Navigating the SEC’s Expanded Dealer Definition


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Published
Mar 6th '24
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The U.S. Securities and Exchange Commission (SEC) has expanded the definition of “dealer” in securities regulations, bringing more entities under regulatory oversight. Now, anyone buying and selling securities as part of their business must register with the SEC, join a self-regulatory organization (SRO), and follow federal securities laws and related rules.

 

In this post, Smarsh share what changed with the SEC’s dealer definition and answer the many questions of how it’ll affect your business.

 

What are the new qualitative criteria used to define dealer activities?

The SEC’s new rules introduce two core qualitative criteria for identifying dealing activity. According to these rules, a person or company engaged in buying and selling securities for its own account is considered to be conducting such activity “as part of a regular business” if certain conditions are met. The SEC’s new criteria for identifying dealing activity include:

 

  • Consistently expressing readily accessible, competitively priced trading interests on both sides of the market without imposing minimum volume or duration limitations.
  • Primarily generating income from capturing bid-ask spreads or receiving exchange incentives based on the overall composition of trading activity, regardless of profitability.

 

Who’s affected by these changes, and who’s exempt?

The SEC’s revised qualitative factors may impact diverse market participants, including proprietary trading firms, high-frequency traders, hedge funds, and other entities with substantial liquidity-supplying market impact. While certain entities, such as crypto platforms, may experience minimal impact due to existing regulations, hedge funds utilizing automated or high-frequency trading strategies could be subject to registration requirements.

 

The Commission excludes persons with total assets below $50 million from dealer registration rules to alleviate the regulatory burden on smaller market participants. Registered investment companies are exempt due to their comprehensive regulatory framework, but private funds and investment advisers are not expressly excluded.

 

Why expanded recordkeeping obligations matter for new registrants

Newly registered firms face stringent recordkeeping rules to enable SEC and SRO compliance examinations. Comprehensive documentation covering communications, transactions, ownership details and finances helps regulators detect manipulation and confirms governance adherence. However, previously exempt entities now fall under expanded examination jurisdiction seeking to boost oversight.

 

Given ramped-up examination powers and sweeping transparency requirements, building reliable recordkeeping processes is pivotal for new registrants. Robust systems facilitating seamless regulatory reviews are imperative as firms assume intensive public reporting and auditing obligations. Carefully implemented documentation infrastructures allow newly-governed companies to emphasize their commitment to compliance and accountability.

 

What are some concerns within the industry regarding these changes?

Industry stakeholders have raised concerns about the broad qualitative tests introduced by the SEC’s expanded dealer definition. They fear that these tests could lead to misclassification of funds and trading strategies, creating uncertainty and additional compliance burdens for affected firms. With an upcoming election on the horizon, there is apprehension about potential shifts in the SEC’s regulatory priorities, adding another layer of uncertainty for market participants to navigate.

 

What should businesses do to prepare for compliance with the new rules?

After the final rules are published, businesses have 60 days before they take effect. They then have a year to ensure compliance, with a deadline expected in April 2025. Businesses should prepare and make necessary changes to meet the new regulatory obligations.

 

What’s the big picture for businesses navigating these changes?

These changes mark a significant shift in regulatory oversight affecting many businesses. Understanding the financial impacts, operational challenges, and evolving regulatory priorities is critical. Vigorous recordkeeping is vital for compliance and managing risk. Firms should be proactive in preparing for these changes to navigate them successfully.

 

FEATURED CHECKLIST: Electronic Communications Compliance Checklist for Broker-Dealers

 

Source: Smarsh. Author: Tiffany Magri Regulatory Advisor at Smarsh

 

About the author: 

As a Regulatory Advisor at Smarsh, Tiffany monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.

 

About Smarsh

Smarsh® is the recognized global leader in electronic communications archiving solutions for regulated organizations. Smarsh provides innovative capture, archiving, e-discovery, and supervision solutions across the industry’s widest breadth of communication channels.

 

Scalable for organizations of all sizes, the Smarsh platform provides customers with compliance built on confidence. It enables them to strategically future-proof as new communication channels are adopted, and to realize more insight and value from the data in their archive. Customers strengthen their compliance and e-discovery initiatives and benefit from the productive use of email, social media, mobile/text messaging, instant messaging and collaboration, web, and voice channels.

 

Smarsh serves a global client base that spans the top banks in North America and Europe, along with leading brokerage firms, insurers, and registered investment advisors. Smarsh also enables state and local government agencies to meet their public records and e-discovery requirements. For more information, visit www.smarsh.com.

 

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