The rules, specifically Exchange Act Rules 3a5-4 and 3a44-2, clarify activities that classify participants as “dealers” or “government securities dealers” under the Securities Exchange Act of 1934. This classification triggers the need for registration under Sections 15 and 15C of the Act, for those involved in certain liquidity-providing roles, barring any exceptions or exemptions.
The Securities and Exchange Commission has adopted two rules aimed at expanding the definition of “dealers” and “government securities dealers” within the market.
The new rules mandate that certain market participants, especially those playing substantial roles in providing liquidity, must now register with the SEC.
Additionally, they are required to become members of a self-regulatory organization (SRO) and adhere to the federal securities laws along with various regulatory responsibilities.
No exceptions or exemptions
The rules, specifically Exchange Act Rules 3a5-4 and 3a44-2, clarify activities that classify participants as “dealers” or “government securities dealers” under the Securities Exchange Act of 1934. This classification triggers the need for registration under Sections 15 and 15C of the Act, for those involved in certain liquidity-providing roles, barring any exceptions or exemptions.
With these rules, any person whose activities align with the described criteria must register with the Commission and become a member of an SRO. They are also required to comply with federal securities laws, regulatory obligations, and applicable SRO and Treasury rules.
The final rules will be officially published in the Federal Register, taking effect 60 days post-publication. Entities affected by these regulations will have one year from the effective date to comply with the new requirements. This move represents a significant step towards closing regulatory gaps and ensuring a more transparent, resilient, and integrity-driven market.
SEC Chair Gary Gensler said, “I am pleased to support this adoption because it requires that firms that act like dealers register with the Commission as dealers, thereby protecting investors as well as promoting market integrity, resiliency, and transparency. These measures are common sense. Congress did not intend for registration and regulatory requirements to apply to some dealers and not to others. Absent an exemption or exception, if anyone trades in a manner consistent with de facto market making, it must register with us as a dealer – consistent with Congress’s intent.”
Could traders be incorrectly classified as dealers?
As usual, the SEC’s adoption of new rules expanding the definition of “dealers” and “government securities dealers” has generated a mix of perspectives.
there is criticism from industry figures. Jack Inglis, CEO of the Alternative Investment Management Association (AIMA), expressed concerns, stating that the SEC has stretched the definition of a dealer beyond its traditional understanding. According to Inglis, this redefinition could mistakenly classify customers of dealers, including certain AIMA members, as dealers themselves. This interpretation marks a significant departure from the past 90 years’ understanding of what constitutes a securities dealer.
SEC Commissioner Hester Peirce also expressed her opposition to the final rule regarding the expanded definitions of “dealers” and “government securities dealers.” She stated that the definition of a dealer as outlined in the final rule is inconsistent with the statutory framework it is supposed to fit within.
Peirce argued that this redefinition would distort market behavior, degrade market quality, and incorrectly classify many traders, who are actually customers, as dealers. This perspective highlights her concern that the rule could have unintended negative impacts on the market by broadening the scope of who is considered a dealer too far.
