Large Trader and Broker-Dealers Obligations
On July 14, 2023, the Securities and Exchange Commission (the "SEC") settled the first enforcement action brought relating to Section 13(h) of the Securities Exchange Act (the "Exchange Act") and Rule 13h-1 thereunder.1
Overview
Section 13(h) of the Exchange Act and Rule 13h-1 thereunder require large traders to make Form 13H filings with the SEC and require broker-dealers to identify and report customers as large traders.
A large trader is a person (whether a natural person, a firm or a group) that, directly or indirectly, has investment discretion over at least one account and transacts in "NMS Securities" (generally, publicly traded equity securities) in aggregate securities transactions 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 20 million shares or shares with a fair market value of $200 million. These two thresholds are known as "identifying activity levels." Large traders are required to make Form 13H filings with the SEC.2 Rule 13h-1 also imposes certain recordkeeping, reporting, and monitoring responsibilities on broker-dealers.3
Form 13H and the recordkeeping, reporting, and monitoring responsibilities of broker dealers are information collection tools for the SEC so that it can have insight into who is trading in US markets and the impact of their activity on the securities markets, reconstruct trading activity following periods of unusual market volatility, and analyze significant market events for regulatory purposes. Prior to this enforcement action, the SEC staff encouraged filers to review reporting obligations.4
First Enforcement Action
On July 14, 2023, the SEC and Cantor entered into an offer of settlement whereby Cantor, without admitting or denying the findings, consented to the entry of the order that finds Cantor willfully violated Section 13(h) of the Exchange Act and Rules 13h-1(b), 13h-1(d) and 13h-1(e) promulgated thereunder.
The SEC found that from at least August 9, 2017 to May 12, 2023 (the "Relevant Period"), Cantor violated Rule 13h-1(b) by failing to file Forms 13H on an annual basis or on a quarterly basis for any quarter in which information required by the form changed, or by filing Forms 13H that were inaccurate or incomplete. Specifically, after filing an annual Form 13H in November 2011, Cantor did not file another annual report on Form 13H until March 2021, and the March 2021 filing failed to include multiple affiliates of Cantor as large traders. Further, except for one quarter in April 2019, Cantor did not file quarterly reports on Form 13H to report changes to information as required.
The SEC also found that Cantor violated Rule 13h-1(d)'s requirement to maintain records for persons that it had reason to know met the definition of a large trader but were unidentified as one ("Unidentified Large Traders"). Specifically, Cantor failed to conduct daily and monthly reviews of large trader activity throughout the Relevant Period, which resulted in its failure to identify more than 100 accounts with significant daily and monthly trading activity.
Finally, the SEC found that the failure to identify more than 100 Unidentified Large Traders caused Cantor to violate Rule 13h-1(e) which requires broker-dealers to electronically report to the SEC upon request applicable information for all transactions in accounts for large traders, including unidentified large traders, equal to or greater than a "reporting activity level." The reporting activity level is defined to include each transaction in NMS Securities, effected in a single account during a calendar day, that is equal to or greater than 100 shares.
Cantor agreed to: (A) cease and desist from committing or causing any violations and any future violations of Section 13(h) of the Exchange Act and Rules 13h-1(b), 13h-1(d) and 13h-1(e) promulgated thereunder; (B) be censured; and (C) pay a civil money penalty in the amount of $1,400,000.
Takeaway and Cautions
The SEC's first enforcement action for non-compliance with Rule 13h-1 may mark the beginning of enhanced SEC scrutiny and enforcement of the requirements of Rule 13h-1. Large traders and broker-dealers should revisit and potentially improve their Section 13(h) compliance systems.
1 See In the Matter of Cantor Fitzgerald & Co., Securities Exchange Act of 1934 Release No. 97906, Administrative Proceeding File No. 3-21528, July 14, 2023 (available here). As described in this alert, charges against Cantor Fitzgerald & Co. ("Cantor") included failing to file Form 13H when required as a principal and for failing to meet its recordkeeping, reporting and monitoring responsibilities as broker-dealer for other large traders.
2 Rule 13h-1(b) of the Exchange Act.
3 Rules 13h-1(d) and 13h-1(e) of the Exchange Act.
4 Staff of the SEC's Office of Compliance Inspections and Examinations had previously observed "numerous instances of potential non-compliance with [Section 13(h)] including where Large Traders may not have self-identified with the SEC and/or may not have filed their annual Form 13H as required by the Rule." OCIE Risk Alert, Dec. 16, 2020 (available here).
5 Rule 13h-1(a)(8) of the Exchange Act.
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