14938 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

1See, e.g., Eastside Church of Christ v. National 

Plan, Inc., 391 F.2d 357 (5th Cir. 1968) (‘‘The 

requirement that brokers and dealers register is of 

the utmost importance in effecting the purposes of 

the Act. It is through the registration requirement 

that some discipline may be exercised over those 

who may engage in the securities business and by 

which necessary standards may be established with 

respect to training, experience, and records.’’); see 

also section 2 of the Exchange Act, 15 U.S.C. 78b 

(stating that ‘‘transactions in securities as 

commonly conducted upon securities exchanges 

and over-the-counter markets are effected with a 

national public interest which makes it necessary 

to provide for regulation and control of such 

transactions and of practices and matters related 

thereto’’). 

2See Further Definition of ‘‘As a Part of a Regular 

Business’’ in the Definition of Dealer and 

Government Securities Dealer, Exchange Act 

Release No. 94524 (Mar. 28, 2022), 87 FR 23054 

(Apr. 18, 2022) (‘‘Proposing Release’’). 

3See section III. 

4See supra note 1; see also Roth v. SEC, 22 F.3d 

1108, 1109 (D.C. Cir. 1994). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–99477; File No. S7–12–22] 

RIN 3235–AN10 

Further Definition of ‘‘As a Part of a 

Regular Business’’ in the Definition of 

Dealer and Government Securities 

Dealer in Connection With Certain 

Liquidity Providers 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

is adopting new rules to further define 

the phrase ‘‘as a part of a regular 

business’’ as used in the statutory 

definitions of ‘‘dealer’’ and ‘‘government 

securities dealer’’ under sections 3(a)(5) 

and 3(a)(44), respectively, of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’). 

DATES: 

Effective date: April 29, 2024. 

Compliance date: The compliance 

date is discussed in section II.B of this 

release. 

FOR FURTHER INFORMATION CONTACT: 

Emily Westerberg Russell, Chief 

Counsel; John Fahey, Deputy Chief 

Counsel; Joanne Rutkowski, Assistant 

Chief Counsel; Bonnie Gauch, Senior 

Special Counsel; Shauna Sappington 

Vlosich, Senior Special Counsel; Geeta 

Dhingra, Branch Chief; Katherine 

Lesker, Special Counsel; and Carl 

Emigholz, Special Counsel at 202–551– 

5550 in the Office of Chief Counsel, 

Division of Trading and Markets, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–7010. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting the following 

new rules under the Exchange Act: (1) 

17 CFR 240.3a5–4 (‘‘Rule 3a5–4’’), and 

(2) 17 CFR 240.3a44–2 (‘‘Rule 3a44–2’’) 

(collectively, ‘‘final rules’’). 

Table of Contents 

I. Introduction 

A. Background 

B. Overview of the Final Rules and 

Modifications to the Proposal 

II. Discussion of Final Rules 

A. Component Parts 

1. Qualitative Standard 

a. Elimination of the Proposed First 

Qualitative Factor 

b. Expressing Trading Interest Factor 

c. Primary Revenue Factor 

2. Quantitative Standard 

3. Exclusions 

a. Person That Has or Controls Assets of 

Less Than $50 Million 

b. Registered Investment Companies, 

Private Funds, and Registered 

Investment Advisers 

c. Official Sector Exclusions 

d. Other Requests for Exclusions 

4. Definitions and Anti-Evasion 

5. No Presumption 

B. Compliance Date 

III. Economic Analysis 

A. Introduction 

B. Baseline 

1. Rules and Regulations That Apply to 

Registered Dealers 

2. Affected Parties 

a. Principal Traders 

b. Private Funds and Advisers 

c. Number of Affected Parties 

3. Competition Among Significant 

Liquidity Providers 

4. Externalities 

C. Economic Effects, Including Impact on 

Efficiency, Competition, and Capital 

Formation 

1. Benefits 

a. Regulatory Consistency and Competition 

b. Regulations on Financial and 

Operational Risk-Taking 

c. Regulations on Reporting 

d. Regulations on Deceptive Practices 

e. Regulations Related to Examinations 

2. Costs 

a. Compliance Costs 

b. Costs Associated With the Net Capital 

Rule 

c. Potential Implications for Private Funds 

and Advisers 

d. Effects on Market Liquidity 

3. Effects on Efficiency, Competition, and 

Capital Formation 

a. Effects on Efficiency 

b. Effects on Competition 

c. Effects on Capital Formation 

D. Reasonable Alternatives 

1. Retain the Quantitative Standard 

2. Retain the First Qualitative Standard 

(e.g., ‘‘Routinely Making Roughly 

Comparable Purchases and Sales of the 

Same or Substantially Similar Securities 

[or Government Securities] in a Day’’) 

3. Remove the Exclusion for Registered 

Investment Companies 

4. Exclude Registered Investment Advisers 

and Private Funds 

5. Require Registered Investment Advisers 

and Private Funds To Report to TRACE 

6. Carve Out or Narrow Application to 

Crypto Asset Securities 

IV. Paperwork Reduction Act 

V. Regulatory Flexibility Act 

VI. Other Matters 

Statutory Authority 

I. Introduction 

The dealer regulatory regime is a 

cornerstone of the U.S. Federal 

securities laws and helps to promote the 

Commission’s longstanding mission to 

protect investors, maintain fair, orderly, 

and efficient markets, and facilitate 

capital formation.1 Advancements in 

electronic trading across securities 

markets have led to the emergence of 

certain market participants that play an 

increasingly significant liquidityproviding role in overall trading and 

market activity—a role that has 

traditionally been performed by entities 

regulated as dealers.2 However, some of 

these market participants—despite 

engaging in liquidity-providing 

activities similar to those traditionally 

performed by either ‘‘dealers’’ or 

‘‘government securities dealers’’ as 

defined under sections 3(a)(5) and 

3(a)(44) of the Exchange Act, 

respectively, and despite their 

significant share of market volume—are 

not registered with the Commission as 

either dealers or government securities 

dealers under sections 15 and 15C of the 

Exchange Act, respectively. The 

identification, registration, and 

regulation of these market participants 

as dealers will provide regulators with 

a more comprehensive view of the 

markets through regulatory oversight 

and will support market stability and 

resiliency and protect investors by 

promoting the financial responsibility 

and operational integrity of market 

participants that are acting as dealers.3

Further, the final rules will promote 

competition among entities that 

regularly provide significant liquidity 

by applying consistent regulation to 

these entities, thus leveling the 

competitive playing field between 

liquidity provision conducted by 

entities that are currently registered as 

dealers and government securities 

dealers and by entities that are not. 

