SEC Proposes Large Trader Reporting System

by Ropes & Gray LLP
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In an effort to enhance its ability to study and monitor U.S. securities markets, the Securities and Exchange Commission (SEC) proposed a new rule on April 14, 2010 to help identify persons that conduct substantial trading activity (large traders) and monitor their trading activity. The proposal would establish a new Rule 13h-1 (the Rule) and Form 13H under Section 13(h) of the Securities Exchange Act of 1934 (the Exchange Act). Rule 13h-1 generally would require any person to register with the SEC as a large trader by filing Form 13H if that person, together with persons it controls, has traded either two million shares or $20 million of shares within a single day, or twenty million shares or $200 million of shares within a calendar month. For purposes of determining whether an investment adviser exceeds these thresholds, trading activity in all accounts over which it exercises investment discretion would need to be aggregated. After filing Form 13H, a large trader would be assigned a unique Large Trader Identification Number (LTID), which that trader would then need to disclose to any registered broker-dealer through which it effects trades.

Background

Section 13(h), which was added to the Exchange Act by the Market Reform Act of 1990, authorizes the SEC to establish a large trader reporting system to facilitate identifying large traders and monitoring their trading activity. The SEC previously proposed a rule under Section 13(h) in 1991, and reproposed it in 1994, to establish a large trader reporting system, but such a rule was never adopted. In the proposing release for the Rule, the SEC noted that the transition in recent years from manual trading to automated trading and other technological advances have led to trading by institutional investors at high speeds and in large volumes. The SEC suggested that a correlation exists between the speed and volume at which these large traders currently trade and recent increases in volatility in the stock markets, and noted the emergence of high frequency traders, who are estimated to account for more than 50% of total trading volume. Rule 13h-1 is intended to supplement the existing Electronic Blue Sheets system to provide the SEC with adequate information to monitor large traders and their trading activity.

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