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On February 6, 2024, the Securities and Exchange Commission (“SEC”) adopted final rules (the “Final Rules”) that will further define the phrase “as a part of a regular business” as used in the statutory definitions of “dealer” and “government securities dealer” under Sections 3(a)(5) and 3(a)(44) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Final Rules identify certain liquidity-providing activities that would cause persons engaged in such activities to be “dealers” or “government securities dealers” so as to be subject to regulation under Sections 15 and 15C of the Exchange Act. The Final Rules come almost two years after the SEC proposed the amendments on March 28, 2022 (the “Proposed Rules”). The full text of the adopting release, including the Final Rules can be viewed here.
Section 3(a)(5) of the Exchange Act defines the term “dealer” to mean “any person engaged in the business of buying and selling securities… for such person’s own account through a broker or otherwise,” but specifically excludes “a 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 determination of whether a person is engaged in activities “as part of a regular business” and thus, meets the definition of a “dealer” involves an analysis of all of the relevant facts and circumstances. With advancements in electronic trading across securities markets, certain market participants have emerged who play an increasingly significant liquidity-providing role in overall trading and market activity – a role traditionally performed by dealers and government securities dealers regulated under the Exchange Act. However, some of these market participants, despite engaging in liquidity-providing activities and despite their significant share of market volume, are not registered as dealers or government securities dealers. The Final Rules aim to enhance investor protections and support market resiliency and stability by imposing regulation on these entities. The SEC believes the Final Rules will also promote competition by leveling the playing field between liquidity provision conducted by entities that are currently registered as dealers and government securities dealers with those entities that are currently unregistered.
The Final Rules address various concerns raised during the comment period on the Proposed Rules and are intended to require only entities engaging in de facto market making activity to register as dealers. New Rules 3a5-4 and 3a44-2 under the Exchange Act set forth two non-exclusive qualitative ways in which a person will be determined to be engaged in buying and selling securities for their own account “as part of a regular business” as the phrase is used in Sections 3(a)(5) and 3(a)(44) of the Exchange Act. Under the Final Rules, any person that engages in a regular pattern of buying and selling securities that has the effect of providing liquidity to other market participants through the following activities would be a “dealer” or “government securities dealer” for purposes of the Exchange Act.
Absent an exemption or exception, market participants who meet the qualitative factors set forth in the Final Rules are required to:
The Final Rules specifically exclude any person who has or controls total assets of less than $50 million, registered investment companies, central banks, sovereign entities and international financial institutions (all as defined in the Final Rules). However, private funds and registered investment advisers are not expressly excluded because the regulatory regimes that apply to these entities differ from the one applicable to dealers, including with respect to leverage constraints and reporting. The SEC states that, depending on the totality of the facts, an investment adviser or private fund may be engaged in the business of buying and selling securities for its own account in a manner that could trigger dealer registration requirements under the Final Rules.
The Final Rules define “own account” to mean an account: (i) held in the name of that person; or (ii) held for the benefit of that person. Diverting from the Proposed Rules, the Final Rules do not include the proposed aggregation provision, which would have broadened the definition of “own account” to include accounts “held in the name of a person over whom that person exercises control or with whom that person is under common control.”
To deter the establishment of multiple legal entities or accounts to evade regulation, the Final Rules include an anti-evasion provision that prohibits persons from evading the registration requirements by: (i) engaging in activities indirectly that would satisfy the qualitative factors; or (ii) disaggregating accounts.
The Final Rules provide that no presumption arises that a person is not a dealer or government securities dealer solely because that person does not engage in activities identified in the Final Rules. The adopting release states that the Final Rules do not address all circumstances under which a person may be acting as a dealer or government securities dealer, nor do they replace otherwise applicable interpretations or precedent.
The Final Rules will become effective 60 days after publication in the Federal Register. The compliance date for the Final Rules will be one year after the effective date of the Final Rules.
For additional information related to the Final Rules, please contact one of the authors, or any member of our Securities Law Practice Group.
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