Frequently Asked Questions Regarding the Large Trader Reporting Rules. (November 21, 2011)

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1 These Frequently Asked Questions are provided as a service to members. They are not intended as legal advice, and they are not a substitute for professional legal counsel. We undertake no duty to update them. Frequently Asked Questions Regarding the Large Trader Reporting Rules (November 21, 2011) On July 26, the Securities and Exchange Commission (SEC) adopted new Rule 13h-1 and Form 13H under the Securities Exchange Act of 1934, establishing the Large Trader Reporting system. The rule and form are intended to assist the SEC in identifying and obtaining certain information about traders that conduct a substantial amount of trading activity in the U.S. securities markets. The rule and form became effective on October 3, and the compliance date for filing the initial Form 13H is December 1. Rule 13h-1 requires all large traders to identify themselves to the SEC by electronically filing and periodically updating Form 13H. Upon receipt of an initial Form 13H, the SEC will assign and issue a unique large trader identification number ( LTID ) to the large trader. Each large trader then must disclose its LTID and each account to which it applies to the registered broker-dealers effecting transactions on its behalf. If requested, large traders must also promptly provide additional descriptive or clarifying information to the SEC that would allow the Commission to further identify the large trader and all accounts through which the large trader effects transactions. To assist members in complying with the new rule, the IAA has posted on the member web site a memorandum describing the new rule requirements. As the compliance date approaches, the IAA staff has received numerous questions regarding the new rule and form. This document compiles these questions to assist members with various interpretive questions. To further assist members, the IAA also hosted a webinar on November 10, entitled, Are You a Large Trader? The Answer May Surprise You. What You Should Know if You Are a Large Trader. Members also may wish to consult the webinar and the accompanying materials. Large Trader Status 1. To whom do large trader reporting requirements apply? The reporting requirements would apply to any person that directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security for or on behalf of such accounts, by or through one or more registered broker-dealers, at the identifying activity level discussed below. The large trader does not have to be an investment adviser, another regulated entity, or a US entity as long as the person exercises investment discretion.

2 2. Does a person have to file an initial Form 13H to obtain a large trader identification number (LTID)? Yes. Triggering Threshold 1. What is the identifying activity level that triggers large trader status? The identifying activity level is aggregate transactions in NMS securities that are equal to or greater than: (i) during a calendar day, either two million shares or shares with a fair market value of $20 million or (ii) during a calendar month, either twenty million shares or shares with a fair market value of $200 million. 2. Does the triggering activity level apply to a single security or to all of a firm s trading for the day/month? A firm does not trigger the thresholds per security as it does for a Schedule 13D or 13G filing. The thresholds are triggered by the aggregate trading activity of the firm. 3. What is an NMS Security? NMS security is defined 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. An NMS security generally refers to exchange-listed securities, including equity and options. Although a debt security could technically be an NMS security, we are currently not aware of any debt securities that are listed on an exchange and reported pursuant to a transaction plan. 4. Are mutual funds NMS securities? Mutual funds (except for exchange-traded funds or ETFs) are not exchange-listed securities and therefore are not NMS securities. 5. Do NMS securities include foreign stocks traded on foreign stock exchanges? It is unlikely that foreign stocks traded primarily on a foreign stock exchange would be an NMS security. If that foreign stock is an American Depositary Receipt ( ADR ), however, a firm may need to determine whether the ADR is an exchange-listed security and its transactions are reported pursuant to a transaction plan. 2

