentified Large Trader, which the SEC defines as either an individual or company that might fit the requirements of Large Traders but is not yet registered.

  • If you believe that you are working with a person or entity which may qualify as a Large Trader, the SEC requires you to assign a unique identifier for their account.

  • Broker-dealers must also keep records of all transactions that they have with a qualified customer or Unidentified Large Trader or any qualified account that the broker-dealer has investment discretion over.

3. Procedure for “Unidentified Large Traders”

The Safe Harbor Provision allows broker dealers to adopt policies and procedures to detect “unidentified large traders” and inform them of Rule 13h-1 and their potential obligations to file with the SEC.

An “unidentified large trader” is a person that: (i) has not filed a Form 13H with the SEC nor provided its LTID to the broker-dealer and (ii) a registered broker dealer knows or has reason to know the person is a Large Trader.

SEC-registered investment advisers who have been advised by a broker-dealer that they meet the definition of a large trader, but were unaware of such status, should immediately review their trading activity and compliance policies and procedures to ensure compliance with Rule 13h-1.

4. Consolidated Audit Trail

Rule 613 mandatory provision known as a Consolidated Audit Trail (CAT) requires self-regulatory organizations to submit plans to create, implement and maintain CAT reporting plans. Reporting into the CAT applies to all Broker-Dealers, and Rule 613 specifies the type of data to be collected, and when the collection will occur.

Reporting of customer identifying information to the CAT as it relates to Large Traders commenced on April 26, 2021 based on the following key requirements and guidance set forth in the CAT Reporting Customer and Account Information Technical Specifications:

  • Broker-Dealers are required to obtain and report LTIDs to the CAT for accounts with reportable events.

  • Impacted firms for which this is a new requirement may be required to change their current onboarding activities to verify whether an LTID exists, and to ensure any account with a reportable event is recorded and reported to the CAT.

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Conclusion: Large Trader Reporting

The SEC’s Large Trader Rule is designed to ensure that individuals and entities trading in large volumes are registered with and monitored by the SEC. It is important that broker dealers assess their policies and procedures to ensure compliance with the key provisions of the Large Trader rule highlighted above.

Brokerage firms and their associated traders must set up Consolidated Audit Trails
reporting for such customers and stay abreast of the changing regulations to ensure compliance with the Large Trader Rule.

Policies and procedures should be reviewed to ensure they contain a process for monitoring and filing Form 13H. A timely filing of Form 13H is required with respect to both the initial and annual filing requirement as well as obligations to provide amended filings in the event that any of the information contained in the filing becomes inaccurate for any reason.

It is recommended that compliance with the Large Trader Rule be validated through a quarterly and annual process to check the status of Rule 13h-1 eligibility. Specifically, new clients with large account values could cause the firm to cross the threshold, so initiate a process to review trades when new, large accounts are traded.

If your investment adviser firm would like assistance in reviewing your policies and procedures relating to Form 13H, we encourage you to reach out to us to discuss your risks and compliance needs.

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Published on Mar 27, 2022


Last updated on Aug 8, 2023

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