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SEC RIA Compliance Risk Alert Flags Rule 13h-1 Large Trader Obligations

Posted by RIA in a Box

Dec 23, 2020 9:40:00 AM

SEC investment adviser risk alert on credential stuffing cyber attacksOn December 16th, 2020, the Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released a new risk alert that discusses the results of recent examinations that focused on Rule 13h-1. This rule was adopted to help the SEC 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 (such persons are referred to as "Large Traders")," the alert explains further. According to OCIE staff observations, many investment advisers were not in compliance with Rule 13h-1 due to lack of knowledge or not knowing the rule exists. The risk alert is meant to assist registered investment adviser ("RIA") firms and broker-dealers in "reviewing and enhancing their compliance programs with respect to their Large Trader obligations."

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An RIA firm is considered a Large Trader if their "transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month." Therefore, an RIA firm that meets these requirements must be in compliance with Rule 13h-1 by making the necessary changes to their policies and procedures and filing the required Form 13H.

The SEC OCIE staff encourages RIA firms to consider the following when reviewing their policies and procedures:

  • Identifying situations that could lead the investment adviser to become a Larger Trader under the Rule.
    • For example, if an investment adviser enters into a new discretionary client or customer agreement, the trading activity may meet the transaction thresholds of the Rule and result in the investment adviser being deemed a Large Trader.
  • Timely filing of Form 13H, with respect to both the annual filing requirement and obligations to provide amended filings, where applicable.
  • Promptly following the end of a calendar quarter amending Form 13H in the event that any of the information contained within the filing becomes inaccurate for any reason, including the list of broker-dealers effecting transactions in eligible securities by the investment adviser, or the investment adviser's affiliates.
  • Notifying any broker-dealers through which the investment adviser executes transactions of its Large Trader status. 

The SEC OCIE staff noted that the investment advisers who were examined generally responded positively and made the appropriate changes to comply with Rule 13h-1. Additionally, firms or individuals who had missed filing their Form 13H in the past took the suggested steps to resolve the issue, and submitted the missing Form 13Hs from past years. In conclusion, the SEC OCIE staff encourages all RIAs to review their policies and procedures and to consider possible Form 13H filing requirements to address the topics discussed in the risk alert

Be sure to check back soon as we continue to provide updates on relevant RIA regulatory compliance focus areas.

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Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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