Proposed rules would include certain market participants as “dealers”

Apr 14, 2022
Asset management Capital markets
Financial services Financial reporting SEC matters Audit

A number of market participants assume certain dealer-like roles and increasingly act as major liquidity providers in the markets, but are not registered with the SEC either as “government securities dealers” under Section 15C of the Exchange Act (“the Act”) or as “dealers” under Section 15 of the Act. Accordingly, the SEC recently proposed new rules, which, if finalized, would further define what it means to be buying and selling securities “as a part of a regular business” within the definitions of “dealer” and “government securities dealer” under Sections 3(a)(5) and 3(a)(44) of the Act, respectively.

The proposed rules focus on activities (rather than labels, intent or status) that would potentially scope in other market participants as “dealers” or “government securities dealers” and subject such market participants to the registration requirements of Sections 15 and 15C of the Act, respectively. Proposed Rules 3a5-4 and 3a44-2 would set forth identical qualitative standards designed to identify market participants who assume certain dealer-like roles, in particular those who engage in activities that have the effect of providing liquidity to other market participants, including:

  • Routinely making purchases and sales of substantially similar securities in a day,
  • Routinely expressing trading interests that are near the best available prices on both sides of the market and that are represented in a way that makes them accessible to other market participants, and
  • Earning revenue primarily from capturing bid-ask spreads, or from capturing any incentives offered by trading venues for providing liquidity.

In addition, Rule 3a44-2 would set forth a quantitative standard under which a person engaging in certain specified levels of activity (generally buying and selling more than $25 billion of trading volume in government securities in each of four out of the last six calendar months) would be deemed to be buying and selling government securities “as a part of a regular business,” regardless of whether it meets any of the proposed rule’s qualitative standards. The proposed rules would exclude (a) any person that has or controls total assets of less than $50 million and (b) an investment company registered under the Investment Company Act of 1940.

If the proposed rules are finalized, any market participant that engages in activities as described in the proposed rules would be a “dealer” or “government securities dealer” and, absent an exception or exemption, would be required to:

  • Register with the SEC as a dealer under Section 15(a) or as a government securities dealer under Section 15C, as applicable;
  • Become a member of a self-regulatory organization (SRO); and
  • Comply with SEC, SRO and Treasury (with respect to government securities dealers) rules and requirements, including certain financial responsibility and risk management rules, transaction and other reporting requirements, operational integrity rules, and books and records requirements.

The proposed rules are available for comment until May 27, 2022 or 30 days following publication of the proposing release in the Federal Register, whichever is later.

If the proposed rules are finalized, certain market participants will become subject to the registration and associated compliance requirements. Organizations with non-registered market participants (particularly, proprietary or principal trading firms, and private funds, especially hedge funds) should evaluate the potential impact of the proposed rules, consider various alternatives and plan for compliance solutions, as appropriate. It is also possible that the activities of some investment advisers could meet the requirements of the proposed rules, and particular attention should be given to the proposed rules’ aggregation provisions and definitions of “own account,” “control” and “parallel account structure.”

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