The Federal securities laws provide a 

comprehensive system of regulation of 

securities activity, and the definition of 

‘‘dealer’’ is one of the Exchange Act’s 

most important definitions, as it sets 

forth certain activities that cause 

persons to fall within the Commission’s 

regulatory ambit.4 Section 3(a)(5) of the 

Exchange Act defines the term ‘‘dealer’’ 

to mean ‘‘any person engaged in the 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14939 

5Unless otherwise indicated, references to 

‘‘dealer’’ activity apply both with respect to 

‘‘dealers’’ and ‘‘government securities dealers’’ 

under sections 3(a)(5) and 3(a)(44) of the Exchange 

Act, respectively; and references to ‘‘security’’ 

apply both with respect to ‘‘security’’ and 

‘‘government security’’ under sections 3(a)(10) and 

3(a)(42) of the Exchange Act, respectively. See 

Proposing Release at 23057 (Congress defined 

‘‘dealer’’ broadly ‘‘to encompass a wide range of 

activities involving investors and securities 

markets.’’); Registration Requirements for Foreign 

Broker Dealers, Exchange Act Release No. 27017 

(July 11, 1989), 54 FR 30013, 30015 (July 18, 1989) 

(‘‘Foreign Broker Dealer Adopting Release’’). 

6See Proposing Release at 23057; Foreign Broker 

Dealer Adopting Release at 30015. 

7See, e.g., Exchange Act section 3(b) (authorizes 

the SEC to define terms used in the Exchange Act, 

consistent with the provisions and purposes of the 

Exchange Act. 15 U.S.C. 78c(b)). 

8On Mar. 28, 2022, the Commission voted to 

issue the proposed 17 CFR 240.3a5–4 (‘‘proposed 

Rule 3a5–4’’) and 240.3a44–2 (‘‘proposed Rule 

3a44–2’’) (collectively, ‘‘proposed rules’’) to further 

define ‘‘as a part of a regular business’’ as that 

phrase is used in the statutory definitions of 

‘‘dealer’’ and ‘‘government securities dealer.’’ See 

Proposing Release. The release was posted on the 

Commission website that day, and comment letters 

were received beginning that same date. The 

comment period closed on May 27, 2022. 

Comments are available here: https://www.sec.gov/ 

comments/s7-12-22/s71222.htm. We have 

considered all comments received since Mar. 28, 

2022. 

9See 17 CFR 240.3a5–4(c) (‘‘Rule 3a5–4(c)’’) and 

240.3a44–2(c) (‘‘Rule 3a44–2(c)’’) (providing that no 

presumption shall arise that a person is not a dealer 

or government securities dealer solely because that 

person does not satisfy the standards of the final 

rules). As discussed in the Proposing Release and 

below, the courts and the Commission look to an 

array of factors in determining whether someone is 

a ‘‘dealer’’ within the meaning of the statute. See, 

e.g., Definition of Terms in and Specific Exemption 

for Banks, Savings Associations, and Savings Banks 

Under Sections 3(a)(4) and 3(a)(5) of the Securities 

Exchange Act of 1934, Exchange Act Release No. 

46745 (Oct. 30, 2002), 67 FR 67496, 67498–67500 

(Nov. 5, 2002) (‘‘2002 Release’’); see also section 

II.A.5 (explaining that otherwise applicable 

interpretations and precedent continue to apply to 

determine whether a person is acting as a dealer, 

even when that person does not fall within the 

requirements of the new rules); section II.A.3 

(explaining that the $50 million threshold is not an 

exclusion from the ‘‘dealer’’ definition for all 

purposes, but only for purposes of the new rules). 

10Section III below describes the estimated 

benefits and costs associated with registering as a 

dealer or government securities dealer for those 

persons who meet the qualitative standard of the 

final rules. 

11See sections 3(a)(5)(A) and (B) of the Exchange 

Act, 15 U.S.C. 78c(a)(5)(A) and (B). The definition 

of ‘‘dealer’’ in the Exchange Act is largely 

unchanged from its enactment in 1934. Until the 

Gramm-Leach-Bliley Act (‘‘GLBA’’) was enacted in 

1999, banks were excluded from the definition of 

‘‘dealer.’’ The GLBA added section 3(a)(5)(C) of the 

Exchange Act to create a series of functional 

exemptions from the statutory definition of dealer. 

The Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010 (‘‘Dodd-Frank Act’’) further 

amended section 3(a)(5)(A) of the Exchange Act to 

exclude from the dealer definition persons engaged 

in the business of buying and selling security-based 

swaps, other than security-based swaps with or for 

persons that are not eligible contract participants. 

The Dodd-Frank Act established a statutory 

framework for regulating security-based swaps that 

includes the registration and regulation of securitybased swap dealers. 

12See 2002 Release (explaining that ‘‘a person 

that is buying securities for its own account may 

still not be a ‘dealer’ because it is not ‘engaged in 

the business’ of buying and selling securities for its 

own account as part of a regular business,’’ and that 

‘‘[t]his exclusion is often referred to as the dealer/ 

trader distinction’’). 

