More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
Although the SEC has given a temporary pass to broker-dealers on complying with Rule 13h-1, the Large Trader Rule, advisors must still comply if they qualify, which could mean more paperwork, depending on how they handle client securities.
The new rule is intended to track large traders—any person or entity with discretion directly or indirectly to effect the trade in an account, to the tune of 2 million shares or $20 million per day, or 20 million shares or $200 million per month.
That means, according to Jesse Lawrence, managing director and senior managing counsel at Pershing, that if you as an advisor are making investment decisions or trades in that amount for clients, even if through separately managed accounts, you are required to register.
Advisors can register via Form 13H to get a large trader identification number, or LTID, which then must be provided to their broker-dealer. If the advisor fails to self-register, their BD is obliged to report the advisor as a large trader based on the advisor’s activity, since the BD is also required to track the advisor’s activity and maintain records on it.
There are a number of ways, Lawrence said, in which advisors are affected by the new rule. While Lawrence said that the effect on BDs is much more far-reaching, advisors who think compliance begins and ends with the LTID should think again. For one thing, BDs will want more and different information from advisors going forward, although the jury is still out on how much and what kind, since the industry has posed a number of questions to the SEC for interpretive guidance.
For another, Lawrence added, advisors will have to pay attention to information that perhaps wasn’t of significant concern before. Aggregate trades are an area of concern, lest the advisor cross the threshold in a supervisory program.
Said Lawrence, “I use the example of an advisor who manages accounts for a thousand people, buys 2,000 shares in each customer account a day and now has breached the 2 million threshold and has to register.”
He added that, depending on how many clients a corporate RIA would have, the qualifying large trader may be an individual advisor or individual customer “or you could be talking about a corporate entity.” Explaining that Pershing’s parent company, BNY Mellon, has several different divisions and units that qualify individually as large traders, he said that at the ultimate parent level the company obtains a single LTID. The divisions and units will all carry that same eight-digit number, but with suffixes to distinguish among them.
Along those lines, as previously mentioned, the amount and type of information that BDs will have to gather from their large traders is an open issue. One area that may be up for change is compressed trades. If an advisor is trading away from a custody broker, and the broker may have executed 20 trades on the same security in the same marketplace, those trades previously could be compressed into one trade at an average price and given to the custody broker who will settle the trade.
Now, however, because of the information the SEC is seeking, particularly on individual trades, that can no longer be done. Instead of one trade at an average price, the advisor will have to take in, for instance, the data on 20 trades for 500 shares each at various strike prices, and capture the trade times—and be able to report it on request.
BDs have been given extra time to comply with the requirements of Rule 13h-1, although large traders have not. An extension was granted on April 20 that exempts BDs from the recordkeeping, reporting and monitoring requirements of the rule until May 1, 2013; U.S.-registered BDs or traders that trade via sponsored access arrangements are also temporarily exempted from these requirements, but only until Nov. 30.