On March 28, 2022 the SEC published proposed rules that could require certain firms to register as dealers with the SEC, as well as register as an SRO, if they are deemed to be engaged in buying/selling securities as part of a “regular business.” The SEC’s stated impetus behind the proposed rule is to ensure that those market participants who play a significant liquidity-providing role in the market are subjected to the same regulatory requirements as those firms currently registered as “dealers,” who have historically performed that role. Such market participants may not be currently registered as dealers due to the existing definition of “dealer” under the Exchange Act Sections 3(a)(5) and 3(a)(44) and have been operating under an existing trader exemption.
The SEC detailed both qualitative and quantitative standards that would be utilized to determine if firms are acting as dealers. The qualitative standards would apply to dealers potentially across multiple types of securities whereas the quantitative standards only apply to government securities dealers. The qualitative standards include the following:
- Routinely making comparable purchases/sales of the same securities on the same day “Routinely” is defined as more frequent than occasional but not necessarily continuous
- Routinely expressing trading interest at or near the best available prices on both sides of the market and communicated in a way that makes them accessible to other market participants
- Earning revenue primarily from capturing bid-ask spreads or capturing incentives offered by trading venues to liquidity suppliers
The quantitative standard is as follows:
- Four of the last six months where the firm bought/sold more than $25 billion of trading volume in government securities
The proposed rules specifically exclude investment companies, certain registered investment advisers and firms/individuals with assets under $50 million. However, the proposed rules do have the potential to extend the dealer registration requirement to firms not subject to such oversight currently, including proprietary trading firms (high frequency traders), private funds or even potentially digital asset traders, if such digital assets are deemed securities.
Market participants will have a one-year compliance period to register as a dealer from the final effective date of the new rules, if approved. Currently, the proposal has been issued for comments/feedback from the industry with comments to be submitted by May 27, 2022.
ViP: The implications of dealer registration can be extensive including net capital requirements, registration of staff, recordkeeping standards and an enhanced supervisory system. Many impacted firms may have existing monitoring/surveillance processes that will only require updating to ensure they meet the SEC/SRO standards, while other firms will need to implement such monitoring as part of their new supervisory system. Validus maintains a suite of procedures for monitoring market integrity and potential fraud/manipulation across multiple asset classes including equities, derivatives, fixed income and digital assets. Additional procedures related to quoting statistics are also available. We will monitor these proposed rules with clients and the industry and update procedures as needed so that our clients have the tools required to properly supervise their business activities.