13A bank engaged in these activities with respect 

to government securities would not register with 

the Commission as a dealer. See Exchange Act 

section 3(a)(5)(C)(i)(II) (providing an exception from 

dealer status when a bank buys or sells exempted 

securities, which are defined in Exchange Act 

section 3(a)(12)(A) to include government 

securities); see also Exchange Act section 3(a)(6) 

(definition of ‘‘bank’’). A bank may nonetheless be 

a government securities dealer under section 

3(a)(44). As such, it would not register with the 

Commission but instead would provide written 

notice of its government securities dealer status 

with the appropriate Federal banking regulator. 

business of buying and selling securities 

. . . for such person’s own account 

through a broker or otherwise,’’ but 

excludes ‘‘a person that buys or sells 

securities . . . for such person’s own 

account, either individually or in a 

fiduciary capacity, but not as a part of 

a regular business.’’ Similarly, section 

3(a)(44) of the Exchange Act provides, 

in relevant part, that the term 

‘‘government securities dealer’’ means 

‘‘any person engaged in the business of 

buying and selling government 

securities for his own account, through 

a broker or otherwise,’’ but ‘‘does not 

include any person insofar as he buys or 

sells such securities for his own 

account, either individually or in some 

fiduciary capacity, but not as part of a 

regular business.’’ These statutory 

definitions of ‘‘dealer’’ and ‘‘government 

securities dealer,’’ and the 

accompanying registration requirements 

of the Exchange Act, were drawn 

broadly by Congress to encompass a 

wide range of activities involving the 

securities markets and their 

participants.5 Market participants that 

meet these statutory definitions are 

required to register with the 

Commission and are subject to a 

panoply of regulatory obligations and 

supervisory oversight, unless an 

exemption or exception applies.6

Under the Exchange Act, the SEC has 

the authority to define the terms used in 

the statutory definitions of ‘‘dealer’’ and 

‘‘government securities dealer,’’ and to 

oversee and regulate registered dealers.7

The Commission is adopting new Rules 

3a5–4 and 3a44–2 under the Exchange 

Act to further define what it means to 

be engaged in the business of buying 

and selling securities ‘‘as a part of a 

regular business’’ within the definitions 

of ‘‘dealer’’ and ‘‘government securities 

dealer,’’ respectively.8 The final rules, 

which have been modified to narrow the 

scope of the proposed rules and 

carefully tailored in response to 

commenter concerns, will help to 

ensure that market participants that take 

on significant liquidity-providing roles 

are appropriately registered and 

regulated as dealers and government 

securities dealers. As discussed further 

below, the final rules are one way to 

establish that a person is a dealer or 

government securities dealer; otherwise 

applicable court precedent and 

Commission interpretations will 

continue to apply.9

Registration will enable more 

comprehensive regulatory oversight of 

securities markets and those 

participants that take on significant 

liquidity-providing roles. The final rules 

will support market stability and 

resiliency and protect investors by 

promoting the financial responsibility 

and operational integrity of significant 

liquidity providers that are acting as 

dealers in the securities markets.10

A. Background 

The statutory definition of ‘‘dealer’’ in 

section 3(a)(5) and the accompanying 

registration requirements of the 

Exchange Act were drawn broadly by 

Congress in 1934 to encompass a wide 

range of activities involving the 

securities markets and their 

participants. Section 3(a)(5) of the 

Exchange Act defines the term ‘‘dealer’’ 

to mean ‘‘any person engaged in the 

business of buying and selling securities 

. . . for such person’s own account 

through a broker or otherwise,’’ but 

excludes ‘‘a person that buys or sells 

securities . . . for such person’s own 

account, either individually or in a 

fiduciary capacity, but not as a part of 

a regular business.’’ 11 This statutory 

exclusion from the definition of 

‘‘dealer’’ is often referred to as the 

‘‘trader’’ exception.12 Absent an 

exception or an exemption, section 

15(a)(1) of the Exchange Act makes it 

unlawful for a ‘‘dealer’’ to effect any 

transactions in, or to induce or attempt 

to induce the purchase or sale of, any 

security unless registered with the 

Commission in accordance with section 

15(b) of the Exchange Act.13 Similarly, 

section 3(a)(44) of the Exchange Act 

provides, in relevant part, that the term 

‘‘government securities dealer’’ means 

‘‘any person engaged in the business of 

buying and selling government 

securities for his own account, through 

a broker or otherwise,’’ but ‘‘does not 

include any person insofar as he buys or 

sells such securities for his own 

account, either individually or in some 

fiduciary capacity, but not as part of a 


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14940 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

14 15 U.S.C. 78c(a)(44). Congress added the 

definition of ‘‘government securities dealer’’ to the 

Exchange Act in the Government Securities Act of 

1986 (‘‘GSA’’). Public Law 99–571, 100 Stat. 3208 

(Oct. 28, 1986). In addition to otherwise applicable 

regulations, government securities dealers must 

comply with rules adopted by the Treasury. See 

regulations under section 15C of the Securities 

Exchange Act of 1934, 17 CFR 400.1(b), available 

at https://www.govinfo.gov/content/pkg/CFR-2018-

title17-vol4/pdf/CFR-2018-title17-vol4.pdf. These 

regulations address financial responsibility, 

protection of customer securities and funds, 

recordkeeping, and financial reporting and audits. 

Also included are rules concerning custodial 

holdings of government securities by depository 

institutions. The Commission retains broad 

antifraud authority over banks that are government 

securities dealers. Soon after enactment of the GSA, 

the staff issued a series of no-action letters to 

persons seeking assurances that the staff would not 

recommend enforcement action if they did not 

register as government securities dealers. See, e.g., 

Bankers Guarantee Title & Trust Co., SEC No-Action 

Letter (Jan. 22, 1991); Bank of America, Canada, 

SEC No-Action Letter (May 1, 1988); Citicorp 

Homeowners, Inc., SEC No-Action Letter (Oct. 7, 

1987); Fairfield Trading Corp., SEC No-Action 

Letter (Dec. 10, 1987); Louis Dreyfus Corp., SEC NoAction Letter (July 23, 1987); United Savings 

Association of Texas, SEC No-Action Letter (Apr. 2, 

1987); Continental Grain Co., SEC No-Action Letter 

(Nov. 28, 1987). Staff reports, Investor Bulletins, 

and other staff documents (including those cited 

herein) represent the views of Commission staff and 

are not a rule, regulation, or statement of the 

Commission. The Commission has neither 

approved nor disapproved the content of these staff 

documents and, like all staff statements, they have 

no legal force or effect, do not alter or amend 

applicable law, and create no new or additional 

obligations for any person. Staff in the Division of 

Trading and Markets is reviewing its no-action 

letters and other staff statements that address the 

Exchange Act’s definition of ‘‘dealer’’ or 

‘‘government securities dealer’’ to determine which 

letters and other staff statements, or portions 

thereof, should be withdrawn in connection with 

the adoption of the final rules. Some of these letters 

and staff statements, or portions thereof, may be 

moot, superseded, or otherwise inconsistent with 

the final rules, and, therefore, may be withdrawn 

by the staff. A list of the letters to be withdrawn 

will be available on the Commission’s website. 

