In response to an exemption request submitted by the Securities Industry and Financial Markets Association (SIFMA),¹ the Securities and Exchange Commission (SEC) recently granted exemptions from the definition of “transactions” in its large trader reporting rule for certain securities offerings by issuers and selling security holders.²  As a result, the exempted securities offerings may be conducted without any concern of triggering the large trader reporting rule’s filing and other requirements.

Large Trader Reporting Rule Impact on Capital Markets Transactions

Background.  Last year, the SEC adopted Rule 13h-1 under the Securities Exchange Act of 1934 to assist it in identifying, and obtaining trading information on, “large traders.”³  A “large trader” is generally defined as a person who effects “transactions” for the purchase or sale of “NMS securities,”⁴ which include exchange-listed equity securities and options, in an aggregate amount equal to or greater than:

• two million shares or shares with a fair market value of $20 million during a calendar day; or
• 20 million shares or shares with a fair market value of $200 million during a calendar month.

A person that qualifies as a large trader must, among other things, identify itself to the SEC and make certain disclosures to the SEC on Form 13H.

“Transactions” definition includes certain issuer and selling security holder offerings. The term “transactions” in the large trader definition means all transactions in NMS securities. Certain enumerated transactions are excluded from the “transactions” definition, including securities offerings by an issuer or by an underwriter or agent on behalf of an issuer provided that the offerings are not effected through the facilities of a national securities exchange.

In its exemption request, SIFMA pointed out that, unlike ordinary primary offerings, “dribble out” programs (also referred to as “at-the-market,” or “ATM,” offerings or equity distribution programs) are typically effected through the facilities of a national securities exchange.  In addition, SIFMA noted that all or part of any offering may be “crossed” on a national securities exchange purely for ease of settlement.  Without an exemption, a single transaction under a dribble out program of at least two million shares or shares with a fair market value of $20 million and an offering “crossed” on a national securities exchange of at least two million shares or shares with a fair market value of $20 million would otherwise be subject to the large trader reporting rule. As a result, SIFMA requested an exemption from the “transactions” definition for securities offerings effected through the facilities of a national securities exchange as these offerings are distinguishable from ordinary secondary market trading activity that is the focus of Rule 13h-1.

SIFMA also noted that only sales by issuers and underwriters are excluded from the “transactions” definition. Sales of at least two million shares or shares with a fair market value of $20 million by selling security holders in an initial public offering (IPO) or registered secondary offering would be subject to the large trader reporting rule. As a result, SIFMA requested a limited exemption from the “transactions” definition for sales in an IPO or registered secondary offering by selling security holders that are current or former employees of the issuer where the securities were acquired as a part of their employee compensation on the basis that these transactions are distinguishable from ordinary secondary market trading activity and occur with minimal frequency.

SEC Exemptions

In response to SIFMA’s request, the SEC exempted from the “transactions” definition for purposes of determining whether a person is a large trader:

• transactions that are part of a securities offering 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 the offering is subject to registration under the Securities Act of 1933 and whether or not the transaction is effected through the facilities of a national securities exchange; and
• sales of securities by a selling security holder in connection with an IPO or registered secondary offering if the selling security holder is a current or former employee of the issuer and the securities being sold were acquired as part of the person’s employee compensation from the issuer.

Impact of Limited Exemptions

As a result of the limited exemptions, issuers can conduct primary securities offerings through the facilities of a national securities exchange, including dribble out programs and offerings “crossed” on a national securities exchange, without any concern of triggering the large trader reporting rule. In addition, current or former employees may sell securities acquired as part of their employee compensation in an IPO and in registered secondary offerings without any concern of triggering the large trader reporting rule.

As the selling security holder exemption is very limited, many secondary transactions are not covered and could trigger the large trader reporting rule. For example, the large trader reporting rule would be triggered by a secondary sale of at least two million shares or shares with a fair market value of $20 million during a calendar day by:

• venture capital, private equity and hedge funds, the sponsor and/or the general partner of a master limited partnership and other entities; or
• employees whose securities being sold were not acquired as part of their employee compensation or where the sale is not part of an IPO or registered secondary offering.

1. See Letter from Sean Davy, Managing Dir., SIFMA, to David S. Shillman, Assoc. Dir., SEC Div. of Trading & Markets (Mar. 26, 2012), available at http://www.sec.gov/comments/s7-10-10/s71010-99.pdf.

2. See Order Temporarily Exempting Broker-Dealers from the Recordkeeping, Reporting, and Monitoring Requirements of Rule 13h-1 under the Securities Exchange Act of 1934 and Granting an Exemption for Certain Securities Transactions, Exchange Act Release No. 34-66839, 77 Fed. Reg. 25,007 (Apr. 26, 2012), available at http://www.gpo.gov/fdsys/pkg/FR-2012-04-26/pdf/2012-10026.pdf.

3. See Large Trader Reporting, Exchange Act Release No. 34-64976, 76 Fed. Reg. 46,960 (Aug. 3, 2011), available at http://www.gpo.gov/fdsys/pkg/FR-2011-08-03/pdf/2011-19419.pdf. Please see our client alert dated September 7, 2011, Securities and Exchange Commission Adopts Large Trader Reporting Rule.

4. The term “NMS security” is defined to mean “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.” 17 C.F.R. § 242.600(b)(46). The term generally refers to exchange-listed equity securities and standardized options, but does not include exchange-listed debt securities, securities futures or open-end mutual funds, which are not currently reported pursuant to an effective transaction reporting plan. See SEC Div. of Trading & Markets, Responses to Frequently Asked Questions Concerning Large Trader Reporting, Question 1.1 (Apr. 13, 2012), available at http://sec.gov/divisions/marketreg/large-trader-faqs.htm.