SEC Adopts Rules to Expand Definition of “Dealers”
All Fintech
Registration and Licensing
February 29, 2024
The Case
In a February 6, 2024 release, the Securities and Exchange Commission (SEC) adopted two new rules - Rules 3a5-4 and 3a44-2 - that expand the definition of “dealer” and “government securities dealer” under the Securities Exchange Act of 1934 (Exchange Act), requiring registration by market participants that take on significant liquidity-providing roles.
Specifically, a person is engaged in buying and selling securities or government securities for its own account “as part of a regular business” if it engages in a “regular” pattern of buying and selling securities or government securities that provides liquidity to other market participants.
By adopting the rules, the SEC sought to:
Extend its regulatory oversight of a broader scope of market participants;
Support market stability and resiliency and better protect investors; and
Promote competition among entities that provide significant market liquidity.
Funds and investment advisers are encouraged to review their trading activities and strategies to determine whether they might meet the definition of “dealer” or of “government securities dealer” and take steps to either register as such or modify their activities such that they would not meet either definition. In addition, funds and investment advisers should review and modify as necessary the investment objective, strategy, trading, and related descriptions and disclosures in their documentation, disclosures, marketing materials, and other communications.
It’s noteworthy that certain entities, such as registered investment companies and international financial institutions, remain outside the scope of these rules.
The Final Rules are set to be enforced from April 29, 2024, with a grace period extending to April 29, 2025, for affected entities to complete their registration.
Why Does This Matter?
While the ruling was the result of the SEC’s specific concerns with unregistered market participants acting as dealers, such as large hedge funds involved in algorithmic high-frequency trading, it could carry profound implications for many market participants including lenders and crypto asset securities, requiring registration as broker-dealers and adherence to comprehensive regulatory obligations.
Under the ruling, market participants deemed “dealers” or “government securities dealers” under the new rules are required to:
Register with the SEC under either Section 15(a) or Section 15C;
Become a member of an SRO, like FINRA; and
Comply with federal securities laws, regulatory obligations, and applicable SRO and Treasury rules and requirements.
InnReg's Experience
Since its inception in 2013, InnReg has developed deep expertise in registration support, compliance services and regulatory interaction with FINRA, the SEC and other regulators for broker dealers and other fintechs. InnReg’s consulting services are tailored to address each client’s unique requirements and growth strategies in the face of regulatory evolution, combining compliance advisory, technology expertise, and managed services.
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