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The US Securities and Exchange Commission (SEC) has adopted a final Dealer Rule that will expand the definition of a ‘securities dealer’ and ‘government securities dealer’.
The adopted rules will further define what it means to be engaged in a business of buying and selling securities “as a part of a regular business”.
It will do so for both dealers and government securities dealers by requiring entities engaging in “de facto market making” activity to register as 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”.
Secondly, it may do so by 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”.
Market participants that engage in certain dealer roles — in particular, those who take on significant liquidity-providing roles in the markets — are now required to register with the SEC.
These participants will need to become members of a self-regulatory organisation (SRO) and comply with federal securities laws and regulatory obligations.
According to the SEC, principal-trading firms (PTFs) and other institutions are “acting in a manner consistent with dealers in the securities markets”.
It notes that PTFs that use high-frequency trading strategies are now participating “significantly” in the Treasury cash market. In 2019, these firms represented around 60 per cent of the volume on the interdealer broker platforms in the Treasury markets.
Despite these firms acting as de facto market makers, and despite their regularity of participation consistent with buying and selling securities or government securities “as a part of a regular business”, the SEC says that a number of these firms have not registered with the Commission as dealers.
SEC chair Gary Gensler says that this deprives investors and the markets themselves of important protections that benefit market integrity, resiliency and transparency.
Gensler adds: “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.”
The Alternative Investment Management Association (AIMA) indicates that the rules will require certain hedge funds and, potentially, advisers to register as dealers or government securities dealers if they meet one of two qualitative standards.
AIMA CEO Jack Inglis believes that the US SEC has “incorrectly concluded” that customers of dealers, including certain AIMA members, may be dealers themselves.
He says it is a “clear departure from the statutory definition and understanding of what it has meant to be a securities ‘dealer’ for the past 90 years”.
Inglis continues: “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.”
The final rules will become effective 60 days after publication of the adopting release in the Federal Register. The compliance date for the final rules will be one year after the effective date of the final rules.
