On September 17, 2024, the Securities and Exchange Commission (the “SEC” or the “Commission”) announced the settlement of administrative cease-and-desist orders with 11 institutional investment managers for failures to timely report securities holdings required on Form 13F, as required by Exchange Act Section 13(f) and Rule 13f-1.[1] Two of the managers were also charged with failing to file as “large traders” on Form 13H, as required by Exchange Act Section 13(h) and Rule 13h-1.
Background on Forms 13F and 13H
Under Exchange Act Section 13(f)(1), institutional investment managers that use the United States mail (or other means or instrumentality of interstate commerce) in the course of their business and that exercise investment discretion over $100 million or more in Section 13(f) securities may be required to file quarterly reports listing such securities positions on SEC Form 13F.[2] Section 13(f) securities are defined as equity securities of a class described in Section 13(d)(1) of the Exchange Act; on a quarterly basis, the SEC publishes an “Official List of Section 13(f) Securities”[3] identifying such securities. For purposes of Section 13(f), the term “institutional investment manager” is defined as “any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.”[4] Institutional investment managers are deemed to exercise investment discretion if “(i) the manager has the power to determine which securities are bought or sold for the account(s) under management; or (ii) the manager makes decisions about which securities are bought or sold for the account(s), even though someone else is responsible for the investment decisions.”[5]
Once an institutional investment manager meets the $100 million threshold with respect to Section 13(f) Securities at the end of any calendar month in any given year (even if such manager subsequently drops below the filing threshold), that manager is obligated to file four quarterly Form 13F reports, each reporting the Section 13(f) securities over which it has investment discretion at the end of the applicable reporting period. [6]
Under Exchange Act Section 13(h) and Rule 13h-1, any person that directly or indirectly exercises investment discretion over transactions in NMS securities that equal or exceed (i) 2 million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month (“Identifying Activity Level”) must identify themselves as a “large trader” to the SEC and any broker-dealers executing transactions on their behalf.[7] Identification with the SEC is made by filing a Form 13H, after which a Large Trader Identification Number is issued for purposes of notification to broker-dealers.
Focus of the Settled Orders and Potential Benefits of Self-Reporting
Each of the settlements announced were focused on recidivist late filers, many of whom had failed to make quarterly filings for years, with each respondent having failed to timely make ten or more separate Form 13F filings, with some filers failing to make twenty or more required filings. The SEC’s enforcement actions, while not the first of their kind, reflect a more focused approach to the enforcement of 13F reporting violations, which in the past have not received significant focus from the Commission’s Division of Enforcement. Prior to the announcement of these settlements, the SEC had brought only a handful of enforcement actions alleging violations of Exchange Act Section 13(f) and Rule 13f-1 over the past twenty-five years,[8] and even fewer actions targeting the failure to file as a large trader under Section 13(h) and Rule 13h-1.[9] This new focus may have been telegraphed earlier this year when investment managers began receiving Examination Information Request Lists from the SEC’s Division of Examinations that sought evidence of any Form 13F filings made during the examination period, or explanations for why such filings had not been made.[10]
All 11 managers agreed to settle the SEC’s charges, with nine of the managers agreeing to pay more than $3.4 million in combined civil penalties. Two of the 11 managers were not required to pay any civil penalties in recognition of the fact that the managers self-reported their violations and provided cooperation and remediation during the SEC’s investigation. Each of the managers required to pay a civil penalty was also censured. A third manager, while required to pay a civil penalty in connection with its 13(f) and Rule 13f-1 violations, was not required to pay a civil penalty in connection with its separate 13(h) and Rule 13h-1 violations, in recognition that it self-reported those violations during the pendency of the SEC’s investigation of the manager’s 13(f) violations. Among those who were ordered to pay civil penalties, the amounts at issue ranged from $175,000 to $725,000. While the SEC did not explain their rationale for the individual penalty calculations, it appears to have been tied to both the number of violations and the assets under management by the individual respondents, with the larger managers generally being assessed larger fines.
