On March 28, 2022, the SEC announced two proposed rules under the Securities Exchange Act of 1934 that would require certain market participants such as proprietary trading firms that engage in dealer-like activities to register with the SEC, become members of a self-regulatory organization (e.g., FINRA) and comply with federal securities laws and regulatory obligations. The phrase “as a part of a regular business” in the statutory definitions of “dealer” and “government securities dealer” historically distinguished one acting as a “trader” (and not required to be registered) from one acting as a “dealer” (and required to be registered as such). The proposed rules would further define and expand that phrase so as to encompass additional market participants.

Proposed Rule 3a5-4 would subject market participants of a certain threshold size to the registration requirements as a “dealer” if they engage in a routine pattern of buying and selling securities that has the effect of providing liquidity to other market participants by:

• routinely making roughly comparable purchases and sales of the same or substantially similar securities in a day; or

• routinely expressing trading interests that are at or near the best available prices on both sides of the market and that are made 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 incentives offered by trading venues to liquidity-supplying trading interests.

Similarly, Proposed Rule 3a44-2 would subject market participants to the registration requirements as a “government securities dealer” if they engage in any of the above activity in connection with government securities or if they engage in buying and selling more than $25 billion of government securities in four out of six calendar months. Accordingly, the “dealer” definition would be subject to a qualitative test, while the “government securities dealer” definition would be subject to both a qualitative and a quantitative test.

Both tests would be subject to certain exemptions. Under each proposed rule, market participants that (1) control assets of less than $50 million or (2) are registered investment companies under the Investment Company Act of 1940 would be excluded from the definition of “dealer” or “government securities dealer.” Notably, the Investment Company Act exclusion would not exempt private funds, which would be excluded only by the application of the $50 million threshold or the above applicable tests.

The SEC’s proposing release is available here. The public comment period will remain open until May 27, 2022.