SEC Adopts New Rules Expanding Definition of Dealers Required to Register with the SEC
On February 6, 2024, the SEC adopted new Rules 3a5-4 and 3a44-2 under the Securities Exchange Act of 1934 that further define the phrase “as a part of a regular business” that is used in the definitions of “dealer” and “government securities dealer” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.
Under the new rules, any person that engages in a regular pattern of buying and selling securities for its own account that has the effect of providing liquidity to other market participants by either (i) regularly 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 (ii) earning 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, is engaged in such activity “as a part of a regular business.” Accordingly, such person is therefore a “dealer” or “government securities dealer” and required to register with the SEC under Sections 15(a) or 15C of the Exchange Act, as applicable, become a member of a self-regulatory organization (e.g., FINRA) and comply with federal securities laws and regulatory obligations. Persons engaging in buying and selling securities for their own account “as a part of a regular business,” as described in the new rules, are exempt from the new rules if they have or control total assets of less than $50 million, are an investment company registered under the Investment Company Act of 1940, or are a central bank, sovereign entity or international financial institution. The new rules do not seek to address all circumstances under which a person may be acting as a dealer or government securities dealer, and the new rules state there is no presumption that a person is not a “dealer” or a “government securities dealer” solely because that person does not engage in the activities as described in the new rules. Additionally, the new rules provide that a person may not evade the requirements to register with the SEC by engaging indirectly in the activities described in the new rules or by disaggregating accounts.
Rules 3a5-4 and 3a44-2 will become effective on April 29, 2024; the compliance date for the new Rules will be April 29, 2025. The one-year compliance period only applies to market participants who are engaging in activities covered by the new rules prior to the compliance date, and does not apply to persons whose activities otherwise satisfy the definition of dealer under applicable SEC interpretations and court precedent.
The SEC’s adopting release is available here, a related fact sheet is available here, and a related press release is available here.
Vedder Thinking | Articles SEC Adopts New Rules Expanding Definition of Dealers Required to Register with the SEC
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March 12, 2024
On February 6, 2024, the SEC adopted new Rules 3a5-4 and 3a44-2 under the Securities Exchange Act of 1934 that further define the phrase “as a part of a regular business” that is used in the definitions of “dealer” and “government securities dealer” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.
Under the new rules, any person that engages in a regular pattern of buying and selling securities for its own account that has the effect of providing liquidity to other market participants by either (i) regularly 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 (ii) earning 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, is engaged in such activity “as a part of a regular business.” Accordingly, such person is therefore a “dealer” or “government securities dealer” and required to register with the SEC under Sections 15(a) or 15C of the Exchange Act, as applicable, become a member of a self-regulatory organization (e.g., FINRA) and comply with federal securities laws and regulatory obligations. Persons engaging in buying and selling securities for their own account “as a part of a regular business,” as described in the new rules, are exempt from the new rules if they have or control total assets of less than $50 million, are an investment company registered under the Investment Company Act of 1940, or are a central bank, sovereign entity or international financial institution. The new rules do not seek to address all circumstances under which a person may be acting as a dealer or government securities dealer, and the new rules state there is no presumption that a person is not a “dealer” or a “government securities dealer” solely because that person does not engage in the activities as described in the new rules. Additionally, the new rules provide that a person may not evade the requirements to register with the SEC by engaging indirectly in the activities described in the new rules or by disaggregating accounts.
Rules 3a5-4 and 3a44-2 will become effective on April 29, 2024; the compliance date for the new Rules will be April 29, 2025. The one-year compliance period only applies to market participants who are engaging in activities covered by the new rules prior to the compliance date, and does not apply to persons whose activities otherwise satisfy the definition of dealer under applicable SEC interpretations and court precedent.
The SEC’s adopting release is available here, a related fact sheet is available here, and a related press release is available here.
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