SEC proposes change to definition of “dealer”

The SEC’s latest proposal could force more individuals to register as broker dealers and have a significant impact on the market.

In the proposed rule the SEC would reinterpret the “dealer-trader” distinction in a manner which would expand the scope of individuals required to register as broker-dealers and government securities dealers.  As the rule proposal is targeted at actively trading private funds and principal trading firms, the proposal could increase the scope of trading activities that could subject firms to dealer registration.

The Exchange Act defines a dealer as a person that is engaged in the business of buying and selling securities for a person’s own account through a broker or otherwise.  A person is not considered a dealer if it does so “for such person’s own account, either individually or in a fiduciary capacity, but not as a part of regular business.”  A person or entity as such that would fall into the definition of a dealer must register as a broker-dealer with the SEC and become a member of an SRO (FINRA) and comply with a set of comprehensive regulatory framework that covers all aspects of their business activities.

The dealer-trader distinction has been refined over decades through court decisions, SEC no-action letters, among others.  In more recent years, electronic trading firms have used technology to engage in high-frequency trading.  Typically these firms take the position that they are traders as opposed to “liquidity providing” dealers.  As such, the proposal can change their position.

Essentially, the proposal would look at whether a person has the effect of providing liquidity to the market.  The following would be considered as trading activities that provide liquidity and in effect deem the person as a dealer, regardless of investment purposes:

  • Making on a routine basis comparable purchases and sales of the same or similar securities in a day
  • Routinely expressing trading interests that are at best available prices on both sides of the market; communicated in ways that make them accessible to other market participants
  • Earning on a primary basis from capturing bid-ask spreads or by capturing incentives offered by trading venues to liquidity-supplying trading interest.

Although the rule proposal is broad, if adopted it may have a significant impact on the market, notably the necessity to register as a broker-dealer.  It remains unclear as to whether firms would choose to continue engaging in activities which would trigger the need to register, or alter activity to avoid registration.

How Bovill can help

Bovill regularly assists applicant broker-dealers through their entire New Member Application (NMA) and Change Membership Application (CMA) process.  Bovill’s expertise with the entire process from start to finish can help your firm navigate and determine the necessity to register based on the most current rules, regulations, and mandates.

Additionally, Bovill conducts annual independent 3120 supervisory controls testing and annual independent AML compliance testing for numerous FINRA member broker-dealers in an effort to regularly update and review compliance programs for the latest developments as outlined in the recently published report.  Bovill also helps firms during their FINRA examination, to best respond and remediate any identified risk.

Bovill conducts a quarterly AML roundtable for FINRA member broker-dealers and webinars highlighting the most recent updates to applicable rules and regulations. Get in touch to join the conversation.

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