SEC Broadens 'Dealer' Definition

On February 6, 2024, the Securities and Exchange Commission (SEC) adopted two new rules that expand who may be considered a dealer or a government securities dealer under the Securities Exchange Act of 1934, as amended (Exchange Act) and be required to register in such capacity. The new rules depart significantly from decades of established precedent distinguishing between "dealer" activity necessitating registration and "trader" activity that does not. The SEC adopted the new rules in a controversial 3-2 vote.

As background, the Exchange Act defines the term "dealer" as "any person engaged in the business of buying and selling securities . . . for such person’s own account through a broker or otherwise." In addition, the Exchange Act excludes from the "dealer" definition any "person that buys or sells securities . . . for such person's own account, either individually or in a fiduciary capacity, but not as a part of a regular business." The Exchange Act also sets forth parallel language applicable to government securities dealers.

The newly adopted rules define the phrase “as a part of a regular business” as used in the definitions described above. A person that buys and sells securities for its own account “as a part of a regular business” generally must register with the SEC as a broker-dealer unless an exemption or exclusion from registration applies. Specifically, absent an exemption or exclusion, the new rules provide that the following activities require registration as a broker-dealer:

• engaging in a regular pattern of buying and selling securities that has the effect of providing liquidity to other market participants by “[r]egularly 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
• engaging in a regular pattern of buying and selling securities that has the effect of providing liquidity to other market participants by “[e]arning 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.”

The new rules also set forth exclusions for registered investment companies, central banks, sovereign entities, international financial institutions and persons with total assets of less than $50 million. However, the new rules do not include a carve-out for private funds, and as such, any private fund that engages in one or more of the activities described above may be required to register as a broker-dealer.

Finally, the new rules provide that there shall be no presumption that a person is not a “dealer” solely because that person does not engage in any of the activities described above.

As compared to the proposed rules, the newly adopted rules contain anti-evasion provisions rather than a prescribed aggregation requirement. As background, a more detailed description of the proposed rule is available here. 

The compliance date for the new rules will be one year and 60 days after publication in the Federal Register.

A more detailed advisory on the new rules will be published on Katten’s website in the coming days.