The U.S. Securities and Exchange Commission (SEC) released, on March 28, 2022, new proposed rules aimed at making more entities subject to registration and regulation as securities dealers. In support of the proposal, SEC Gary Gensler stated: "[R]equiring all firms that regularly make markets, or otherwise perform important liquidity-providing roles, to register as dealers or government securities dealers also could help level the playing field among firms and enhance the resiliency of our markets."
In a statement, SEC Commissioner Hester M. Peirce noted: "Drawing the line between dealers and other active participants in our markets has long been challenging, and those challenges have only increased as our markets have evolved over the decades ... While I have deep reservations about the breadth of today's proposal, it addresses some important issues on which public comment will be valuable." She believes that clarifying the scope of the term "dealer" is important but is not convinced that the proposal gets it right and thus she welcomes public comment.
- The SEC is proposing to expand the number of market participants subject to regulation as securities dealers.
- In support, SEC Chair Gary Gensler cites an explosion of trading activity by entities not currently regulated as dealers.
- SEC Commissioner Hester M. Peirce agrees that the scope of the term "dealer" needs clarification.
- However, Peirce is concerned that regulating more market participants as dealers will produce more costs than benefits.
Scope of the Proposed Rules
The proposed rules include both qualitative and quantitative tests. Regarding the U.S. Treasury market, covered entities would include persons or entities that had at least $25 billion of trading volume in government securities in at least four of the previous six calendar months. Meanwhile, registered investment companies would not be covered, neither would persons who have or control total assets of less than $50 million.
SEC Chair Gary Gensler's View
SEC Chair Gary Gensler issued a statement in support of the proposed rules, noting that they were proposed unanimously by the SEC. Highlights follow.
"Section 3(a)(5) of the Securities Exchange Act of 1934 defines a dealer as someone who is engaged in the business of buying and selling securities for their own account. It also provides that if a person buys and sells securities for their own account but not as part of a regular business, they would fall within what is known as the 'trader exception,' and thus would not be considered a dealer."
"[E]lectronification and the use of algorithmic trading have made transacting in this market faster than ever before. As a result, certain market participants, including PTFs [Principal Trading Firms] (which some people call high-frequency trading firms) started participating significantly in markets such as the Treasury cash market. Today, for example, PTFs represent 50 to 60 percent of the volume on the interdealer broker platforms in the Treasury markets, and often account for a large percentage of total volume of the broader secondary markets."
"[I]mportant protections to investors and the markets that result from registration and regulation under the Exchange Act, including those obligations that promote market stability, are inconsistently applied to firms engaged in similar activities."
"[I]n recent years, we've seen a number of high-profile events in markets with significant participation by PTFs. Tremors in the Treasuries markets in 2014, 2019, and at the beginning of the COVID crisis in 2020 demonstrate the importance of the SEC's oversight of dealers, consistent with the statute."
SEC Commissioner Hester M. Peirce's View
SEC Commissioner Hester M. Peirce also issued a statement on the proposed rules. Highlights follow, including some of the questions on which she welcomes public comment.
"I particularly appreciate the use of the rulemaking process to clarify the scope of the term 'dealer' ... in lieu of extending ambiguous provisions of the law through enforcement actions against unsuspecting market participants."
"The market generally benefits when there are more, rather than fewer, liquidity providers."
"What benefit would come from requiring active liquidity providers to register as dealers? The proposing release seems to take the position that some non-dealer liquidity providers are too highly leveraged and too risky for their own good and that of the markets, and that dealer rules would be a handy tool to tamp down this leverage. One of the reasons our capital markets are so dynamic, however, is that we allow market participants to fail."
"Is there something unique about the Treasury markets that makes dealer registration of large liquidity providers in that market appropriate? ... Would regulating these market participants as dealers help to address the types of market events we have seen over the past several years?"
"[D]oes it make sense to subject to the dealer regulatory framework proprietary market participants that do not have any customers and that add to market liquidity through their own regular trading activities?"
"[E]xperience suggests that, once registered with us, firms are likely to see their regulatory obligations grow over time. Once registered with us, firms become attractive candidates for additional regulation ... What are the ancillary and future regulatory burdens that firms required to register as dealers under this rule should expect to incur?"