SEC Proposes New Rules Defining "Dealer" Status: Proposal Seeks To Clarify When Unregistered Firms Engaged In Market-Making And Liquidity-Providing Activities May Need To Register As Dealers

• Published date: 07 April 2022
• Subject Matter: Corporate/Commercial Law, Technology, Corporate and Company Law, Securities, Fin Tech
• Law Firm: WilmerHale
• Author: Mr Bruce Newman, Stephanie Nicolas, Andre E. Owens, Tiffany J. Smith and Kyle P. Swan

SEC Proposes New Rules Defining "Dealer" Status: Proposal Seeks to Clarify When Unregistered Firms Engaged in Market-Making and Liquidity-Providing Activities May Need to Register as Dealers¹

On March 28, 2022, the Securities and Exchange Commission (SEC) proposed new Rules 3a5-4 and 3a44-2 under the Securities Exchange Act of 1934 (Exchange Act) (collectively, the Proposed Rules). The Proposed Rules seek to clarify certain aspects of the definitions of "dealer" and "government securities dealer."² In particular, the SEC seeks to further define the phrases "as a part of a regular business" and "own account," as used in the statutory definitions of "dealer" and "government securities dealer."³ As further explained below, the definitions of these phrases have been key for certain market participants in determining that registration as a "dealer" was not required.⁴

In explaining the basis for the Proposed Rules, the Proposing Release cites the emergence of certain unregistered market participants that "play an increasingly significant liquidity-providing role in overall trading and market activity" in the securities markets and U.S. Treasury securities markets.⁵ In the SEC's view, because these participants are not registered, "investors and the markets lack important protections."⁶ Accordingly, the SEC believes that the identification and registration of these market participants as dealers would "provide regulators with a more comprehensive view of the markets through regulatory oversight" and would enhance market stability and investor protection.⁷

To clarify when certain liquidity-providing and market-making activities could trigger dealer status, the Proposed Rules establish a qualitative standard that would apply to market participants buying and selling any security and a quantitative standard that would apply only to market participants buying and selling government securities. The Proposing Release states that the following market participants, among others, could trigger the new "dealer" definitions in the proposals if they meet the quantitative or qualitative standards: proprietary trading firms (or PTFs), private funds (including hedge funds) and investment advisers.⁸ Persons who meet the definitions of dealer would be required to register with the SEC as a broker-dealer and become a member of a self-regulatory organization ("SRO") (absent an applicable exemption).

Section I of this client alert provides background on the historic "Dealer/Trader"...