Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer in Connection With Certain Liquidity Providers

<RULE> SECURITIES AND EXCHANGE COMMISSION <CFR>17 CFR Part 240</CFR> <DEPDOC>[Release No. 34-99477; File No. S7-12-22]</DEPDOC> <RIN>RIN 3235-AN10</RIN> <SUBJECT>Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer in Connection With Certain Liquidity Providers</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Securities and Exchange Commission. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Securities and Exchange Commission (“SEC” or “Commission”) is adopting new rules to further define the phrase “as a part of a regular business” as used in the statutory definitions of “dealer” and “government securities dealer” under sections 3(a)(5) and 3(a)(44), respectively, of the Securities Exchange Act of 1934 (“Exchange Act”). </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> April 29, 2024. <E T="03">Compliance date:</E> The compliance date is discussed in section II.B of this release. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Emily Westerberg Russell, Chief Counsel; John Fahey, Deputy Chief Counsel; Joanne Rutkowski, Assistant Chief Counsel; Bonnie Gauch, Senior Special Counsel; Shauna Sappington Vlosich, Senior Special Counsel; Geeta Dhingra, Branch Chief; Katherine Lesker, Special Counsel; and Carl Emigholz, Special Counsel at 202-551-5550 in the Office of Chief Counsel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-7010. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> The Commission is adopting the following new rules under the Exchange Act: (1) 17 CFR 240.3a5-4 (“Rule 3a5-4”), and (2) 17 CFR 240.3a44-2 (“Rule 3a44-2”) (collectively, “final rules”). <HD SOURCE="HD1">Table of Contents</HD> <EXTRACT> <FP SOURCE="FP-2">I. Introduction</FP> <FP SOURCE="FP1-2">A. Background</FP> <FP SOURCE="FP1-2">B. Overview of the Final Rules and Modifications to the Proposal</FP> <FP SOURCE="FP-2">II. Discussion of Final Rules</FP> <FP SOURCE="FP1-2">A. Component Parts</FP> <FP SOURCE="FP1-2">1. Qualitative Standard</FP> <FP SOURCE="FP1-2">a. Elimination of the Proposed First Qualitative Factor</FP> <FP SOURCE="FP1-2">b. Expressing Trading Interest Factor</FP> <FP SOURCE="FP1-2">c. Primary Revenue Factor</FP> <FP SOURCE="FP1-2">2. Quantitative Standard</FP> <FP SOURCE="FP1-2">3. Exclusions</FP> <FP SOURCE="FP1-2">a. Person That Has or Controls Assets of Less Than $50 Million</FP> <FP SOURCE="FP1-2">b. Registered Investment Companies, Private Funds, and Registered Investment Advisers</FP> <FP SOURCE="FP1-2">c. Official Sector Exclusions</FP> <FP SOURCE="FP1-2">d. Other Requests for Exclusions</FP> <FP SOURCE="FP1-2">4. Definitions and Anti-Evasion</FP> <FP SOURCE="FP1-2">5. No Presumption</FP> <FP SOURCE="FP1-2">B. Compliance Date</FP> <FP SOURCE="FP-2">III. Economic Analysis</FP> <FP SOURCE="FP1-2">A. Introduction</FP> <FP SOURCE="FP1-2">B. Baseline</FP> <FP SOURCE="FP1-2">1. Rules and Regulations That Apply to Registered Dealers</FP> <FP SOURCE="FP1-2">2. Affected Parties</FP> <FP SOURCE="FP1-2">a. Principal Traders</FP> <FP SOURCE="FP1-2">b. Private Funds and Advisers</FP> <FP SOURCE="FP1-2">c. Number of Affected Parties</FP> <FP SOURCE="FP1-2">3. Competition Among Significant Liquidity Providers</FP> <FP SOURCE="FP1-2">4. Externalities</FP> <FP SOURCE="FP1-2">C. Economic Effects, Including Impact on Efficiency, Competition, and Capital Formation</FP> <FP SOURCE="FP1-2">1. Benefits</FP> <FP SOURCE="FP1-2">a. Regulatory Consistency and Competition</FP> <FP SOURCE="FP1-2">b. Regulations on Financial and Operational Risk-Taking</FP> <FP SOURCE="FP1-2">c. Regulations on Reporting</FP> <FP SOURCE="FP1-2">d. Regulations on Deceptive Practices</FP> <FP SOURCE="FP1-2">e. Regulations Related to Examinations</FP> <FP SOURCE="FP1-2">2. Costs</FP> <FP SOURCE="FP1-2">a. Compliance Costs</FP> <FP SOURCE="FP1-2">b. Costs Associated With the Net Capital Rule</FP> <FP SOURCE="FP1-2">c. Potential Implications for Private Funds and Advisers</FP> <FP SOURCE="FP1-2">d. Effects on Market Liquidity</FP> <FP SOURCE="FP1-2">3. Effects on Efficiency, Competition, and Capital Formation</FP> <FP SOURCE="FP1-2">a. Effects on Efficiency</FP> <FP SOURCE="FP1-2">b. Effects on Competition</FP> <FP SOURCE="FP1-2">c. Effects on Capital Formation</FP> <FP SOURCE="FP1-2">D. Reasonable Alternatives</FP> <FP SOURCE="FP1-2">1. Retain the Quantitative Standard</FP> <FP SOURCE="FP1-2"> 2. Retain the First Qualitative Standard ( <E T="03">e.g.,</E> “Routinely Making Roughly Comparable Purchases and Sales of the Same or Substantially Similar Securities [or Government Securities] in a Day”) </FP> <FP SOURCE="FP1-2">3. Remove the Exclusion for Registered Investment Companies</FP> <FP SOURCE="FP1-2">4. Exclude Registered Investment Advisers and Private