SEC Adopts Final “Dealer” Rule
The US Securities and Exchange Commission (SEC) has approved a final Dealer Rule that broadens the definitions of “securities dealer” and “government securities dealer.”
The enacted regulations would expand on what it means to be engaged in the business of buying and selling securities “as part of a regular business.” It will do so for both dealers and government securities dealers by requiring businesses that engage in “de facto market making” to register as either dealers or government securities dealers.
To be “part of a regular business” a firm will be “engag[ing] in a regular pattern of buying and selling securities” or “government securities” that has the effect of providing liquidity to other market participants. It may do so by regularly expressing “trading interest that is at or near the best available prices on both sides of the market for the same security — and which is communicated and represented in a way that makes it accessible to other market participants,” explained the SEC.
Market participants that perform certain dealer duties, particularly those who provide considerable liquidity in the markets, must now register with the SEC. These participants will need to join a self-regulatory organization (SRO) and follow federal securities laws and regulatory requirements.
The SEC states that principal-trading firms (PTFs) and other institutions are “acting in a manner consistent with dealers in the securities markets.” The SEC reports that PTFs that use high-frequency trading strategies are now “significantly” participating in the Treasury cash market. In 2019, these firms accounted for over 60% of total traffic on interdealer broker platforms in the Treasury markets.
According to the Alternative Investment Management Association (AIMA), the guidelines will compel certain hedge funds and advisors to register as dealers or government securities dealers if they meet one of two qualitative criteria.
AIMA CEO Jack Inglis believes the SEC has “incorrectly concluded” that clients of dealers, including some AIMA members, can be dealers themselves. It represents a “clear departure from the statutory definition and understanding of what it has meant to be a securities dealer for the past 90 years.”
“Although the Commission did not adopt some problematic aspects that were included in the proposed rule, the final rule may nonetheless capture certain funds and strategies and therefore subject them to potential registration as a dealer and government securities dealer. AIMA will review the final rule text and assess next steps,” added Inglis.
