Buy-side associations file lawsuit against US SEC to vacate Dealer Rule
19 March 2024 US
Image: eccolo/stock.adobe.com
Three associations have filed a lawsuit to vacate the recently adopted Dealer Rule by the US 麻豆传媒 and Exchange Commission (SEC) that aims to expand the definitions of a 鈥渄ealer鈥� and 鈥済overnment securities dealer鈥�.
The National Association of Private Fund Managers (NAPFM), the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA) filed a lawsuit to the US District Court for the Northern District of Texas in Fort Worth.
This is the second time the buy-side Associations have challenged rulings by the US SEC in recent months. In December 2023, they launched legal action against the Commission to invalidate rules on reporting and public disclosure of securities lending and short selling.
According to the Associations, by 鈥渇ailing to definitively and accurately define what a dealer is鈥� the Dealer Rule may deter regulated market participants 鈥� such as registered investment advisers 鈥� from engaging in investment activity in various asset classes, including US treasuries.
The three entities indicate this adopted definition will unnecessarily harm markets, funds and investors by decreasing liquidity and market efficiency, while increasing volatility and costs.
Adopted in February, the rules will further define what it means to be engaged in a business of buying and selling securities 鈥渁s a part of a regular business鈥�.
It will do so for both dealers and government securities dealers by requiring entities engaging in 鈥渄e facto market making鈥� activity to register as dealers or government securities dealers.
Market participants that engage in certain dealer roles 鈥� in particular, those that take on significant liquidity-providing roles in the markets 鈥� are now required to register with the SEC.
These participants will need to become members of a self-regulatory organisation (SRO) and comply with federal securities laws and regulatory obligations.
According to the SEC, principal-trading firms (PTFs) and other institutions are 鈥渁cting in a manner consistent with dealers in the securities markets鈥�.
At the time of adoption, SEC chair Gary Gensler said: 鈥淭hese measures are common sense. 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 鈥� consistent with Congress鈥檚 intent.鈥�
The Associations鈥� complaint asserts that the rule upends the meaning of what constitutes dealer activity under the 麻豆传媒 Exchange Act of 1934 and 鈥渘early a century of market practice鈥�.
NAPFM, AIMA and MFA indicate that the Dealer Rule is 鈥渋ndeterminate鈥� and 鈥渙verbroad鈥� in its definition, suggesting that it can capture a wide variety of non-dealing activity.
As a result, the three entities believe it could subject private funds to dealer registration to 鈥渁n end-run around legislative intent鈥�.
The Associations argue that the rule must be rescinded under the pretence that the US SEC engaged in 鈥渁rbitrary and capricious decision-making鈥�, including by failing to adequately address the economic consequences of the Dealer Rule.
In addition, the entities say that the US Dealer Rule is 鈥渙therwise contrary to law because it imposes a burden on competition not necessary or appropriate in furtherance of the purposes of the 麻豆传媒 Exchange Act鈥�.
Commenting on the lawsuit, president and CEO of MFA Bryan Corbett says: 鈥淲e were left with no choice but to challenge the Dealer Rule, because it will harm markets and create tremendous uncertainty for investors.
鈥淭he Dealer Rule is indeterminate and leaves certain market participants uncertain of their need to comply with the dealer regulatory framework. Alternative asset managers are not dealers. They are customers of dealers.鈥�
He adds: 鈥淚f the rule is permitted to stand, it could mean that managers in scope and the funds they manage would lose their customer protections with their dealer counterparties and could not participate in IPOs. This would harm funds, their investors and issuers looking to raise capital.鈥�
AIMA CEO Jack Inglis comments: 鈥淭he US SEC has exceeded its statutory authority by incorrectly concluding that customers of dealers may be dealers themselves 鈥� a clear departure from the statutory definition and understanding of what has meant to be a securities 鈥榙ealer鈥� for the past 90 years.
鈥淭his rule will force certain hedge funds to either register as dealers, thereby subjecting them to an unworkable regulatory framework, or force them to significantly curtail or cease altogether their trading activity.鈥�
The National Association of Private Fund Managers (NAPFM), the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA) filed a lawsuit to the US District Court for the Northern District of Texas in Fort Worth.
This is the second time the buy-side Associations have challenged rulings by the US SEC in recent months. In December 2023, they launched legal action against the Commission to invalidate rules on reporting and public disclosure of securities lending and short selling.
According to the Associations, by 鈥渇ailing to definitively and accurately define what a dealer is鈥� the Dealer Rule may deter regulated market participants 鈥� such as registered investment advisers 鈥� from engaging in investment activity in various asset classes, including US treasuries.
The three entities indicate this adopted definition will unnecessarily harm markets, funds and investors by decreasing liquidity and market efficiency, while increasing volatility and costs.
Adopted in February, the rules will further define what it means to be engaged in a business of buying and selling securities 鈥渁s a part of a regular business鈥�.
It will do so for both dealers and government securities dealers by requiring entities engaging in 鈥渄e facto market making鈥� activity to register as dealers or government securities dealers.
Market participants that engage in certain dealer roles 鈥� in particular, those that take on significant liquidity-providing roles in the markets 鈥� are now required to register with the SEC.
These participants will need to become members of a self-regulatory organisation (SRO) and comply with federal securities laws and regulatory obligations.
According to the SEC, principal-trading firms (PTFs) and other institutions are 鈥渁cting in a manner consistent with dealers in the securities markets鈥�.
At the time of adoption, SEC chair Gary Gensler said: 鈥淭hese measures are common sense. 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 鈥� consistent with Congress鈥檚 intent.鈥�
The Associations鈥� complaint asserts that the rule upends the meaning of what constitutes dealer activity under the 麻豆传媒 Exchange Act of 1934 and 鈥渘early a century of market practice鈥�.
NAPFM, AIMA and MFA indicate that the Dealer Rule is 鈥渋ndeterminate鈥� and 鈥渙verbroad鈥� in its definition, suggesting that it can capture a wide variety of non-dealing activity.
As a result, the three entities believe it could subject private funds to dealer registration to 鈥渁n end-run around legislative intent鈥�.
The Associations argue that the rule must be rescinded under the pretence that the US SEC engaged in 鈥渁rbitrary and capricious decision-making鈥�, including by failing to adequately address the economic consequences of the Dealer Rule.
In addition, the entities say that the US Dealer Rule is 鈥渙therwise contrary to law because it imposes a burden on competition not necessary or appropriate in furtherance of the purposes of the 麻豆传媒 Exchange Act鈥�.
Commenting on the lawsuit, president and CEO of MFA Bryan Corbett says: 鈥淲e were left with no choice but to challenge the Dealer Rule, because it will harm markets and create tremendous uncertainty for investors.
鈥淭he Dealer Rule is indeterminate and leaves certain market participants uncertain of their need to comply with the dealer regulatory framework. Alternative asset managers are not dealers. They are customers of dealers.鈥�
He adds: 鈥淚f the rule is permitted to stand, it could mean that managers in scope and the funds they manage would lose their customer protections with their dealer counterparties and could not participate in IPOs. This would harm funds, their investors and issuers looking to raise capital.鈥�
AIMA CEO Jack Inglis comments: 鈥淭he US SEC has exceeded its statutory authority by incorrectly concluding that customers of dealers may be dealers themselves 鈥� a clear departure from the statutory definition and understanding of what has meant to be a securities 鈥榙ealer鈥� for the past 90 years.
鈥淭his rule will force certain hedge funds to either register as dealers, thereby subjecting them to an unworkable regulatory framework, or force them to significantly curtail or cease altogether their trading activity.鈥�
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