IAA Calls on SEC to Exclude Advisers, Private Funds, Other Advisory Clients from Dealer Proposal

June 7, 2022

The IAA filed a comment letter recently strongly opposing the SEC’s proposal to redefine who is a “dealer.” The SEC seeks to capture market participants that are “providing an important liquidity provision function in today’s securities markets,” but have traditionally fallen within an exclusion from the dealer definition for persons trading for their own account, but not as a part of a regular business. In particular, the proposal vastly expands who would be considered a dealer and significantly limits the “trader” exclusion by imposing qualitative and quantitative tests that would aggregate advisers’ and their client accounts in certain circumstances.

Though the SEC’s main concern appears to be with certain largely unregulated market participants that it says provide liquidity to the market, the proposal is also explicitly intended to capture certain investment advisers and private funds – and, potentially, other advisory clients – if they, alone or aggregated with other advisory accounts, meet certain vague qualitative (for securities dealers) and arbitrary (for government securities dealers) tests.

The proposal would expand the definitions of both “dealer” and “government securities dealer” by newly defining: (i) what it means to be “engag[ing] in a pattern of buying and selling securities that has the effect of providing liquidity to other market participants”; and (ii) a person’s “own account” that would be in scope for the new activities-based tests. The proposal would capture certain SEC-registered investment advisers and certain clients. The IAA strongly opposes application of the “dealer” definition to SEC-registered investment advisers and their clients and asks the SEC to:

• categorically exclude SEC-registered investment advisers from the definition of “dealer” because Congress intended to regulate the conduct of investment advisers under the Advisers Act. We believe that it’s ill fitting, inappropriate, and unwarranted to attempt to regulate advisers as dealers under the Exchange Act;
• categorically exclude private funds managed by SEC-registered investment advisers from the definition of “dealer” because they are pooled investment vehicles, typically managed by registered advisers and created to follow an agreed-upon risk-based investment strategy for the benefit of their investors, and which would be significantly harmed if their funds are regulated as dealers; and
• eliminate a proposed aggregation requirement that could apply to client accounts managed by an adviser under similar strategies.

Since the proposal was issued with only a 60-day comment period, the IAA had joined several other trade associations in a May 20 letter urging the SEC to extend the comment period to 120 days. The letter noted that, given the scope of the proposed new requirements and the potential costs on market participants, particularly in the cash Treasury and Treasury futures markets, 60 days was simply not enough time to understand and consider the potential impact of any new requirements, including assessing the costs of dealer registration and compliance and the potential economic impact and systemic risk implications for markets.

The IAA’s June 3 comment letter is available on the IAA website. See “IAA Letter to SEC on Dealer Proposal.”