15A government securities dealer that is a 

registered dealer or a financial institution must file 

notice with the appropriate regulatory agency that 

it is a government securities dealer. See 15 U.S.C. 

78o–5(a). Exchange Act section 3(a)(46) defines the 

term ‘‘financial institution’’ to include: (i) a bank (as 

that term is defined in Exchange Act section 3(a)(6) 

(15 U.S.C. 38c(a)(6)); (ii) a foreign bank (as that term 

is used in the International Banking Act of 1978); 

and (iii) a savings association (as defined in section 

3(b) of the Federal Deposit Insurance Act, the 

deposits of which are insured by the Federal 

Deposit Insurance Corporation). See 15 U.S.C. 

78c(a)(46)(A) through (C). 

16 2002 Release at 67498–67500. 

17See id.; see also Proposing Release at 23058– 

59. 

18See Proposing Release at 23081. 

19Nellie Liang and Pat Parkinson, Hutchins 

Center Working Paper #72, Enhancing Liquidity of 

the U.S. Treasury Market Under Stress (Dec. 16, 

2020), at 6. The term ‘‘PTF’’ is not defined in the 

securities laws. PTFs trade as principals, buying 

and selling for their own accounts, and often 

employ automated, algorithmic trading strategies 

(including passive market making, arbitrage, and 

structural and directional trading) that rely on 

speed, which allows them to quickly execute trades, 

or cancel or modify quotes in response to perceived 

market events. See Proposing Release at 23055. See 

also Joint Staff Report: The U.S. Treasury Market on 

Oct. 15, 2014 (July 13, 2015) (‘‘2015 Joint Staff 

Report’’), prepared by staff of the U.S. Department 

of the Treasury, Board of Governors of the Federal 

Reserve System, Federal Reserve Bank of New York, 

U.S. Securities and Exchange Commission, and U.S. 

Commodity Futures Trading Commission, available 

at https://www.sec.gov/reportspubs/specialstudies/ 

treasury-market-volatility-10-14-2014-jointreport.pdf. The 2015 Joint Staff Report is a report 

of the Inter-Agency Working Group for Treasury 

Market Surveillance (‘‘IAWG’’). In contrast, many 

equity market participants may already be 

registered in order to take advantage of certain 

incentives offered only to exchange members. See 

Exchange Act section 6(c)(1) (requiring a national 

securities exchange to deny membership to any 

person that is not a registered broker or dealer or, 

if a natural person, associated with a registered 

broker or dealer). 

20The significant role played by market 

participants not registered as dealers distinguishes 

the Treasury market from other markets where these 

types of participants are more typically registered 

as dealers. One commenter stated that it understood 

‘‘from its member firms that one of the effects of the 

Market Access Rule is that many previously 

unregistered PTFs operating in the equity and 

options markets became registered as broker-dealers 

due to their business need to submit their orders 

directly into the market without having to first run 

them through the risk controls of other brokerdealers,’’ and that the Proposing Release did not 

address this market development. See Comment 

Letter of Securities Industry and Financial Markets 

Association (May 27, 2022) (‘‘SIFMA Comment 

Letter I’’); see also 17 CFR 240.15c3–5 (‘‘Rule 15c3– 

5’’ or ‘‘Market Access Rule’’) (requiring brokerdealers with market access to establish, document, 

and maintain a system of risk management controls 

and supervisory procedures reasonably designed to 

manage financial, regulatory, and other risks of this 

business activity). As explained in the Proposing 

Release, it is the Commission’s understanding that 

in the equity markets, because PTF trading 

strategies typically depend on latency and cost 

advantages made possible by trading directly (via 

membership) on a national securities exchange, and 

the Exchange Act limits exchange membership to 

registered broker-dealers, there is incentive for 

many PTFs to register as broker-dealers to gain 

these advantages. In the U.S. Treasury market, 

however, where trading occurs on alternative 

trading systems (‘‘ATSs’’) and other non-exchange 

venues, PTFs lack this incentive to register. See 

Proposing Release at 23072–73. See also Exchange 

Act section 6(c)(1) (‘‘A national securities exchange 

shall deny membership to (A) any person, other 

than a natural person, which is not a registered 

broker or dealer or (B) any natural person who is 

not, or is not associated with, a registered broker or 

dealer.’’). 21See, e.g., Inter-Agency Working Group for 

Treasury Market Surveillance Joint Staff Report, 

Recent Disruptions and Potential Reforms in the 

U.S. Treasury Market: A Staff Progress Report 

regular business.’’ 14 Read together, 

these provisions identify a ‘‘government 

securities dealer’’ as a person engaged in 

the business of buying and selling 

government securities for its own 

account as part of a regular business. 

