SEC Announces Charges Against Institutional Investment Managers in Connection with 13F and 13H Reporting Violations, and Signals Willingness to Offer Cooperation Credit for[...]

Authors: Nathan M. Erickson (Washington, DC) and Josh La Grange (Washington, DC)

Introduction

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.

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