SEC Rules: Buying & selling securities as a part of a regular business
On February 6, 2024, the Securities and Exchange Commission (SEC) adopted two rules that will require market participants that assume certain dealer-like roles and increasingly act as major liquidity providers in the markets to register with the SEC either as “government securities dealers” under Section 15C of the Exchange Act of 1934 (the Act) or as “dealers” under Section 15 of the Act.
The final rules accomplish this by further defining what it means to be buying and selling securities (including any crypto asset that is a “security” or “government security” within the meaning of the Act) “as a part of a regular business” within the definitions of “dealer” and “government securities dealer” under Sections 3(a)(5) and 3(a)(44) of the Act, respectively. The final rules are principally consistent with the proposal discussed in this April 2022 Financial Reporting Insights article; however, there were several modifications, including, but not limited to, the following:
- Removal of the first qualitative standard (i.e., “routinely making roughly comparable purchases and sales of the same or substantially similar securities (or government securities) in a day”)
- Clarification of the second qualitative standard to include the phrase “for the same security” after “on both sides of the market”
- Removal of the quantitative standard (under which a person engaging in certain specified levels of activity—generally buying and selling more than $25 billion of trading volume in government securities in each of four out of the last six calendar months—would be deemed to be buying and selling securities “as a part of a regular business,” regardless of whether it met any of the qualitative standards)
- Revision of the definition of “Own Account” to mean “any account held in the name of that person; or held for the benefit of that person”
- Introduction of an anti-evasion provision to hold accountable entities or persons attempting to circumvent the final rules by engaging in activities that would satisfy the conditions of the final rules indirectly or by disaggregating accounts
- Expansion of the exclusion of market participants that would not be subject to the final rules to include “Central Banks,” “Sovereign Entities” and “International Financial Institutions” (as defined in the final rules)
- These exclusions are in addition to those proposed and adopted in the final rules (i.e., (a) any person that has or controls total assets of less than $50 million and (b) an investment company registered under the Investment Company Act of 1940)
The SEC’s intent with the issuance of the final rules was to focus on activities (rather than labels, intent or status) that would potentially scope in other market participants as “dealers” or “government securities dealers” and subject such market participants to the registration requirements of Sections 15 and 15C of the Act, respectively. Under the final rules, any market participant that engages in activities as described in the final rules would be a “dealer” or “government securities dealer” and, absent an exception or exemption, would be required to:
- Register with the SEC as a dealer under Section 15(a) or as a government securities dealer under Section 15C, as applicable;
- Become a member of a self-regulatory organization (SRO); and
- Comply with SEC, SRO and Treasury (with respect to government securities dealers) rules and requirements, including certain financial responsibility and risk management rules, transaction and other reporting requirements, operational integrity rules, and books and records requirements.
RSM believes it is likely that many market participants will become subject to the registration and associated compliance requirements. Non-registered organizations regularly participating in the securities and government securities markets (particularly, proprietary or principal trading firms; private funds, especially investment vehicles that have high frequency or liquid strategies; and registered and unregistered investment advisers) should assess whether they are engaged in activities that demonstrate “a regular business of buying and selling securities” as further defined in the final rules, and plan for compliance solutions, as appropriate. The final rules adopted the proposed “no presumption clause,” which is intended to include persons that do not otherwise meet the conditions set forth in the final rules but may still be a “dealer” or “government securities dealer” under existing applicable SEC interpretations and court precedents. Matt Gill, RSM’s National Capital Markets Industry Leader, states, “These final rules will clearly have an impact on a number of entities within the financial services market. It's imperative that all entities that buy, sell or otherwise transact with securities, consider these new rules and carefully analyze if they meet the definition of a ‘dealer’ or ‘government securities dealer.’”
The final rules are effective 60 days after the date of publication in the Federal Register and the compliance date is one year after the effective date.