SEC Adopts Rules to Expand Definitions of Dealer and Government Securities Dealer | Practical Law

SEC Adopts Rules to Expand Definitions of Dealer and Government Securities Dealer | Practical Law

The SEC adopted 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 market participants, particularly principal trading firms (PTFs) engaging in liquidity providing activities, to register with the SEC as dealers or government securities dealers.

SEC Adopts Rules to Expand Definitions of Dealer and Government Securities Dealer

Practical Law Legal Update w-042-2617 (Approx. 4 pages)

SEC Adopts Rules to Expand Definitions of Dealer and Government Securities Dealer

by Practical Law Corporate & Securities
Published on 07 Feb 2024 • USA (National/Federal)
The SEC adopted 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 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 29, 2024, the final rule was published in the Federal Register. The amendments will become effective April 29, 2024, with a compliance date of April 29, 2025.
On February 6, 2024, the SEC adopted final rules to require certain 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 persons engaged in the business of buying and selling securities for their own account, except those buying and selling securities for their own account but not "as a part of a regular business." The term "government securities dealer" is similarly defined under Section 3(a)(44) of the Exchange Act for transactions specific to government securities. To further define "as a part of a regular business" in Sections 3(a)(5) and 3(a)(44) to include certain liquidity providing activities that would require persons to register with the SEC as a dealer or government securities dealer, the SEC has adopted new Exchange Act Rules 3a5-4 and 3a44-2.
Specifically, under Rules 3a5-4 and 3a44-2:
  • A qualitative standard will identify two non-exclusive ways in which persons will be deemed to be engaged in liquidity providing activities "as a part of a regular business" for purposes of determining dealer status:
    • regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security and that is communicated and represented in a way that makes it 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 interest.
  • Emphasizing the non-exclusive nature of the qualitative standard, both Rules 3a5-4 and 3a44-2 explicitly state that no presumption will arise that a person is not a dealer or government securities dealer solely because they do not satisfy the qualitative factors in the respective rules.
  • Exclusions are provided for:
    • persons that have or control total assets of less than $50 million;
    • registered investment companies; and
    • central banks, sovereign entities, and international financial institutions, as those terms are defined in the rules.
Notably, the SEC declined to adopt additional exclusions and carveouts requested by market participants during the comment period, particularly for registered investment advisers and crypto-asset securities. The SEC stated in the adopting release that it believes certain modifications in the final rules from the proposal address the concerns relating to investment advisers.
As for declining to exclude crypto-asset securities, the SEC stated that the dealer framework is based on the trading activities engaged in by persons, not the type of security being traded, and that the technologies used in crypto transactions would not preclude crypto trading activities from being considered dealer activity. Therefore, the SEC was not persuaded to exclude crypto-asset securities, and Rules 3a5-4 and 3a44-2 apply to any persons trading crypto assets that are securities or government securities within the meaning of the Exchange Act.
The final rules become effective 60 days after publication in the Federal Register. To provide affected market participants with time to register with the SEC and to complete the membership application process at relevant self-regulatory organizations (such as FINRA), the compliance date for the final rules for all market participants will be one year after the effective date.
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.