Funds</FP> <FP SOURCE="FP1-2">5. Require Registered Investment Advisers and Private Funds To Report to TRACE</FP> <FP SOURCE="FP1-2">6. Carve Out or Narrow Application to Crypto Asset Securities</FP> <FP SOURCE="FP-2">IV. Paperwork Reduction Act</FP> <FP SOURCE="FP-2">V. Regulatory Flexibility Act</FP> <FP SOURCE="FP-2">VI. Other Matters</FP> <FP SOURCE="FP-2">Statutory Authority</FP> </EXTRACT> <HD SOURCE="HD1">I. Introduction</HD> The dealer regulatory regime is a cornerstone of the U.S. Federal securities laws and helps to promote the Commission's longstanding mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. <SU>1</SU> <FTREF/> Advancements in electronic trading across securities markets have led to the emergence of certain market participants that play an increasingly significant liquidity-providing role in overall trading and market activity—a role that has traditionally been performed by entities regulated as dealers. <SU>2</SU> <FTREF/> However, some of these market participants—despite engaging in liquidity-providing activities similar to those traditionally performed by either “dealers” or “government securities dealers” as defined under sections 3(a)(5) and 3(a)(44) of the Exchange Act, respectively, and despite their significant share of market volume—are not registered with the Commission as either dealers or government securities dealers under sections 15 and 15C of the Exchange Act, respectively. The identification, registration, and regulation of these market participants as dealers will provide regulators with a more comprehensive view of the markets through regulatory oversight and will support market stability and resiliency and protect investors by promoting the financial responsibility and operational integrity of market participants that are acting as dealers. <SU>3</SU> <FTREF/> Further, the final rules will promote competition among entities that regularly provide significant liquidity by applying consistent regulation to these entities, thus leveling the competitive playing field between liquidity provision conducted by entities that are currently registered as dealers and government securities dealers and by entities that are not. <FTNT> <SU>1</SU>   <E T="03">See, e.g., Eastside Church of Christ</E> v. <E T="03">National Plan, Inc.,</E> 391 F.2d 357 (5th Cir. 1968) (“The requirement that brokers and dealers register is of the utmost importance in effecting the purposes of the Act. It is through the registration requirement that some discipline may be exercised over those who may engage in the securities business and by which necessary standards may be established with respect to training, experience, and records.”); <E T="03">see also</E> section 2 of the Exchange Act, 15 U.S.C. 78b (stating that “transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are effected with a national public interest which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto”). </FTNT> <FTNT> <SU>2</SU>   <E T="03">See</E> Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer, Exchange Act Release No. 94524 (Mar. 28, 2022), 87 FR 23054 (Apr. 18, 2022) (“Proposing Release”). </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> section III. </FTNT> The Federal securities laws provide a comprehensive system of regulation of securities activity, and the definition of “dealer” is one of the Exchange Act's most important definitions, as it sets forth certain activities that cause persons to fall within the Commission's regulatory ambit. <SU>4</SU> <FTREF/> Section 3(a)(5) of the Exchange Act defines the term “dealer” to mean “any person engaged in the business of buying and selling securities . . . for such person's own account through a broker or otherwise,” but excludes “a person that buys or sells securities . . . for such person's own account, either individually or in a fiduciary capacity, but not as a part of a regular business.” Similarly, section 3(a)(44) of the Exchange Act provides, in relevant part, that the term “government securities dealer” means “any person engaged in the business of buying and selling government securities for his own account, through a broker or otherwise,” but “does not include any person insofar as he buys or sells such securities for his own account, either individually or in some fiduciary capacity, but not as part of a regular business.” These statutory definitions of “dealer” and “government securities dealer,” and the accompanying registration requirements of the Exchange Act, were drawn broadly by Congress to encompass a wide range of activities involving the securities markets and their participants. <SU>5</SU> <FTREF/> Market participants that m ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 637k characters. 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