3 6. If an SEC-registered adviser is a non-us person and effects its trades through a US registered broker-dealer via the broker-dealer s non-us trading desk, would these trades count towards the threshold? Yes. As long as the securities are NMS securities, the adviser s transactions effected through the non-us trading desk must be counted towards the threshold and the adviser must report its LTID number to the US broker-dealer. 7. Should a firm aggregate trade amounts including commissions? A firm does not have to include commissions to determine fair market value of the shares for purposes of the threshold. 8. Should a firm aggregate purchases and sales? Yes, the rules require market participants to calculate all purchase and sales, without offsetting or netting transactions among or within accounts. 9. What if a market participant does not trade in the aggregate above the thresholds every month or day? A market participant would still have to file Form 13H promptly once it reached the relevant threshold on a calendar day or month. A trader that has not reached the identifying activity level at any time during the prior calendar year may file for inactive status and would no longer be required to filed amendments to its Form 13H. 10. Does a firm aggregate trading activity across all different types of accounts (e.g., sub-advised fund, wrap program, etc)? Yes. 11. How does a firm calculate puts and options for purposes of the aggregate threshold? A large trader must calculate whether it has crossed the trading threshold by including the number of purchases and sales of options and their fair market value. A large trader may exclude transactions in the underlying securities pursuant to exercises or assignments of options contracts. 12. If an adviser does not want to actively monitor its trading levels, can it register voluntarily as a large trader? Yes. 3

4 Affiliates within Corporate Group 1. For affiliates of a large trader, can a single suffix be used for all affiliates in a business division (e.g., asset management division) or must a separate suffix be assigned for each affiliate in the division? A large trader has the discretion to determine whether to assign a suffix for different affiliates, divisions or business lines. A large trader also may decide to give suffixes only to some of its affiliates. In addition, the same suffix may be provided to the same business line in different affiliates. 2. If a financial holding company, which would be a large trader, is majority owned by a single individual, would the majority owner be the filer or the holding company? Both the financial holding company and the majority owner would be large traders, but either could eliminate the filing and reporting obligations of the other by fully performing them with respect to all the activity of the other. For example, if the financial holding company takes on the filing and reporting obligations of the majority owner, the financial holding company would have to provide its LTID number to the transactions engaged in by the majority owner apart from the financial holding company (e.g., transactions in his or her retirement account). 3. If the parent company is not engaged in any investment activity and only one affiliate engages in investment activity, can the affiliate file instead of the parent company? Yes. The parent company does not have to file if the affiliate complies with the obligations on behalf of the parent company with respect to all of the relevant activities. 4. If one broker-dealer affiliate causes the parent company to register, must the company list all other broker-dealer and investment adviser affiliates on the filing? Yes, if the parent company would be a large trader because of one broker-dealer affiliate, the parent company must provide the information about other affiliates on Form 13H. 5. If a firm is an affiliate of another entity that is not a parent company (less than 25% ownership), is the firm required to identify and disclose information regarding its affiliates on Form 13H? Yes. Form 13H requires certain information of the large trader and its Securities Affiliates. A Securities Affiliate is an affiliate of the large trader that exercises investment discretion over NMS securities. 4

5 6. If an adviser has a "proprietary mutual fund" registered with the SEC as an investment company, would the adviser have to include the SEC filings of this fund? A large trader only needs to include any other forms filed with the SEC by the large trader or any of its Securities Affiliates. As stated above, a Securities Affiliate is an affiliate of the large trader that exercises investment discretion over NMS securities. Generally, the adviser to the fund would exercise investment discretion rather than the fund. 7. Would a private fund managed by a large trader be an affiliate whose information must be reported on the form? Same answer as Number 6 above. Form 13H Requirements 1. Form 13H requests the identification of the date that the transactions were first effected. What date should we include for the initial filing? For the first filing that is due by December 1, 2011, a large trader can identify any date after the compliance date of the large trader rule (October 3, 2011). If a firm crosses the threshold after this initial filing compliance date (December 1, 2011), it must file the form promptly after crossing the trading threshold and it must include the date that the threshold was first reached. (The SEC has stated the prompt requirement could be satisfied if the form is filed 10 days after triggering the threshold trading level.) 2. For Item 2 (which asks for other forms the large trader or any of its Securities Affiliates file with the SEC), should only EDGAR filings be included? No, the large trader should include all types of filings that are made by it and its affiliates, such as Form ADV, Schedule 13F filings, and Schedule 13G filings. 3. If a firm manages foreign accounts under an exemption from registering with a foreign regulator, does the firm have to list that foreign regulator in Item 3(b)? No, if a firm is operating under an exemption from a foreign regulator, the firm would not be considered regulated by that foreign authority. 4. Item 4(a) asks for a MPID. What is that? MPID stands for Market Participant ID. If you are a broker-dealer or certain other regulated entity, you would have this identification number. 5

