Co-authored by Tanja Samardzija.

On April 20, the Securities and Exchange Commission issued an order temporarily exempting broker-dealers from the recordkeeping, reporting and monitoring requirements set forth in Rule 13h-1 of the Securities Exchange Act of 1934 (the Large Trader Reporting Rule) that were scheduled to take effect on April 30, 2012. The order also permanently exempts certain transactions from the definition of “transaction” under the Large Trader Reporting Rule, but only for purposes of determining whether a person is a “large trader.”

Generally, the order exempts registered broker-dealers from the Large Trader Reporting Rule’s recordkeeping and reporting requirements until May 1, 2013. Notwithstanding the foregoing, clearing broker-dealers for large traders that (a) are U.S.-registered broker-dealers or (b) trade via sponsored access arrangements are temporarily exempted from such recordkeeping and reporting requirements only until November 30, 2012. In addition, the order provides an exemption to all registered broker-dealers from the Large Trader Reporting Rule’s monitoring requirements, pursuant to which such broker-dealers are required to monitor their customers’ accounts for unidentified large traders, until May 1, 2013.

In its order, the SEC also permanently exempts certain transactions from the definition of “transaction” for purposes of the large trader identifying activity level calculation. The Large Trader Reporting Rule already excludes certain transactions from the identifying activity level calculation, which are not “effected with an intent that is commonly associated with the arm’s-length trading of securities in the secondary market and therefore would not fall within the types of transactions that are characterized by the exercise of investment discretion” for purposes of the Large Trader Reporting Rule. In addition to those transactions currently excluded, the following transactions are now excluded from the definition of “transaction” pursuant to the SEC’s order:

  • any transaction that is part of an offering of securities by or on behalf of an issuer, or by an underwriter on behalf of an issuer, or an agent for an issuer, whether or not such offering is subject to registration under the Securities Act of 1933, regardless of whether such transaction is effected through the facilities of a national securities exchange; and
  • sales of securities by a selling shareholder in connection with an initial public offering or in a registered secondary offering if such selling shareholder is a current or former employee of the issuer and the securities being sold were acquired as part of the person’s compensation as an employee of the issuer.

This limited exemption is meant to reduce the burden on issuers and selling shareholders who would not otherwise meet the definition of large trader in the absence of the transactions listed above, since these transactions typically are “infrequent in nature and are distinguishable in character from the secondary market activity” on which the Large Trader Reporting Rule focuses.

Click here to read SEC Release No. 34-66839.