Takeaways
This dichotomy between the civil penalty amounts assessed to those who self-reported and those who did not appears to be intentional, and was underscored by the Commission in its Litigation Release announcing the settlements, which stated specifically that the resolutions “illustrate how seriously the Commission takes non-compliance as well as the benefits a firm may derive from self-reporting its non-compliance.” While the SEC has often asserted its willingness to give cooperation credit in the resolution of its enforcement actions, [11] it has historically been less forthcoming in providing meaningful guidance on how such cooperation should be translated to real world situations. The SEC’s signals in the context of prior failures to timely file Forms 13F and 13H, however, suggest a willingness to extend meaningful cooperation credit to filers who self-report and promptly rectify such failures.[12] Doing so may have tangible benefits, particularly when the SEC has signaled that the filing of such reports is a current examination focus.
ENDNOTES
[1] See Litigation Rel. No. 2024-135, SEC Charges 11 Institutional Managers with Failing to Report Certain Securities Holdings (Sept. 17, 2024), available at https://www.sec.gov/newsroom/press-releases/2024-135. See also In the Matter of Ashton Thomas Private Wealth, LLC, Ex. Act Rel. No. 101053 (Sep. 17, 2024) ($375,000 civil penalty); In the Matter of Azzad Asset Management, Inc., Ex. Act Rel. No. 101054 (Sep. 17, 2024) ($225,000 civil penalty); In the Matter of Bulltick Wealth Management, LLC, Ex Act Rel. No. 101055 (Sep. 17, 2024) ($175,000 civil penalty); In the Matter of Dixon Mitchell Investment Counsel, Inc., Ex Act Rel. No. 101056 (Sep. 17, 2024) (no financial penalty); In the Matter of Financial Synergies Wealth Advisors, Inc., Ex Act Rel. No. 101057 (Sep. 17, 2024) ($225,000 civil penalty); In the Matter of Focus Financial Network, Inc., Ex Act Rel. No. 101058 (Sep. 17, 2024) ($475,000 civil penalty); In the Matter of Mason Investment Advisory Services, Inc., Ex Act Rel. No. 101059 (Sep. 17, 2024) ($525,000 civil penalty); In the Matter of Nationale-Nederlanden Powszechne Towarzystwo Emerytalne, Ex Act Rel. No. 101060 (Sep. 17, 2024) (no financial penalty); In the Matter of NEPC, LLC, Ex Act Rel. No. 101061 (Sep. 17, 2024) ($725,000 civil penalty); In the Matter of TD Private Client Wealth, LLC, Ex Act Rel. No. 101062 (Sep. 17, 2024) ($475,000 civil penalty); In the Matter of Traphagen Investment Advisors, LLC, Ex Act Rel. No. 101063 (Sep. 17, 2024) ($225,000 civil penalty).
[2] See Securities Exchange Act Section 13(f)(1). The SEC takes an expansive view of the jurisdictional reach of Section 13(f)(1). This is reflected in one of the recently announced orders, involving “a foreign investment adviser with its principal place of business in Poland” that was “not registered with the Commission in any capacity.” See In the Matter of Nationale-Nederlanden Powszechne Towarzystwo Emerytalne S.A., Ex. Act Rel. No. 101060 (Sep. 17, 2024).
[3] See id. The Official List of Section 13(f) Securities is updated quarterly and can be found on the SEC’s website in its repository of frequently asked questions regarding Form 13F. See SEC Frequently Asked Questions About Form 13F (“Form 13F FAQs”).
[4] See Exchange Act Section 13(f)(6)(A). The term “person” is further defined in Exchange Act Section 3(a)(9) to include “a natural person, company, government, or political subdivision, agency, or instrumentality of a government.” While a natural person exercising investment discretion over its own account is not within the definition, the staff of the SEC’s Division of Investment Management has interpreted the definition to also cover a “natural person or an entity that exercises investment discretion over the account of any other natural person or entity. For example, an investment adviser that manages private accounts, mutual fund assets, or pension plan assets is an institutional investment manager. So is the trust department of a bank.” See Form 13F FAQs, Question 3.
