SEC Dealer Definition — Comment Letter

01 — The Rulemaking

The proposal answered a question the U.S. Treasury market had been asking since the flash rally of 2014 and the repo and pandemic dislocations that followed: principal trading firms and certain funds had become de facto liquidity providers in the most systemically important securities market in the world, without carrying the obligations of registered dealers. The Commission's answer was to further define as a part of a regular business in the statutory dealer definition — two qualitative standards built on the effect of providing liquidity, a quantitative standard of USD 25 billion in monthly Treasury volume, and a carve-out for persons controlling under USD 50 million in total assets. The letter took the objective as sound and the calibration as the problem. The court, two years later, took a different view of both.

02 — What the Letter Argued

The threshold measures the wrong thing. A flat USD 50 million asset carve-out mismeasures market impact, because impact scales with the specific security's secondary-market liquidity — USD 50 million controls a small-cap's order book and vanishes in the Treasury market — and an absolute asset figure ignores leverage entirely. The letter proposed a safe harbour combining the asset test with a per-security ceiling on share of average daily trading volume, on the model of Rule 10b-18's 25% ADTV standard for buybacks and the systematic internaliser thresholds under Commission Delegated Regulation (EU) 2017/565.

The qualitative standards would not survive contact with interpretation. "Routinely," "primarily," and revenue-based tests distinguish poorly between spread capture and appreciation of inventory. The workable criterion, the letter argued, is not the revenue outcome but the activity itself — regularly quoting prices, dealing conducted as a service to other market participants, on the logic of BaFin's distinction between Eigenhandel and Eigengeschäft. A comparative survey supplied the alternatives: the market-making strategy definition under RTS 8, the German service criterion, Singapore's undifferentiated dealing definition under the Securities and Futures Act, and the UK's "holding out" test under PERG 2.8.4.

The workable criterion is not the revenue outcome but the activity: dealing conducted as a service to other market participants.

A cleaner taxonomy exists. Two questions — in whose name, and for whose account — sort the field: own name and own account is a dealer, or an exempt trader; own name for a third party's account is a broker; third-party name for a third-party account is an arranger. The beneficial owner of the account, not the name it is held in, is the relevant criterion.

Scope should reach digital assets. On the principle of same business, same risks, same rules, the letter recommended narrow applicability to digital asset trading — while noting that a portion of that liquidity provision was already domiciled in jurisdictions selected for the absence of exactly this kind of rule.

On the rulemaking's purpose — transparency, resiliency of liquidity providers, and a level playing field with the unregulated perimeter — the letter's answers were affirmative throughout.

03 — What Became of the Rule

The Commission adopted the rule on 6 February 2024 as Exchange Act Rules 3a5-4 and 3a44-2, dropping the proposed quantitative Treasury threshold and the asset carve-out along the way. On 21 November 2024, the U.S. District Court for the Northern District of Texas vacated both rules in full, in two parallel cases brought by private fund associations and digital asset trade groups. The court held that the Commission had exceeded its statutory authority — the rule was "untethered from the text, history, and structure" of the Exchange Act, whose dealer concept describes conduct toward customers: services offered to investors, not the mere effect of one's own trading on market liquidity. The Commission dismissed its appeal on 20 February 2025. The rule is dead; the question it answered is not.

— The Part That Aged

The drafting critique held up. The interpretive openness the letter flagged in the qualitative standards, and the service criterion it proposed as the repair, reappeared two years later as the ground on which the rule fell — a court reading "dealer" through precisely the conduct-as-service lens the letter had borrowed from German supervisory practice. The endorsement did not hold up: the letter treated the objective as sound and the calibration as the defect, and the court held that the defect was authority. Both halves belong on the record, which stands as submitted.