In a move designed to modernize the securities market and clarify its participants’ responsibilities, the U.S. Securities and Exchange Commission (SEC) adopted a final rule that redefines who qualifies as a “dealer” or “government securities dealer.” This new rule, effective April 29, 2024, primarily focuses on significant liquidity providers in securities markets, aiming to enhance regulatory oversight and maintain market stability. Below are the key provisions of this important regulatory update.
1. Expanding the Definition of “Dealer” and “Government Securities Dealer”
The rule expands the definitions of “dealer” under Section 3(a)(5) and “government securities dealer” under Section 3(a)(44) of the Securities Exchange Act of 1934. It specifically targets entities that provide liquidity in the market but have previously escaped regulation. The rule clarifies that individuals or entities engaging in securities transactions as part of a “regular business” must register as dealers, even if they are primarily buying and selling for their own accounts.
This extension is crucial for catching liquidity providers who act as de facto market makers without regulatory oversight, particularly those active in U.S. Treasury markets.
2. Qualitative Standards for Identifying Dealers
The final rule establishes qualitative factors to determine whether a market participant is acting as a dealer. These factors include:
- Regular Trading Interest: Regularly expressing trading interest on both sides of the market for the same security at or near the best available prices, making this information accessible to other market participants.
- Primary Revenue from Bid-Ask Spread: Earning revenue primarily by capturing bid-ask spreads (buying at the bid and selling at the offer) or incentives from trading venues for providing liquidity.
By using these qualitative standards, the SEC ensures that the focus remains on activities, not just structure, making it harder for participants to evade regulation.
3. Elimination of the Quantitative Standard
Originally, the SEC proposed a quantitative standard that would define a dealer based on the volume of trades in the U.S. Treasury market. However, after industry feedback, the Commission decided to remove this measure. While it aimed to capture large trading volumes automatically, the quantitative standard was criticized for being too rigid and potentially misclassifying certain investment activities.
4. Exclusions and Exceptions
The rule introduces several key exclusions, ensuring that certain entities are not swept up into the dealer registration requirements. These include:
- Entities with Less Than $50 Million in Assets: Market participants that have or control less than $50 million in assets will not be required to register as dealers.
- Registered Investment Companies and Funds: The rule explicitly excludes registered investment companies, as well as certain private funds and advisers, from the dealer definition.
Notably, the SEC did not extend these exclusions to private funds and registered investment advisers as a whole, leaving it open for private fund activity to be regulated depending on the scope of their dealings.
5. New Anti-Evasion Provisions
To prevent market participants from structuring their operations to evade the new regulations, the SEC included an anti-evasion provision. This prevents entities from disaggregating accounts or using multiple legal entities to avoid dealer registration. This provision ensures that even indirect activities that meet the qualitative standards trigger regulatory oversight.
6. Impact on Liquidity Providers in U.S. Treasury Markets
A key focus of this rule is its impact on significant liquidity providers in the U.S. Treasury market, particularly proprietary trading firms (PTFs). Many of these firms have accounted for a substantial share of trading activity without being registered as dealers. By bringing these firms under the regulatory umbrella, the SEC aims to level the playing field between registered dealers and PTFs.
Conclusion: Reinforcing Market Stability
The SEC’s final rule underscores the importance of transparency, regulatory oversight, and the need for consistent application of securities regulations. By modernizing the definitions of dealers and government securities dealers, the SEC ensures that significant liquidity providers are subject to the same rules as traditional dealers, promoting fair competition, market stability, and investor protection.
About Michael Rasmussen
Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets.
Michael is also the founder of FinProLaw, an online learning platform where Michael has created courses designed for investment adviser compliance professionals. These courses include:
- Investment Adviser Compliance Essential for Chief Compliance Officers
- Foundations of Investment Adviser Compliance
- What is a “Security”?
- Investment Adviser Marketing Rule
- Regulation A – Exemption from Registration
- Regulation Crowdfunding – Exemption from Registration
- Regulation D – Exemption from Registration
Michael can also be found on LinkedIn.
Investment adviser firms who are also clients of United Atlantic Legal Services can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw to learn more.