The U.S. Securities and Exchange Commission (SEC) is adopting new rules that would expand dealer registration requirements to traders that engage in market making, sparking concerns from the fund industry.
The new SEC rules will also require firms that engage in market-making activities to join an industry self-regulatory organization, and comply with federal securities laws and rules.
In a release, SEC chairman Gary Gensler said requiring firms that act like dealers to register with the commission as dealers will protect investors and promote market integrity, resiliency, and transparency.
“These measures are common sense,” he said. “Congress did not intend for registration and regulatory requirements to apply to some dealers and not to others. Absent an exemption or exception, if anyone trades in a manner consistent with de facto market making, it must register with us as a dealer — consistent with Congress’s intent.”
The proposals met with resistance from the SEC’s Republican members, who criticized the expansion of dealer registration requirements.
“This rule turns traders, many of whom are customers, into dealers,” said SEC commissioner, Hester Peirce, in a statement.
This will have the effect of distorting market behaviour and degrading market quality, she said.
Among other things, the new rules will discourage firms from providing liquidity, they will increase compliance costs, and bring various implementation challenges — including their uncertain application in the crypto markets, she noted.
The Investment Company Institute (ICI) acknowledged that the final rules eliminated certain provisions from an earlier draft that would have had negative effects on the market. “However, we remain concerned that some of the remaining qualitative tests under the final rules are overly broad and may cause certain ordinary investment and trading strategies by registered advisers or their clients to inappropriately trigger treatment as a dealer,” said ICI deputy general counsel Sarah Bessin, in a statement.
“ICI and our members are continuing to review the final rules to understand how the final rules will apply in practice,” she added.
Additionally, the Alternative Investment Management Association (AIMA) noted that the rules will require certain hedge funds and advisers to register as dealers.
“The SEC has incorrectly concluded that customers of dealers, including certain AIMA members, may be dealers themselves — a clear departure from the statutory definition and understanding of what it has meant to be a securities ‘dealer’ for the past 90 years,” said Jack Inglis, AIMA CEO, in a statement.
“Although the commission did not adopt some problematic aspects that were included in the proposed rule, the final rule may nonetheless capture certain funds and strategies and therefore subject them to potential registration as a dealer and government securities dealer. AIMA will review the final rule text and assess next steps,” he said.
The final rules will come into effect 60 days after they are published in the Federal Register. Firms will then have a year to comply with the new requirements.