Section 15C of the Exchange Act makes 

it unlawful for a ‘‘government securities 

dealer’’ (other than a registered brokerdealer or financial institution) to induce 

or attempt to induce the purchase or 

sale of any government security unless 

such government securities dealer is 

registered in accordance with section 

15C(a)(2).15

The Commission has long identified 

factors that would be informative for 

determining whether a person is a 

dealer. For example, the Commission’s 

2002 Release states that ‘‘[a] person 

generally may satisfy the definition, and 

therefore, be acting as a dealer in the 

securities markets by conducting 

various activities: (1) underwriting; (2) 

acting as a market maker or specialist on 

an organized exchange or trading 

system; (3) acting as a de facto market 

maker whereby market professionals or 

the public look to the firm for liquidity; 

or (4) buying and selling directly to 

securities customers together with 

conducting any of an assortment of 

professional market activities such as 

providing investment advice, extending 

credit and lending securities in 

connection with transactions in 

securities, and carrying a securities 

account.16 These principles demonstrate 

that the analysis of whether a person 

meets the definition of a dealer depends 

upon all of the relevant facts and 

circumstances.’’ 17

In recent years, market participants 

regularly engaging in significant 

liquidity provision have not registered, 

either as ‘‘dealers’’ under section 15 of 

the Exchange Act or ‘‘government 

securities dealers’’ under section 15C of 

the Exchange Act.18 This is particularly 

true in the U.S. Treasury market where 

certain market participants, particularly 

those commonly known as proprietary 

or principal trading firms (‘‘PTFs’’), 

account for about half of the daily 

volume in the interdealer market and 

yet are not registered as dealers— 

despite performing critical market 

functions, in particular liquidity 

provision, that historically have been 

performed by dealers.19 The 

Commission recognizes that, depending 

on their business models, PTFs may not 

engage in certain types of dealer 

activities. Some may not, for example, 

underwrite securities, solicit clients, 

provide investment advice, carry 

accounts for others, or extend credit, 

and so may not implicate principle (1), 

(2), or (4) as discussed in the 2002 

Release. The Commission is concerned, 

however, that some PTFs act as de facto 

market makers but do so without 

registration.20 Such a regulatory gap 

results in inconsistent oversight of 

market participants performing similar 

functions (whether in the same market 

or across asset classes). This limited 

regulatory oversight of significant 

liquidity providers increases the 

difficulty and complexity for regulators 

to investigate, understand, and address 

significant market events.21 As a result, 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14941 

prepared by U.S. Department of the Treasury, Board 

of Governors of the Federal Reserve System, Federal 

Reserve Bank of New York, U.S. Securities and 

Exchange Commission, U.S. Commodity Futures 

Trading Commission (Nov. 8, 2021) (‘‘2021 IAWG 

Joint Staff Report’’) (describing Mar. 2020 COVID– 

19 and Oct. 15, 2014, flash rally disruptions to the 

Treasury market). See also supra note 18 and 

accompanying text. 

22Proposing Release at 23060–61; see also SEC v. 

Benger, 697 F. Supp. 2d 932, 944 (N.D. Ill. 2010) 

(quoting Celsion Corp. v. Stearns Mgmt. Corp., 157 

F. Supp. 2d 942, 947 (N.D. Ill. 2001) (section 15(a)’s 

registration requirement is ‘‘of the utmost 

importance in effecting the purposes of the Act’’ 

because it enables the SEC ‘‘to exercise discipline 

over those who may engage in the securities 

business and it establishes necessary standards with 

respect to training, experience, and records.’’); Roth 

v. SEC, 22 F.3d 1108, 1109 (D.C. Cir. 1994) (‘‘The 

broker-dealer registration requirement serves as the 

keystone of the entire system of broker-dealer 

regulation.’’); Regional Properties, Inc. v. Financial 

and Real Estate Consulting Co., 678 F.2d 552, 561 

(5th Cir. June 3, 1982); Eastside Church of Christ 

v. National Plan, Inc., 391 F.2d 357, 361 (5th Cir. 

Mar. 12, 1968). 

23See sections 15(b)(8), 15C(e)(1), and 17(b) of the 

Exchange Act, 15 U.S.C. 78o(b)(8), 15 U.S.C. 78o– 

5(e)(1), and 15 U.S.C. 78q(b), respectively. Section 

15(b)(8) of the Exchange Act makes it unlawful for 

any registered broker or dealer to effect any 

transaction in securities (with certain exceptions) 

unless the broker or dealer is a member of a 

registered securities association or effects 

transactions in securities solely on a national 

securities exchange of which it is a member. 

Section 15C(e)(1) of the Exchange Act requires that 

a registered government securities broker-dealer 

become a member of a registered national securities 

exchange or registered national securities 

association. Because government securities are not 

traded on registered national securities exchanges, 

a person that registers as a government securities 

dealer under section 15C to trade only government 

securities would generally need to become a 

member of a registered national securities 

association (FINRA is the only registered national 

securities association). The Commission recently 

adopted amendments to 17 CFR 240.15b9–1 (‘‘Rule 

15b9–1’’) to replace rule provisions that provide an 

exemption for proprietary trading with narrower 

exemptions from national securities association 

membership for any registered broker or dealer that 

is a member of a national securities exchange, 

carries no customer accounts, and effects 

transactions in securities otherwise than on a 

national securities exchange of which it is a 

member. See 17 CFR 240.15b9–1; Exemption for 

Certain Exchange Members, Exchange Act Release 

No. 98202, Aug. 23, 2023), 88 FR 61850 (Sept. 7, 

2023) (‘‘Amended Rule 15b9–1 Adopting Release’’). 

Section 17(b) of the Exchange Act provides, among 

other things, that all records of a broker-dealer are 

subject at any time, or from time to time, to such 

reasonable, periodic, special, or other examinations 

by representatives of the Commission and the 

appropriate regulatory agency of the broker-dealer 

as the Commission or the appropriate regulatory 

agency deems necessary or appropriate in the 

public interest, for the protection of investors, or 

otherwise in furtherance of the purposes of the 

Exchange Act. 

24See, e.g., 17 CFR 240.15c3–1 (‘‘Rule 15c3–1’’ or 

‘‘Net Capital Rule’’); Financial Responsibility Rules 

for Broker-Dealers, Exchange Act Release No. 70072 

(July 30, 2013), 78 FR 51823 at 51849 (Aug. 21, 

2013) (‘‘The capital standard in Rule 15c3–1 is a net 

liquid assets test. This standard is designed to allow 

a broker-dealer the flexibility to engage in activities 

that are part of conducting a securities business 

(e.g., taking securities into inventory) but in a 

manner that places the firm in the position of 

holding at all times more than one dollar of highly 

liquid assets for each dollar of unsubordinated 

liabilities (e.g., money owed to customers, 

counterparties, and creditors)’’). The rule imposes 

a ‘‘moment to moment’’ net capital requirement in 

that broker-dealers must maintain an amount of net 

capital that meets or exceeds their minimal net 

capital requirement at all times. 

