SEC Expanded Definition of Dealer

On Feb. 6, SEC new registration requirements for liquidity providers.

  • SEC adopted two rules under 17 CFR 240 to require market participants who engage in certain dealer roles, those who take on significant liquidity-providing roles, to register.
  • Become members of a Self-regulatory organization (SRO), comply with securities laws.
  • Follows Mar. 2022 proposed rules by SEC to expand dealer definitions, see #133190.
  • Chair Gensler, Commissioners Crenshaw, Lizárraga supported; Peirce, Uyeda could not.
  • SEC made available comments received on proposing release; ICI issued comments.
  • Final Rule Provisions
  • Rules 3a5-4, 3a44-2 under SEA further define phrase as a part of a regular business.
  • To identify activities causing persons to be dealers or government securities dealers.
  • Qualitative standards to identify those who take on significant liquidity-providing roles.
  • Rules do not seek to address all circumstances under which a person may be acting as dealer/government securities dealer/replace applicable interpretations and precedent.
  • Final rules excluded any person that has/controls total assets of less than $50 million.
  • Further, excluded investment companies registered under the Investment company act of 1940, as well as central banks, sovereign entities, international financial institutions.
  • Applicable Dealer Activities
  • Regularly expressing trading interest that is at/near best available prices on both sides of market for same security, communicated and represented that makes it accessible.
  • Or, earning revenue primarily from capturing bid-ask spreads; buying at bid, selling at offer; from capturing incentive by trading venues to liquidity-supplying trading interest
  • Dealer Requirements
  • Absent exception/exemption, market participants would be required to register with SEC under Section 15(a) (15 USC 78o) or Section 15C (15 USC 78o-5), as applicable.
  • Also, required to become a member of an SRO; and comply with federal securities laws and regulatory obligations and applicable SRO and US Treasury rules, requirements.
  • Modifications to the Proposal
  • Excluded additional qualitative factor proposed with regard to a firm regularly making roughly comparable purchases and sales of the same or similar securities in a day.
  • Also, excluded proposal to require registration of all entities with monthly trading volume in government securities above $25bn during 4 out of past 6 calendar months.
  • Adopted anti-evasion provision rather than proposed aggregation across legal entities.
  • Effectiveness
  • Effective 60 days following date of publication of adopting release in federal register.
  • Compliance date for final rules will be one year after effective date of the final rules.
  • Feb. 2024 Fed Reg Final Rule
  • On Feb. 29, 2024, SEC published final rule in federal register, effective Apr. 29, 2024.
  • Compliance date for final rule is one year from the effective date, Apr. 29, 2025.
  • Emphasized the one-year compliance period only applies to market participants who are engaging in activities covered by the final rules prior to the compliance date.
  • Compliance date does not apply to persons whose activities otherwise satisfy the definition of dealer under applicable Commission interpretations and court precedent.
  • In Mar. 2024, AIMA filed lawsuit against US SEC to vacate dealer rule, see #205243.

Regulators ICI; SEC
Entity Types B/D; Bank; Exch; IA; Inv Co
Reference ICI: PR, 2/6/2024; SEC: 89 FR 14938, 2/29/2024; Sp, PR 2024-14, Info, RF 34-99477, 2/6/2024; File No. S7-12-22; RIN 3235-AN10; ICA; SEA; Citation: *15 USC* 78o, 78o-5; 17 CFR 240;
Functions Compliance; Financial; Legal; Market Conduct; Operations; Registration/Licensing; Reporting; Trading; Treasury; Underwriting
Countries United States of America; Cross-Border
Products Banking; Equity; Fixed Income; Fund Mgt; Mutual Funds; Securities
Regions Am
Rule Type Final
Rule Date 2/6/2024
Effective Date 4/29/2024
Rule Id 200346
Linked to Rule :133190
Reg. Last Update 2/29/2024
Report Section US Investment

Last substantive update on 03/04/2024