6 5. Item 5(c) asks for executive officers, directors or trustees of a corporation or a trust. If the filer is an LP or LLC, is there anything to disclose under this item? No, if the large trader is a limited partnership, it should respond to 5(b). 6. Item 6 requests identification of all broker-dealers at which the large trader or its Securities Affiliates has an account. Should a firm list all brokers with which the large trader or its Securities Affiliate has a relationship or only those with which the large trader or its Securities Affiliates actually effect trades on behalf of itself or for its clients? The large trader should list all the broker-dealers on Item 6 with which it or its Securities Affiliate reasonably may expect to effect trades because it or its Securities Affiliate has a trading relationship with such broker-dealers or they are on an approved list. 7. Does a large trader need to identify only the broker name? What about address, etc.? The large trader must identify the name of the broker-dealers and identify the types of services provided. Addresses are not necessary. 8. Would you exclude broker-dealers in Item 6 if they solely perform research? If the broker-dealers do not have the capacity to execute trades or a large trader can be certain that it will not place trades through the broker-dealers, these broker-dealers do not have to be included in Form 13H. 9. Should a foreign affiliate of a large trader be identified as a Securities Affiliate if it exercises investment discretion over an account that trades in NMS securities but it only trades through a foreign broker-dealer? If so, should the foreign broker-dealer be identified in Item 6 of Form 13H? If the foreign affiliate is a Securities Affiliate of a large trader because it exercises investment discretion over NMS securities, information about the foreign affiliate should be provided in the Items of Form 13H as indicated. Foreign broker-dealer information need not be provided in Item 6. Amendments to Form 13H 1. When does a firm have to file amendments to Form 13H? A large trader must file an amendment promptly following the end of a calendar quarter when there are any changes to the form. There is no materiality threshold for amendments. All changes must be reported quarterly. 6

7 A large trader also must file an annual amendment 45 days after the end of the calendar year even if there are no changes to the form. 2. Is the annual calendar year filing due for December 31, 2011 this year even though the initial filing is due on December 1, 2011? No, if a large trader makes its initial filing in 2011, it does not have to make the annual filing until 45 days after December 31, If an amendment filing is required at the end of Q4, does a firm also need to file the end of the year amendment? An amendment filing (due in 10 days) and an annual filing (due in 45 days)? If a firm has a filing requirement at the end of Q4 because of any changes to the form, the firm should file within 10 days of Q4 but mark it as an annual filing. 4. If there are changes during the quarter, is the firm required to restate the entire form on an amendment filing or just list the changes (e.g., additional brokers)? Form 13H is a web-based form. When a large trader amends the form, the form that was last filed with the SEC can be loaded and will prepopulate the amended form. The large trader can make any changes necessary and will not have to fill out other information that has not changed. 5. If a broker-dealer is added to or taken off an approved list, does the large trader have to file an amendment? Yes. Miscellaneous 1. To which entities does a large trader have to disclose its status? A large trader must disclose its LTID and each account to which it applies to each registered broker-dealer it uses to effect transactions. 2. Does a large trader have to provide its LTID to bond brokers because bonds are not likely NMS securities? A large trader does not have to provide its LTID to its bond broker-dealers or list bond broker-dealers on Form 13H if the broker-dealers do not have the ability to effect transactions in NMS securities. 7

8 3. My firm already filed a Form 13H. When should I expect to receive a LTID? The SEC does not plan to issue LTIDs until December 1 at the earliest. A large trader, therefore, is not required to provide its LTID to its broker-dealers by December 1. 8