25See, e.g., FINRA Rule 6730(a)(1) (requiring 

FINRA members to report transactions in TRACEEligible Securities, including Treasury securities, 

which promotes transparency to the securities 

markets, including the Treasury market, by 

providing market participants with comprehensive 

access to transaction data); FINRA Rule 7200 (Trade 

Reporting Facilities); FINRA Rule 4530 (Reporting 

Requirements) which requires FINRA members to 

report among other things when the member or an 

associated person of the member has violated 

certain specified regulatory requirements, is subject 

to written customer complaints, and is denied 

registration or is expelled, enjoined, directed to 

cease and desist, suspended or disciplined by a 

specified regulatory body. The provision at 17 CFR 

240.17a–5(d)(1)(i)(A) (‘‘Rule 17a–5(d)(1)(i)(A)’’) 

requires broker-dealers, subject to limited 

exceptions, to file annual reports, including 

financial statements and supporting schedules that 

generally must be audited by a Public Company 

Accounting Oversight Board (‘‘PCAOB’’) registered 

independent public accountant in accordance with 

PCAOB standards. See also Consolidated Audit 

Trail, Exchange Act Release No. 62174 (May 26, 

2010), 75 FR 32556 (June 8, 2010); Joint Industry 

Plan; Order Approving the National Market System 

Plan Governing the Consolidated Audit Trail, 

Exchange Act Release No. 79318 (Nov. 15, 2016), 

81 FR 84696 (Nov. 23, 2016) (‘‘CAT Approval 

Order’’); Joint Industry Plan; Notice of Filing of a 

National Market System Plan Regarding 

Consolidated Equity Market Data, Exchange Act 

Release No. 77724 (Apr. 27, 2016), 81 FR 30614 

(May 17, 2016) (‘‘CAT Notice’’). 

26See, e.g., Market Access Rule (promotes market 

integrity by reducing risks associated with market 

access by requiring financial and regulatory risk 

management controls reasonably designed to limit 

financial exposures and ensure compliance with 

applicable regulatory requirements). 

27See, e.g., section 17(a) of the Exchange Act and 

17 CFR 240.17a–3 (‘‘Rule 17a–3’’) and 240.17a–4 

(‘‘Rule 17a–4’’); see also, e.g., FINRA Rules 2268, 

4510, 4511, 4512, 4513, 4514, 4515, 5340, and 

7440(a)(4) (requiring member firms to make and 

preserve certain books and records to show 

compliance with applicable securities laws, rules, 

and regulations and enable Commission and FINRA 

staffs to conduct effective examinations); NYSE 

Rule 440 (Books and Records); CBOE Exchange 

Rule 7.1 (Maintenance, Retention and Furnishing of 

Books, Records and Other Information). Among 

other things, Commission and SRO books and 

records rules help to ensure that regulators can 

access information to evaluate the financial and 

operational condition of the firm, including 

examining compliance with financial responsibility 

rules, among other rules, as well as assess whether 

and how a firm’s participation in the securities 

markets impacted a major market event. See Staff 

Study on Investment Advisers and Broker-Dealers 

As Required by section 913 of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Jan. 

2011) at 72. See also Recordkeeping and Reporting 

Requirements for Security-Based Swap Dealers, 

Major Security-Based Swap Participants, and 

Broker-Dealers; Capital Rule for Certain SecurityBased Swaps Dealers, Exchange Act Release No. 

71958 (Apr. 17, 2014), 79 FR 25194, 25199 (May 2, 

2014) (‘‘The requirements are an integral part of the 

investor protection function of the Commission, 

and other securities regulators, in that the preserved 

records are the primary means of monitoring 

compliance with applicable securities laws, 

including antifraud provisions and financial 

responsibility standards.’’). 

28See, e.g., sections 15(c)(1) and (2) of the 

Exchange Act, 15 U.S.C. 78o(c)(1) and (2), and rules 

promulgated thereunder. Section 15(c) of the 

Exchange Act prohibits broker-dealers from 

effecting any transaction in securities by means of 

any manipulative, deceptive, or other fraudulent 

device or contrivance. 

29Under Title I of the GSA, all government 

securities brokers and government securities dealers 

are required to comply with the requirements in 

Treasury’s GSA regulations that are set out in 17 

CFR parts 400 through 449, as well as all other 

applicable requirements. For the most part, 

Treasury’s GSA regulations incorporate with some 

modifications: (1) Commission rules for nonfinancial institution government securities brokers 

and government securities dealers; and (2) the 

appropriate regulatory agency rules for financial 

institutions that are required to file notice as 

government securities brokers and government 

securities dealers. See, e.g., 17 CFR part 400, Rules 

of general application; 17 CFR part 401, 

Exemptions; 17 CFR part 402, Financial 

responsibility; 17 CFR part 403, Protection of 

customer securities and balances; 17 CFR part 404, 

Recordkeeping and preservation of records; 17 CFR 

part 405, Reports and audit; and 17 CFR part 449, 

Forms, section 15C of the Exchange Act. The GSA 

regulations also include requirements for custodial 

holdings by depository institutions at 17 CFR part 

450, which were issued under Title II of the GSA. 

The Treasury GSA regulations provide in many 

Continued 

investors and the markets currently lack 

important protections. 

