The SEC withdrew its appeal challenging a federal court decision that struck down an agency rule broadening the definition of a dealer, leaving the court's decision in place.
On Nov. 21, a federal judge in the U.S. District Court in Fort Worth, Texas, struck down the rule, commonly referred to as the Dealer Rule, concluding that the agency had overstepped its authority.
The rule, finalized by the SEC in February 2024, expanded 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.
Three trade organizations — the National Association of Private Fund Managers, the Alternative Investment Management Association and the Managed Funds Association — brought a lawsuit against the rule in March, contending the SEC overstepped its statutory authority.
After the court vacated the rule, the SEC filed an appeal Jan. 17 to the 5th U.S. Circuit Court of Appeals in New Orleans before former Chair Gary Gensler stepped down.
However, under acting Chair Mark Uyeda, the SEC filed a motion Feb. 19 to “voluntarily dismiss this appeal,” leaving the District Court’s decision in place.
AIMA CEO Jack Inglis said in a Feb. 19 statement that he welcomed the news that the SEC had withdrawn its appeal.
“Hedge funds managed by AIMA’s members are not dealers,” Inglis said. “They do not have customers — a requirement for determining whether a market participant is a dealer. The court affirmed this view when we challenged the rule last year.”
“While today’s decision significantly reduces uncertainty and the potential for market disruption, we urge the commission to review their existing enforcement practices with respect to the dealer definition so that they are consistent with the court’s ruling,” he added.
Bryan Corbett, MFA president and CEO, said in a separate Feb. 19 statement that “withdrawing the appeal turns the page on the Gensler era at the SEC and benefits markets, investors and the economy by decreasing business risk, the cost of capital and systemic risk.”
Corbett also called on the SEC to “review its application of the dealer definition in outstanding enforcement cases,” adding that he “looks forward to working constructively on policies that strengthen U.S. capital markets, embrace alternative asset managers as important market participants and drive economic growth.”
