The National Association of Private Fund Managers (NAPFM), Managed Funds Association (MFA), and the Alternative Investment Management Association (AIMA) have filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) over a new rule that increases scrutiny of the $27 trillion Treasury market. 

According to the suit filed in the U.S. District Court for the Northern District of Texas in Fort Worth, the measures (the Dealer Rule), which apply to firms that trade large volumes of stocks and US government bonds, will unfairly subject their members to regulation as “dealers” and “government securities dealers.” 

“Alternative asset managers are not dealers. They are customers of dealers. If the rule is permitted to stand, it could mean that managers in scope and the funds they manage would lose their customer protections with their dealer counterparties and could not participate in IPOs,” said Bryan Corbett, president & CEO of MFA. 

The groups believe that the SEC exceeded its legal power in establishing the regulation and failed to examine the economic ramifications of its decision. The complaint also claims that the regulation changes the well-established definition of what constitutes dealer activity under the Securities Exchange Act of 1934 and nearly a century of market practice. 

“The SEC has exceeded its statutory authority by incorrectly concluding that customers of dealers may be dealers themselves – a clear departure from the statutory definition and understanding of what has meant to be a securities ‘dealer’ for the past 90 years, added Jack Inglis, CEO of AIMA. 

The Dealer Rule – purportedly designed to increase liquidity in trading markets – could ultimately have the effect of decreasing such liquidity,” said NAPFM. 

The SEC adopted the rule in February to impose tougher monitoring and risk management measures on proprietary traders and other entities that it claims have become key sources of liquidity in the US Treasury market.