On February 6, 2024, the Securities and Exchange Commission (the “SEC”) adopted amendments to the definitions of “dealer” and “government securities dealer” that would subject certain market participants acting as liquidity providers to registration and regulation as a dealer or government securities dealer (the “Amended Rules”).1 The Amended Rules further define the phrase “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Securities Exchange Act of 1934 (the “Exchange Act”) and provide two qualitative standards to identify a market participant as a “dealer” or “government securities dealer”. Persons engaging in such activities will be required to register with the SEC, become members of a self-regulatory organization and comply with federal securities laws and regulatory obligations.
Amendments to the Definition of the Phrase “As Part of a Regular Business”
Section 3(a)(5) of the Exchange Act defines a dealer and government securities dealer as any person engaged in the business of buying and selling securities (or government securities with respect to a government securities dealer) for such person’s own account through a broker or otherwise, but excludes a person that buys or sells such securities for such person’s own account, either individually or in a fiduciary capacity, but not as part of a regular business. Under the Amended Rules, a person will be deemed to be engaging in such activity as part of a regular business if that person engages in a regular pattern of buying and selling securities that has the effect of providing liquidity to other market participants. The Amended Rules establish two non-exclusive ways in which a person will be deemed to be engaged in providing liquidity as part of a regular business:
(1) Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security, and that is communicated and represented in a way that makes it accessible to other market participants; or
(2) Earning 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.
In the Adopting Release, the SEC clarifies that no presumption shall arise that a person is not a dealer if that person does not engage in the activities identified in the Amended Rules. In a deviation from the proposed rule, the SEC chose not to adopt its expanded definition of “own account”, and instead included an anti-evasion provision designed to deter the establishment of multiple legal entities or accounts to evade registration requirements. Consequently, the term “own account” means any account: (i) held in the name of that person or (ii) held for the benefit of that person. Additionally, the SEC chose not to adopt a third qualitative standard which would have included a person “routinely making roughly comparable purchases and sales of the same or substantially similar securities (or government securities) in a day.” The SEC also declined to adopt the proposed quantitative standard for U.S. Treasury securities (i.e., buying and selling over $25 billion worth of trading volume in four of the last six calendar months).
The Amended Rules contain three exclusions from the Amended Rules for: (1) a person that has or controls total assets of less than $50 million; (2) an investment company registered under the Investment Company Act of 1940; and (3) a central bank, sovereign entity, or a specified international financial institution.
Implications for Private Funds
The Amended Rules could bring private funds within the scope of the “dealer” and “government securities dealer” definitions. While the long-only strategies of most private equity funds make it unlikely that they will meet the Amended Rules’ definitions, hedge funds, specifically those that employ high-frequency trading strategies, could meet such definition.
Transition and Compliance
The Amended Rules will become effective 60 days after the date of publication of the Adopting Release in the Federal Register. The compliance date for the Amended Rules will be one year after such effective date.
* * *
If you have any questions regarding the Amended Rules, please contact your Investment Management Group attorney at Seward & Kissel LLP.
 The adopting release for the Amended Rules (the “Adopting Release”) is available at: http://www.sec.gov/files/rules/final/2024/34-99477.pdf