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On April 13, 2012, the staff of the Division of Trading and Markets (the “Staff”) of the Securities and Exchange Commission (the “SEC”) provided a set of responses to questions about Rule 13h-1 under the Securities Exchange Act of 1934, as amended. Rule 13h-1 was adopted on July 27, 2011, and it requires certain persons who conduct transactions in NMS Securities to (a) identify themselves to the SEC as large traders by filing Form 13H and (b) notify their broker-dealers of their large trader status upon receipt of an LTID number from the SEC.
I. NMS Securities
The Staff provides guidance on the definition of the term “NMS Security.” The term generally refers to exchange-listed equity securities and standardized options, but does not include exchange-listed debt securities, securities futures, or open-end mutual funds, which are not currently reported pursuant to an effective transaction reporting plan. As of March 2012, there were two effective transaction reporting plans and one effective national market system plan for reporting transactions in listed options: the Consolidated Tape Association (“CTA”) Plan; the OTC UTP Plan; and the Options Price Reporting Authority (“OPRA”) Plan. The CTA Plan consists of two networks — Network A, which reports transactions in certain securities listed on the New York Stock Exchange, and Network B, which reports transactions in certain securities listed on NYSE Arca, NYSE Amex and other regional exchanges. The CTA Plan is available at www.nyxdata.com/CTA. The OTC UTP Plan reports transactions in certain securities listed on the NASDAQ Stock Exchange. The OTC UTP Plan is available at www.utpplan.com/. The OPRA Plan reports transactions in eligible option contracts listed on national securities exchanges. The OPRA Plan is available at www.opradata.com/overview/opra_over.jsp.
II. Identifying Activity Level
The Staff clarifies that for purposes of calculating the identifying activity level, if more than one large trader exercises investment discretion over a single account, then each person is only required to count transactions that it effects toward the identifying activity level. However, any transactions in the account must be tagged with all applicable LTID numbers of persons who exercise investment discretion over the account.
III. Calculating the Value of Options for Purposes of the Identifying Activity Level
The Staff provides examples and guidance as to how to calculate the identifying activity level in respect of equity options and index options. In addition, the Staff states that when calculating the value of options for purposes of the identifying activity level, a person may either perform the calculation with reference to the price of the underlying security at the time of the options transaction, or with reference to the price of the underlying security at the close of trading on the trade date.
IV. Riskless Principal Transactions
Regarding riskless principal transactions, the Staff states that a broker-dealer does not exercise investment discretion if it holds a customer order as agent and, after receiving the order, effects a riskless principal transaction with its customer. Consequently, broker-dealers are not required to count such transactions towards the identifying activity level.
V. Use of Optional Suffixes
If a large trader uses an optional suffix, it may use a common suffix to sub-identify multiple persons under its control. The Staff notes that use of a common suffix for separate affiliates should reflect some commonality among the affiliates such as a similar business line, reporting line or geographic location.
VI. Broker-Dealer Identification
The Staff clarifies that a large trader is required to list in Item 6 of Form 13H all registered broker-dealers with which the large trader has an account for trading NMS securities, even if the large trader does not effect transactions in NMS Securities through one of these broker-dealers during the applicable reporting period. At its option, a large trader also may list non-registered broker-dealers (e.g., foreign broker-dealers) and broker-dealers that effect transactions in non-NMS Securities on behalf of the large trader.
VII. Annual Filings
The Staff notes that no annual filing was due for 2011 but that a large trader who registers at any time during 2012 will be required to file an annual filing for the period ending December 31, 2012. The Staff states that a large trader is required to file an annual filing within 45 days after the end of each full calendar year, regardless of whether the large trader files an amended filing for the fourth quarter of the same calendar year. The Staff is considering allowing large traders to satisfy the amended filing and annual filing requirements by filing a single form, provided that the filing is made promptly after the end of the fourth quarter.
VIII. Accessing Form 13H
The Staff provides instructions on how to obtain access codes and file Form 13H.
IX. Accounts of the Large Trader
The Staff clarifies that the phrase “accounts of the large trader” in Item 5(b) refers to ownership of the large trader partnership entity, not the accounts that may be managed by the large trader.
X. LTID Numbers
The Staff provides some guidance on the receipt and formatting of LTID numbers.
XI. Recordkeeping
The Staff clarifies that broker-dealers should designate Unidentified Large Traders by an identification number in the format of an LTID number. Broker-dealers need only keep records relating to NMS securities. In addition, broker-dealers do not need to keep records of options exercises or assignments of options contracts.
Further details about this release may be obtained at www.sec.gov/divisions/marketreg/large-trader-faqs.htm.
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