SEC Proposes New Dealer Rule

The Securities and Exchange Commission has proposed a new rule that seeks to expand the definition of dealers to include entities that engage in buying and selling securities as a part of a regular business. Under the Proposed Dealer Rule, proprietary trading firms, which include certain private funds (i.e., hedge funds and private equity funds) and private funds advisers, would be required to register with the SEC as dealers and seek membership with the Financial Industry Regulatory Authority (“FINRA”). The proposed rule comes off the heels of the SEC witnessing an increased number of unregistered market participants engaging in trading and other market activity that is traditionally performed by dealers. Under this activity, the markets and many investors lose out on protections that result from dealer registration with and regulatory oversight by the SEC. It is the SEC’s position that identifying these market participants for the purpose of requiring registration as dealers would preserve market integrity and investor protection.

Firms who find themselves bound to the rule will be obligated to implement a compliance framework.  Such framework will include, among others, the following:

• Registration and annual financial reporting;Compliance program(s);
• Net capital requirement;·
• Risk management;
• Training and education;
• Disclosures; and
• Regulatory inquiries and examinations.

The SEC’s proposed rule to expand the definition of dealer to minimize risk to the markets and investors caused by unregistered market participants is part of their effort to increase regulation and oversight. This effort may result in unintentional consequences to firms who find themselves obligated to the rule. Aware of the potential consequences, the SEC has encouraged comments from the public on the impact of the proposed rule and industry organizations continue to advocate on behalf of their members. As the SEC progresses through its rule making agenda, EisnerAmper will track the public’s comments and write a follow-up article on the outcome of the proposed rule.