A trio of trade associations representing the private funds industry on March 18 filed a lawsuit in federal court seeking to overturn a new Securities and Exchange Commission rule that broadened its definition of a dealer.
The dealer rule, which the SEC finalized in February in a 3-2 vote with the agency’s two Republican commissioners dissenting, is indeterminate, overbroad and can be read to capture a wide variety of nondealing activity, the National Association of Private Fund Managers, the Managed Funds Association and the Alternative Investment Management Association asserted in their lawsuit filed in U.S. District Court in Fort Worth, Texas.
The groups claim the SEC lacks the statutory authority to issue such a rule, the rule is arbitrary and capricious and runs afoul of the Securities Exchange Act by imposing a burden on competition not necessary or appropriate.
Bryan Corbett, president and CEO of MFA, said in a news release that the groups were left with no choice but to challenge the rule because it will harm markets and create uncertainty for investors.
“The dealer rule is indeterminate and leaves certain market participants uncertain of their need to comply with the dealer regulatory framework,” Corbett said. “Alternative asset managers are not dealers. They are customers of dealers. If the rule is permitted to stand, it could mean that managers in scope and the funds they manage would lose their customer protections with their dealer counterparties and could not participate in IPOs. This would harm funds, their investors and issuers looking to raise capital.”
The SEC rule expanded the definitions of a dealer and government securities dealer to include traders that engage in one of two activities "as part of a regular business." Those activities are regularly expressing trading interest that is at or near the best available prices on both sides of the market, and collecting revenue chiefly 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," SEC Chair Gary Gensler said at the Feb. 6 meeting when the rule was finalized.
