SEC Drops Appeal of District Court Decision to Vacate "Dealer Rule"
Commentary by Steven Lofchie
The SEC moved to dismiss its appeal of a federal court ruling that struck down the "Dealer Rule." The rule would have expanded the definitions of "dealer" and "government securities dealer" to entities that had historically been considered "traders" outside the scope of the broker-dealer registration requirement. (See prior coverage.)
Following the rule proposal, crypto industry trade associations sued the SEC to vacate the rule. The associations argued that (i) the new definition of dealer would sweep-in all manner of digital asset markets participants, including users who merely participate in digital asset liquidity pools; (ii) the rule would impose broad costs and harm competition by discouraging participation in certain trading protocols; and (iii) the rule applied similar regulations to the digital assets industry, as it did for traditional financial markets, despite entirely different market structures.
The District Court for the Northern District of Texas denied the SEC's request to limit or modify the scope of its decision, saying "Complete vacatur is warranted because . . . the very promulgation of the Rule was in excess of [the SEC's] statutory authority." The Court vacated the rule in its entirety.
Commentary
The Dealer Rule embodied three flaws that ran through virtually all SEC rulemakings during the past four years.
- First, it was outside of the statutory authority of the SEC. (Indeed, some of the cases cited by the SEC in support of its authority were so strained that they damaged the credibility of the agency.)
- Second, the required cost-benefit analysis in the rulemaking was inadequate (at best) and a sham (at worst). For the Dealer Rule, the "analysis" of costs focused on US Government securities (where the costs are least) and ignored other types of securities, including foreign securities, illiquid assets and digital assets, where the capital charges would have been impossible for a registered entity to bear.
- Third, the applicability of the rule requirements were utterly ambiguous.
The SEC withdrawal of its appeal on the Dealer Rule is sure to be followed by other steps to undo the questionable actions of the prior Administration that were based on these three flaws.
Related Articles
-
The United States is entering a new and dynamic environment for cryptocurrency activities. The incoming Trump Administration intends to address the regulatory vacuum and "legalize" activities in the space. It is unfortunate that the SEC, headed by outgoing SEC Chair Gensler, will leave US regulators (not just the SEC) unprepared at the SEC.
-
A United States District Court "vacated in its entirety" the SEC's "Dealer Rule." The rule would have expanded the definitions of "dealer" and "government securities dealer" to entities that had historically been considered "traders" outside the scope of the broker-dealer registration requirement.
-
Two crypto industry trade associations sued to vacate the SEC's recently adopted "Dealer Rule." The rule expanded the definitions of "dealer" and "government securities dealer" as it applies to participants in decentralized finance.
-
The Alternative Investment Management Association, the Managed Funds Association and the National Association of Private Fund Managers filed a Complaint against the SEC to vacate the agency's recently adopted rule to change the definitions of "dealer" and "government securities dealer.”
-
An SEC final rule expanding the definition of "broker-dealer" under the Securities Exchange Act was published in the Federal Register.
-
Regulatory Intelligence Commentary: SEC Expands Broker-Dealer Registration Requirement: The Rule, The Consequences, The Legal Questions
-
The SEC adopted two new rules under the Securities Exchange Act to further define the term "as a part of a regular business." The new rules expand the scope of firms that are required to register as broker-dealers and as government securities broker-dealers.