Courts have repeatedly recognized the 

requirement that dealers register as 

being ‘‘of the utmost importance in 

effecting the purposes of the Exchange 

Act.’’ 22 Dealers generally must register 

with the Commission and become 

members of a self-regulatory 

organization (‘‘SRO’’); 23 comply with 

Commission and SRO rules, including 

certain financial responsibility and risk 

management rules,24 transaction and 

other reporting requirements,25

operational integrity rules,26 and books 

and records requirements,27 all of which 

help to enhance market stability by 

giving regulators increased insight into 

firm-level and aggregate trading activity 

and so help regulators to evaluate, 

assess, and address market risks. In 

addition, registered dealers and 

government securities dealers are 

required to comply with all applicable 

securities laws, including not only 

section 17(a) of the Securities Act of 

1933 (‘‘Securities Act’’) and section 

10(b) of the Exchange Act but also 

specialized anti-manipulative and other 

antifraud rules promulgated pursuant to 

section 15(c) of the Exchange Act.28

These regulatory requirements provide 

fundamental protections that contribute 

to fair and orderly markets. Firms that 

are government securities dealers 

(including registered broker-dealers 

trading government securities) must also 

comply with rules adopted by the U.S. 

Treasury, including rules relating to 

financial responsibility, recordkeeping, 

financial condition reporting, and risk 

oversight.29 Importantly, dealers are 


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instances that a registered dealer can comply with 

a Commission rule to establish compliance with the 

comparable Treasury requirement. See, e.g., 17 CFR 

402.1(b) (‘‘This part does not apply to a registered 

broker or dealer . . . that is subject to [Rule 15c3– 

1].’’); 17 CFR 403.1 (regarding application to 

registered brokers or dealers); 17 CFR 404.1 and 17 

CFR 405.1(a) (same). 

30See Exchange Act section 15(b) (regarding 

Commission authority to sanction brokers and 

dealers); section 15C(c) (regarding Commission 

authority to sanction government securities dealers 

that are registered with it); section 15C(d) 

(authorizing the Commission to examine books and 

records of government securities dealers registered 

with it); and section 17(b) (broker-dealer 

recordkeeping and examination). See also section 

15C(g) (restricting the authority of the Commission 

with respect to government securities dealers that 

are not registered with the Commission). 

31See Proposing Release; see also Exchange Act 

section 15 (regarding registration of dealers) and 

section 15C (regarding registration of government 

securities dealers). 

32Comments received in response to the 

Proposing Release are available at: https://

www.sec.gov/comments/s7-12-22/s71222.htm. 

33See, e.g., Comment Letter of The Financial 

Industry Regulatory Authority, Inc. (June 23, 2022) 

(‘‘FINRA Comment Letter’’); Comment Letter of 

Better Markets (May 27, 2022) (‘‘Better Markets 

Comment Letter’’). 

34 Id. 

35See, e.g., SIFMA Comment Letter I (‘‘We 

support the policy goal of proposed Rule 3a44–2 to 

require PTFs in the government securities market to 

register as government securities dealers, but 

believe that the Commission can adequately capture 

trading activity by unregistered PTFs by adopting 

solely the qualitative standards set forth Rule 3a44– 

2(a)(1)(ii) and (iii), without the need to adopt the 

standard in Rule 3a44–2(a)(1)(i).’’); Comment Letter 

of Modern Markets Initiative (May 27, 2022) (‘‘MMI 

Comment Letter’’) (‘‘MMI appreciates the SEC’s 

intent in the Proposal to further support 

transparency, market integrity, and resiliency across 

the U.S. Treasury market and other securities 

markets, as it relates to ensuring that proprietary (or 

principal) trading firms and other market 

participants who are acting as dealers be, in fact, 

registered as ‘dealers.’ MMI agrees it is important 

that dealers or those who engage in buying and 

selling of government securities as registered 

dealers should become members of a self-regulatory 

organization, and receive the benefits and 

obligations under the existing framework of Federal 

securities laws.’’); Comment Letter of Asset 

Management Group of Securities Industry and 

Financial Markets Association (May 27, 2022) 

(‘‘SIFMA AMG Comment Letter’’) (‘‘While SIFMA 

AMG can appreciate the Commission’s efforts to 

protect investors and further the public interest, we 

do not believe that the Proposal will achieve those 

goals with respect to money managers.’’); Comment 

Letter of FIA Principal Traders Group (Dec. 12, 

2023) (‘‘FIA PTG Comment Letter II’’). 

36See, e.g., Comment Letter of Association of 

Digital Asset Markets (May 27, 2022) (‘‘ADAM 

Comment Letter’’); Comment Letter of Citadel (June 

7, 2022) (‘‘Citadel Comment Letter’’); Comment 

Letter of Morgan, Lewis & Bockius LLP (June 8, 

2022) (‘‘Morgan Lewis Comment Letter’’); Comment 

Letter of T. Rowe Price (June 8, 2022) (‘‘T. Rowe 

Price Comment Letter’’); Comment Letter of 

Investment Company Institute (May 27, 2022) (‘‘ICI 

Comment Letter’’); SIFMA Comment Letter I; 

SIFMA AMG Comment Letter; Comment Letter of 

Alternative Investment Management Association 

(May 27, 2022) (‘‘AIMA Comment Letter II’’); 

Comment Letter of Managed Funds Association 

(May 27, 2022) (‘‘MFA Comment Letter I’’); 

Comment Letter of McIntyre & Lemon, PLLC (May 

31, 2022) (‘‘McIntyre Comment Letter II’’); 

Comment Letter of FIA Principal Traders Group 

(May 27, 2022) (‘‘FIA PTG Comment Letter I’’); 

Comment Letter of Managed Funds Association 

(Dec. 19, 2023) (‘‘MFA Comment Letter V’’). See 

also section II.A.1. 

37See, e.g., AIMA Comment Letter II; MFA 

Comment Letter I; Comment Letter of Element 

Capital Management LLC (May 27, 2022) (‘‘Element 

Comment Letter’’); SIFMA Comment Letter II; MFA 

Comment Letter V. 

38See, e.g., MFA Comment Letter I; SIFMA AMG 

Comment Letter; T. Rowe Price Comment Letter. 

39See, e.g., SIFMA AMG Comment Letter; 

Comment Letter of Two Sigma (May 27, 2022) 

(‘‘Two Sigma Comment Letter I’’). 

subject to Commission and SRO 

examination and enforcement for 

compliance with applicable Federal 

securities laws and SRO rules.30

On March 28, 2022, the Commission 

proposed Rules 3a5–4 and 3a44–2 to 

identify certain activities that would 

constitute a ‘‘regular business’’ requiring 

a person engaged in certain liquidityproviding activities to register as a 

‘‘dealer’’ or a ‘‘government securities 

dealer,’’ absent an exception or 

exemption.31 Proposed Rules 3a5–4 and 

3a44–2 were designed to define the 

types of activities that would cause a 

person to be regarded as a de facto 

market maker and therefore subject to 

registration as a dealer under sections 

15 and 15C of the Exchange Act. 