[5] See 13F FAQs, Question 6, citing Securities Exchange Act Section 3(a)(35), and Exchange Act Rule 13f-1(b). Under Rule 13f-1(b), institutional investment managers are also deemed to exercise investment discretion over “all accounts over which any person under its control exercises investment discretion,” which the staff of the SEC’s Division of Investment Management has interpreted to mean that parent corporations have shared investment discretion with their subsidiaries. See Exchange Act Rule 13f-1(b) and Form 13F FAQs, Question 6.
[6] See Exchange Act Rule 13f-1(a)(1); see also Form 13F FAQs, Questions 25, 28 and 29. The first such report is required to be filed based on the Section 13(f) securities over which the manager has investment discretion at the end of December during the calendar year in which the manager first reached the month-end $100 million filing threshold. The second, third and fourth Form 13F reports are required to be filed based on the Section 13(f) securities over which the manager has investment discretion at the end of March, June and September in the year following the calendar year in which the filing threshold was initially met. Each required filing is due within 45 days of the end of the calendar quarters ending in December, March, June and September. The Form 13F filing obligation is therefore triggered based on activity in one year, and met through filings made in the successive year.
[7] See Exchange Act Section 13(h) and Rule 13h-1(a) and (b). An “NMS security” is “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.” The term refers generally to U.S. exchange-listed securities, including equities and options.
[8] See In the Matter of Joel R. Mogy Investment Counsel Inc. and Joel R. Mogy, Ex. Act Rel. No. 44268 (May 7, 2001); In the Matter of Quattro Global Capital, LLC, Ex. Act Rel. No. 56252 (Aug. 15, 2007); Lit. Rel. No. 20258 (Aug. 29, 2007), SEC v. Scott R. Sacane, et al., Civil Action No. 3:05cv1575 (SRU) (D. Conn., filed Oct. 12, 2005); In the Matter of Ensign Peak Advisors, Inc., and The Church of Jesus Christ of Latter-Day Saints, Ex. Act Rel. No. 96951 (Feb. 21, 2023); In the Matter of Artemis Wealth Advisors, LLC, Ex. Act Rel. No. 98381 (Sep. 13, 2023). After the September 17, 2024 announcement of these recent settlements, the SEC announced a separate settlement with Alphabet Inc. in connection with charges that it failed to timely file 35 separate Forms 13F, covering the quarters ending December 31, 2013 through June 30, 2022. Alphabet Inc. paid $750,000 to settle the charges, which also included separate violations of the reporting provisions of Exchange Act Section 16(a). See In the Matter of Alphabet Inc., Ex. Act Rel. No. 101165 (Sep. 25, 2024).
[9] The authors are aware of only one such prior enforcement action. See In the Matter of Cantor Fitzgerald & Co., Ex. Act Rel. No. 97906 (July 14, 2023).
[10] Regulatory Compliance Watch, SEC 13F Filing Sweep Exam Letter, (Jan. 3, 2024), available at https://www.regcom/sec-13f-filing-sweep-exam-letter/
[11] See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Ex. Act Rel. No. 44969 (Oct. 23, 2001) (the “Seaboard Report”).
[12] The SEC’s willingness to extend cooperation credit is subject to a host of factors, and cannot be reduced to simple formulas, even in the context of similar disclosure violations.
This post comes to us from Fried Frank LLP. It is based on the firm’s memorandum, “SEC Announces Charges Against Institutional Investment Managers in Connection with 13F and 13H Reporting Violations, and Signals Willingness to Offer Cooperation Credit for Self-Reported 13F and 13H Reporting Violations,” dated October 1, 2024, and available here.