On 6 February 2024, the US Securities and Exchange Commission (SEC) adopted two new rules – Rules 3a5-4 and 3a44-2 of the Securities Exchange Act of 1934 (the Act) – that significantly expand the definitions of a “dealer” and “government securities dealer.” The new rules define the phrase “as a part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Act to determine if a person is engaged in a “regular pattern of buying and selling securities that has the effect of providing liquidity to other market participants.” Such persons would be required to register as “dealers” or “government securities dealers” under Sections 15 and 15C of the Act, respectively.

The final rules establish two non-exclusive qualitative standards to determine whether market participants that provide significant liquidity do so as part of a regular business such that they would need to register as a “dealer” or “government securities dealer”:

• Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security and that is communicated and represented in a way that makes it accessible to other market participants; or
• Earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interest.

The final rules exclude persons that have or control total assets of less than US$50 million and exclude investment companies registered under the Investment Company Act of 1940, central banks, sovereign entities and international financial institutions (as defined in the final rules).

These amendments significantly alter the regulatory landscape, potentially requiring proprietary trading firms, private funds, pension funds, sovereign wealth funds and DeFi automated market makers, to register as “dealers” or “government securities dealers” unless an exemption applies.

Although the SEC modified the final rules to narrow the scope of the March 2022 proposed rules, Commissioners Peirce and Uyeda sharply dissented.

The effective date for the final rules will be sixty days after publication in the Federal Register, with the compliance date following one year later.