Texas District Court Nixes SEC Dealer Rule

The U.S. Securities and Exchange Commission’s Dealer Rule has been vacated by the U.S. District Court for the Northern District of Texas, which has dealt a serious setback to the regulator’s efforts to broaden its oversight of market participants. The court determined that the SEC had exceeded its statutory authority in enforcing the rule.

The decision was made in response to a legal challenge initiated by the National Association of Private Fund Managers, the Alternative Investment Management Association (AIMA), and the Managed Funds Association (MFA) in March. The groups had contended that the rule had improperly expanded the definitions of “dealer” and “government securities dealer.”

AIMA CEO Jack Inglis celebrated the ruling, stating, “We are very pleased by the court’s ruling, a result that rightfully sets aside the SEC’s attempt to dramatically expand its authority by adopting a sweeping, unprecedented new interpretation of a 90-year-old statutory definition.”

Inglis noted that the decision would spare hedge fund managers from having to either comply with dealer registration requirements or modify their trading strategies.

The SEC’s failure to adequately address the economic consequences of the rule and its lack of statutory authority to adopt such broad definitions were among the key arguments that anchored the challenge. These concerns are effectively validated by the court’s decision.

Bryan Corbett, president and CEO of the MFA, echoed these sentiments, asserting that “alternative asset managers are not dealers.” Corbett emphasized that the decision would benefit markets, fund managers, and investors, including pensions, foundations, and endowments.