SEC Proposes to Expand the Definitions of Dealer and Government Securities Dealer | Practical Law

SEC Proposes to Expand the Definitions of Dealer and Government Securities Dealer | Practical Law

The SEC proposed two new rules to further define "as a part of a regular business" in Sections 3(a)(5) and 3(a)(44) of the Exchange Act to require certain significant market participants, particularly principal trading firms (PTFs) engaging in liquidity providing activities, to register with the SEC as dealers or government securities dealers.

SEC Proposes to Expand the Definitions of Dealer and Government Securities Dealer

Practical Law Legal Update w-035-0017 (Approx. 5 pages)

SEC Proposes to Expand the Definitions of Dealer and Government Securities Dealer

by Practical Law Corporate & Securities
Published on 29 Mar 2022 • USA (National/Federal)
The SEC proposed two new rules to further define "as a part of a regular business" in Sections 3(a)(5) and 3(a)(44) of the Exchange Act to require certain significant market participants, particularly principal trading firms (PTFs) engaging in liquidity providing activities, to register with the SEC as dealers or government securities dealers.
Update: On February 6, 2024, the SEC adopted final rules, with some modifications from the proposed rules, to include certain market participants as dealers or government securities dealers.
On March 28, 2022, the SEC proposed new rules that would require certain significant market participants, particularly principal trading firms (PTFs) engaging in liquidity providing activities, to register with the SEC as dealers or government securities dealers.
Under Section 3(a)(5) of the Exchange Act, the term "dealer" is defined as a person engaged in the business of buying and selling securities for its own account, but excludes a person that buys and sells securities for its own account, but not "as a part of a regular business." Similarly, Section 3(a)(44) of the Exchange Act defines "government securities dealer" as any person engaged in buying and selling government securities for its own accounts, except those buying and selling government securities for their own account, but not "as a part of a regular business."
The SEC is now proposing new Exchange Act Rules 3a5-4 and 3a44-2 to further define "as a part of a regular business" in Sections 3(a)(5) and 3(a)(44). Any person meeting the the activity-based standards in the proposed rules would be a dealer or government securities dealer required to register with the SEC, provided no other exemption or exception is available. Specifically, under the SEC's proposal:
  • New Rules 3a5-4(a)(1) and 3a44-2(a)(1) would establish identical qualitative standards for liquidity providing activities that would be "as a part of a regular business" for purposes of the dealer and government securities dealer definitions. Identified activities include providing liquidity to market participants by:
    • routinely making roughly comparable purchases and sales of the same or substantially similar (government) securities;
    • routinely expressing trading interests that are at or near the best available prices on both sides of the market and that are communicated and represented in a way that makes them accessible to other market participants; or
    • earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interests.
    The SEC's proposing release also includes non-exclusive examples of activity that would fall within each qualitative standard.
  • New Rule 3a44-2(a)(2) would establish an additional quantitative threshold under which any person buying and selling more than $25 billion of trading volume in government securities in each of four of the last six calendar months would be deemed a government securities dealer regardless of whether they meet any of the qualitative standards in Rule 3a44-2(a)(1).
  • Registered investment companies and persons that have or control total assets of less than $50 million would be exempt from Rules 3a5-4 and 3a44-2.
  • Both new Rules 3a5-4 and 3a44-2 would explicitly provide that no presumption will arise that a person is not a dealer or government securities dealer solely because they do not satisfy the qualitative standards in the respective rules.
The SEC believes the scope of the proposed rules is appropriate and will primarily require registration by the targeted PTFs. However, it notes that dealer registration requirements could also be triggered for other market participants under the proposed rules, such as investment advisers engaged in certain activities. In addition, the SEC's release also notes that the proposed rules would apply to any digital asset that is a security or government security within the meaning of the Exchange Act.
The comment period for the proposed rule will close 30 days after publication in the Federal Register or May 27, 2022, whichever is later.
For more information on current broker-dealer registration requirements, see Practice Notes, Determining Broker-Dealer Status: Who is a Dealer? and Broker-Dealer Registration: Overview.
For up-to-date information on the status of significant SEC rulemaking, see Practice Note, SEC Rulemaking Tracker.