Trade Organizations Oppose SEC Proposal to Expand "Dealer" Registration Requirement

Numerous market participants opposed an SEC proposal to further define the phrase "as part of a regular business," which would expand the definition of the terms "dealer" and "government securities dealer" (and the related registration requirements) under the Exchange Act. (See previous coverage.) The comment period closed on May 27, 2022.

Alternative Investment Management Association ("AIMA")

AIMA stated that the expanded definition of dealer would profoundly impact liquidity and also requested that the SEC provide additional time to comment on the proposal.

Blockchain Association

The Blockchain Association asserted that the SEC's proposed definition of "dealer" exceeds the SEC's statutory authority. The association argued that the expanded definition would exacerbate uncertainty as to the regulatory treatment of digital assets as securities, and that the rule proposal would be in violation of the Administrative Procedure Act by reason of, among other things, its insufficient cost-benefit analysis.

Futures Industry Association ("FIA") - Principal Traders Group

FIA asserted that the SEC was inappropriately classifying traders as dealers, and that the proposal would have a material negative impact on market liquidity with no countervailing benefit.

Global Digital Asset & Cryptocurrency Association ("GDCA")

The GDCA focused on the impracticality of requiring firms trading in digital assets to register as dealers. The GDCA argued that the digital assets would have no value for capital purposes and would be treated as liabilities if they were held in custody. The GDCA also argued that Rule 15c2-11 ("Initiation or resumption of quotations without specific information") would effectively prohibit SEC-registered dealers from quoting prices for most digital asset securities. (Note: Steven Lofchie of Fried Frank served as the Chair of the Drafting Committee for the letter.)

Hedge Fund Advisors

Several hedge fund advisors argued that the SEC's proposed definition of "dealer" was inconsistent with the statute and prior SEC interpretations, and that the SEC had significantly underestimated the costs of the proposal. They argued that the SEC had largely ignored the costs of compliance with the SEC's own net capital rule. (Note: Fried Frank represented these registered investment advisers to private funds.)

Independent Dealer and Trader Association ("IDTA")

The IDTA argued that the expansion of the dealer definition would misclassify "traders" as "dealers" and would effectively drive firms from the market and thus reduce liquidity and price competition.

Investment Company Institute ("ICI")

ICI argued that the trading activities defined as "dealer" activities were inappropriately broad and that it was generally impractical to require the aggregation of different funds for purposes of determining dealer status.

Managed Funds Association ("MFA")

The MFA said that the proposal would result in needless duplicative regulation of advisers and private funds, that the proposal filed to take account of costs, and was in violation of the Administrative Procedure Act by reason of, among other things, its insufficient cost-benefit analysis.

Representatives Patrick T. McHenry ("R-NC) and Bill P. Huizenga (R-MI)

The Republican Congressmen argued that the SEC was improperly expanding its statutory authority by expanding the definition of the term "dealer," and that the expansion of such term to digital assets was particularly inappropriate given the absence of cost-benefit analysis.

SIFMA

SIFMA stated that it generally supported the goal of having certain proprietary trading firms registered as dealers in government securities, but argued that the dealer definition was overly broad, particularly insofar as it focuses on the volume of trading activity. SIFMA also argued that the SEC overstated the informational benefits of the rule as it failed to take account of the substantial amount of trading data that the SEC already receives and will receive from the Consolidated Audit Trail.

SIFMA Asset Management Group ("SIFMA AMG")

SIFMA AMG argued that investment advisers should not be required to register as broker-dealers, and in particular that the aggregation provisions of the proposal were fundamentally unworkable in that they required the combination of separate legal entities into a single dealer entity.

Virtu Financial, Inc. ("Virtu")

Virtu argued that the proposal insufficiently considered the costs of the proposal, failed to identify clear benefits and did not take account of the potentially disruptive effectives of driving active traders from the market or forcing them to reduce their trading activities.