November 22, 2024
In an important victory for investment advisers and private funds, a U.S. District Court in Texas threw out the SEC’s problematic dealer rule. The court held that the SEC exceeded its statutory authority in adopting the dealer rule. Because the SEC’s interpretation of the statute is “untethered from the text, history, and structure” of the Securities Exchange Act, the court could not “envision how the SEC could satisfactorily salvage” the rule and found it necessary to vacate the rule in its entirety.
The rule was adopted in February 2024 with an expected compliance date of April 2025.
Under the Exchange Act, a dealer trades for its own account “as part of a regular business.” Until the SEC’s dealer rule, the statute had been read to exclude “traders,” which trade for their own account but do not have customers. The court agreed with this historical reading, holding that the statute “does not regulate trading entities without customers as dealers.” The court noted that the terms “broker” and “dealer” in “broker-dealer” must be read together and that both act on behalf of customers.
The IAA had strongly opposed the dealer rule, which turned the statutory definition on its head. Under the rule, investment advisers and private funds would have been required to register as dealers if their execution of investment strategies in the course of buying and selling securities had the effect of providing liquidity to the markets under overbroad and vague trading and revenue tests.
The IAA does not believe that Congress intended that investment advisers acting as fiduciaries for their clients be considered to be acting as dealers. This result would have created unnecessary and unworkable conflicts of interest for advisers and, as we further explained to the SEC, imposed an ill-fitting regulatory regime onto their fiduciary business models. While our advocacy resulted in final rules that were significantly narrower than the proposal, we remained opposed to the rule since it did not categorically exclude investment advisers and their advisory clients, including private funds, as we had urged.
The court issued a similar decision in a related challenge to the rule brought by crypto participants.
We will provide ongoing updates and analysis through our committees, website, newsletters, and social media channels. Stay informed and connected with the latest developments.
We will also continue to actively engage with the SEC and other agencies and their new leadership to address issues of relevance to our members and advocate for changes that benefit you.
Please contact the IAA legal team at iaalegalteam@investmentadviser.org with questions or comments.
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