Gary Gensler
The SEC on Feb. 6 finalized rules that will change the definitions of a "dealer" and "government securities dealer," expanding the scope of firms that are required to register with the agency.
SEC Chair Gary Gensler said the rules are needed to fill a "regulatory gap" in which many principal-trading firms and others are participating in the Treasury market without SEC registration.
Adopted in a 3-2 vote, with Republican Commissioners Hester M. Peirce and Mark T. Uyeda voting against it, the rule will expand the definitions of a dealer and government securities dealer to include traders that engage in either of two activities "as part of a regular business."
Those activities are frequently expressing trading interest that is at or near the best available prices on both sides of the market, and collecting 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," according to an SEC fact sheet.
"These measures, to me, are just common sense," Gensler said at the Feb. 6 meeting.
The final rule, first proposed in March 2022, made some changes to the original proposal due to public feedback, Gensler added.
Those include dropping an additional qualitative provision that would have captured firms "routinely making roughly comparable purchases and sales of the same or substantially similar securities in a day" and dropping a quantitative provision that would have captured market participants "engaged in certain levels of activity in the U.S. Treasury market," according to the final rule. The rule also added an anti-evasion provision that prohibits participants from evading SEC registration through engaging in activities that indirectly qualify them as a dealer or disaggregating accounts.
Despite the changes, Commissioners Peirce and Uyeda still expressed concern about the scope of the final rule, and some trade associations have lingering concerns, too.
While the final rule is a "significant improvement" from the original proposal, "MFA will continue to review the final rule to assess if our members' investment activities are harmed by the commission's dealer definition," MFA President and CEO Bryan Corbett said in a Feb. 6 statement. "Alternative asset managers are not dealers, and MFA is concerned that the rule may not go far enough in excluding them and private funds from being regulated as dealers."
"The SEC has incorrectly concluded that customers of dealers, including certain AIMA members, may be dealers themselves – a clear departure from the statutory definition and understanding of what it has meant to be a securities 'dealer' for the past 90 years," Jack Inglis, CEO of the Alternative Investment Management Association, said in a separate Feb. 6 statement. "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."
However, Better Markets, an nonprofit watchdog organization, is fully supportive of the reforms, Director of Securities Policy Benjamin Schiffrin said.
"The use of these qualitative standards to regulate dealers will confer significant benefits in terms of investor protection, market stability, transparency, oversight and fairness," Schiffrin said in the organization's Feb. 6 statement.
