The SEC issued a press release regarding Rules 3a5-4 and 3a44-2

On March 28, 2022, the Securities Exchange Commission (SEC) issued a Press release regarding two proposed rules, Rules 3a5-4 and 3a44-2 under the Securities Exchange Act of 1934 (the Act). These proposed rules seek to further define the term “in the course of a regular business” to identify certain activities that would cause a business to be considered a “dealer” or a “state securities dealer “. Any company deemed to be such, in the absence of an exemption, is subject to the registration requirements of Sections 15 and 15C of the Act and would be required to register with the SEC as well as become a member of a regulatory body. regulator (SRO) such as as the Financial Industry Regulatory Authority (FINRA). The company would then be required to comply with all federal securities laws, as well as applicable SEC, SRO, and Treasury rules and requirements.

The proposed rules focus on activity rather than label or status, and if adopted as proposed, will have quantitative and qualitative standards to identify which companies should be considered a “broker” or “State Securities Dealer”. Qualitatively, the proposed rules define activities that seek to identify businesses where liquidity provision is not incidental to trading activities and where businesses buy and sell securities on their own account, and also provide cash “as part of their regular business”. Quantitatively, proposed Rule 3a44-2 would establish a clear line test that a business engaged in certain specified levels of activity would be deemed to buy or sell government securities “in the course of a regular course of business.” . If either quantitative or qualitative standard is met, the business will be considered a “dealer” and subject to registration.

The press release says the rule primarily targets trading companies that act as liquidity providers in the markets. The SEC believes that these proposed rules will primarily require registration of principal and/or proprietary trading firms and private funds, although certain investment advisers may also be included. The proposed rule could require many hedge funds and high-frequency traders to register as brokers. The SEC’s concern is that under the current definition of Sections 3(a)(5) and 3(a)(44) of the Exchange Act, those companies that may hold a significant share of market volume are not required to be registered, so investors and markets lack the protections that result from registration and regulation. SEC Chairman Gary Gensler said:[R]requiring all firms that regularly make markets, or otherwise play significant liquidity-providing roles, to register as dealers or dealers in government securities could also help level the playing field between firms and strengthen the resilience of our markets.

The public comment period ends on May 27, 2022. After the comment period ends, the SEC will consider public comments on the proposed rules when determining whether to adopt the rules or make changes. additional adjustments.

©2022 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 122

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