SEC Rules 3A5-4 AND 3A44-2 Requiring Registration Of Liquidity-Providing Persons As “Dealers”

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By Robert R. Boeche, Partner; Robert D. Conca, Partner; and Eden Elkayam, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Tuesday, March 19, 2024.

What Are the New Rules About?

On February 6, 2024, the Securities and Exchange Commission (“SEC”) adopted Rules 3a5-4 and 3a44-2 (“Final Rules”) defining the phrase “as a part of a regular business” and identifying activities that would cause people within certain activities to be “dealers” or “government securities dealers.” [1] These revised definitions implicate registration requirements in compliance with Sections 15 and 15C of the Securities Exchange Act of 1934 (“Act”). [2]

Who do the Final Rules Apply to?

The activities that would involve identifying as a “dealer” or “government securities dealer” would include:

1)      “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;” [3] or

2)      “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.” [4]

**If not engaged in these activities, one cannot presume someone could not still identify as a “dealer” or “government securities dealer.”** [5]

What Are the Requirements Under the Final Rules?

Under the Final Rules, and without an applicable exemption, qualified participants must:

1)      Register with the SEC under Section 15(a) or 15(c);

2)      Become a member of a self-regulatory organization; and

3)      Comply with federal securities laws and requirements listed by specific self-regulatory organizations and the Treasury. [6]

Is Anyone Excluded From the Final Rules?

Those exempt from the Final Rules include:

1)      A person who has or controls total assets of less than $50 million;

2)      An investment company registered under the Investment Company Act of 1940; or

3)      A central bank, sovereign entity, or international financial institution. [7]

When Are The Final Rules Effective and Compliance Required?

The Final Rules are effective 60 days after the date of publication of the Final Rules, and the compliance date for the Final Rules is 1 year after the effective date of the Final Rules. [8]

If you have questions about the new Private Fund Rules, or about other compliance or legal matters, we are here to help.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many broker-dealers, registered representatives, investment advisors, investors, and businesses.
Robert Boeche and Robert D. Conca can be reached in the firm’s San Diego office at (619) 696-9500.

[1] 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, Exchange Act Release No. 99477 (Feb. 5, 2024) (“Adopting Release”), available at https://www.sec.gov/files/rules/final/2024/34-99477.pdf.

[2] Id. at 4.

[3] Id. at 28.

[4] Id. at 29.

[5] Id. at 6.

[6] Id. at 12-13.

[7] Id. at 22.

[8] https://www.sec.gov/files/34-99477-fact-sheet.pdf.