On March 28th, the SEC announced that it is proposing new rules that would add clarity to certain terminology currently included in the Securities Exchange Act of 1934 (Exchange Act). New rules 3a5-4 and 3a44-2 under the Exchange Act will further define the phrase,“as a part of a regular business”, in Sections 3(a)(5) and 3(a)(44) of the Exchange Act to identify specific activities that would lead individuals who engage in such activities to act as “dealers” or “government securities dealers” subject to the registration requirements of Sections 15 and 15C of the Act, respectively.
With considerable developments in electronic trading throughout securities markets, there has been an increase in certain market participants that play a substantial role in providing liquidity in overall trading and market activity. This role has customarily been assumed by individuals registered as dealers with the SEC. While these market participants engage in liquidity-providing activities comparable to those traditionally performed by either “dealers” (Section 3(a)(5)) or “government securities dealers” (Section 3(a)(44)), and even though they hold a sizable share of market volume, they may not be registered as either dealers or government securities dealers. Consequently, investors and the markets do not benefit from safeguards that accompany an entity’s registration and regulation under the Exchange Act.
Moreover, the proposed rule is expected to foster transparency, market integrity, and flexibility across the US Treasury market and other securities markets by continuing to promote consistency in monitoring individuals engaging in dealer-like activities.
Under the proposed rules, market participants that assume certain dealer-like roles and/or engage in certain levels of buying and selling government securities would be required to:
register with the SEC
become a member of a self-regulatory organization (SRO)
conform to federal securities laws and regulatory obligations
These rules would apply to proprietary (or principal) trading firms. More specifically, the rules would implement the following changes:
Rule 3a44-2 would introduce a quantitative standard by which an individual engaging in certain specified levels of activity would be considered to be buying and selling government securities “as a part of a regular business,” whether or not it meets any of the proposed rule’s qualitative standards. It should not be presumed that an individual is not a dealer solely because that person does not engage in the activities detailed in the proposed rules. The proposed rules are not intended to: (1) address all situations in which an individual may act in dealer-like roles, or (2) replace otherwise applicable interpretations and precedent.
Rules 3a5-4 and 3a44-2 would establish identical qualitative standards intended to identify market participants who assume specific dealer-like roles, namely those who assume the roles of liquidity providers in the markets.
The proposed rules would exclude any individual that holds or controls assets less than $50 million. The rule proposal would further exclude an investment company registered under the Investment Company Act of 1940.
The public comment period will remain open for 30 days following publication of the proposing release in the Federal Register or May 27, 2022 (or 60 days after publication of the proposing release on the SEC’s website, whichever period is longer). For more information on how to submit comments, refer to the Rule Proposal on the SEC’s website.