Specifically, the proposed rules would 

have established three qualitative 

factors, as well as a quantitative 

standard applicable only with respect to 

government securities. The proposed 

rules also further defined the types of 

entities that would be included in and 

excluded from the ambit of the rules. 

The proposed rules focused only on the 

de facto market maker test, as 

emphasized through the inclusion of the 

‘‘no presumption’’ language, which 

provided that the further definition of 

‘‘regular business,’’ if adopted, would 

not seek to address all persons that may 

be acting as dealers under otherwise 

applicable interpretations and 

precedent. 

The Commission received comment 

letters from a variety of commenters 

including investment advisers, PTFs, 

private fund advisers, crypto asset 

related entities and industry groups, 

insurance industry groups, industry 

associations, advisory groups, retail 

investors, and other market 

participants.32 The comments addressed 

all aspects of the proposal. 

Commenters in support of the 

proposal shared the Commission’s 

concerns regarding the significant role 

of unregistered entities that act as 

liquidity providers and emphasized the 

benefits of registration and regulation.33

These commenters discussed specific 

benefits, in particular transparency, 

market integrity and investor protection, 

as well as appropriate Commission and 

SRO oversight of entities registered as 

dealers and government securities 

dealers.34

Some commenters stated that they 

supported the Commission’s policy 

goals but expressed concerns regarding 

whether the proposed rules would 

achieve those goals.35 As discussed 

more fully below, these and other 

commenters raised certain common 

themes, which generally reflected 

concerns regarding the breadth of the 

proposed rules and that the proposed 

rules would inappropriately apply to 

persons not engaging in dealer activity. 

Specifically, many commenters stated 

that some of the terms used in the 

proposed qualitative factors were vague 

and overly broad.36 As discussed below, 

some commenters thought that the 

proposed first qualitative factor was 

overinclusive and would capture 

activity that was not dealing.37

Commenters also raised concerns about 

certain terms used in the proposed first 

qualitative factor, the manner in which 

they would be interpreted, and the 

compliance challenges that they might 

present.38 While the Commission is 

generally retaining the overall structure 

of the proposed rules, the Commission 

is making certain modifications to the 

text of the rules and also is providing 

guidance to address concerns raised 

during the public comment process. 

Many commenters also questioned 

whether the quantitative standard 

exceeds the Commission’s authority 

under the Exchange Act and is 

consistent with historical Commission 

interpretations and guidance and 

Federal case law.39 As discussed above, 

the SEC has the authority to define the 

terms used in the statutory definition of 

‘‘dealer’’ and oversee and regulate 

registered dealers. Further, the statutory 

definitions of ‘‘dealer’’ in section 3(a)(5) 

and ‘‘government securities dealer’’ in 

section 3(a)(44), and the accompanying 

registration requirements of the 

Exchange Act, were drawn broadly by 

Congress to encompass a wide range of 

activities involving the securities 

markets and their participants. PTFs 

and other market participants that 

engage in dealer activity in the U.S. 

Treasury market should be subject to the 

same regulatory requirements as other 

dealers. 

In addition, commenters, many of 

which were in the asset management 

industry, stated that the proposed 

definition of ‘‘own account’’ would 


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40See, e.g., Comment Letter of National 

Association of Private Fund Managers (May 27, 

2022) (‘‘NAPFM Comment Letter’’); MFA Comment 

Letter I; AIMA Comment Letter II. See also section 

II.A.3. 

41The Proposing Release used the phrase ‘‘digital 

asset that is a security.’’ See Proposing Release at 

23057 n.36. For purposes of this Adopting Release, 

the Commission does not distinguish between the 

terms ‘‘digital asset securities’’ and ‘‘crypto asset 

securities.’’ 

42See, e.g., Comment Letter of Andreessen 

Horowitz (May 27, 2022) (‘‘Andreessen Horowitz 

Comment Letter’’); AIMA Comment Letter II; 

ADAM Comment Letter; MFA Comment Letter I; 

Comment Letter of Blockchain Association (May 27, 

2022) (‘‘Blockchain Association Comment Letter’’); 

Comment letter of U.S. Representatives Patrick 

McHenry and Bill Huizenga (Apr. 18, 2022) (‘‘U.S. 

Reps Comment Letter’’); Comment Letter of Virtu 

Financial (May 27, 2022) (‘‘Virtu Comment Letter’’); 

Comment Letter of Alphaworks Capital 

Management (May 27, 2022) (‘‘Alphaworks 

Comment Letter’’); Two Sigma Comment Letter I; 

FIA PTG Comment Letter I; Comment Letter of 

Independent Dealer and Trader Association (May 

27, 2022) (‘‘IDTA Comment Letter’’); NAPFM 

Comment Letter; Comment Letter of Schulte Roth 

& Zabel LLP (May 27, 2022) (‘‘Schulte Roth 

Comment Letter’’); SIFMA Comment Letter I; 

Comment Letter of James Overdahl (May 27, 2022) 

(‘‘Overdahl Comment Letter’’); Comment Letter of 

Fried, Frank, Harris, Shriver, & Jacobson LLP (May 

27, 2022) (‘‘Fried Frank Comment Letter’’); Element 

Comment Letter; Comment Letter of Chamber of 

Digital Commerce (June 13, 2022) (Chamber of 

Digital Commerce Comment Letter’’); Morgan Lewis 

Comment Letter; Comment Letter of DeFi Education 

Fund (May 27, 2022) (‘‘DeFi Fund Comment 

Letter’’); Comment Letter of Ranking Member, Tim 

Scott, U.S. Senator (Dec. 14, 2023) (‘‘Scott Comment 

Letter’’). 

43See, e.g., MMI Comment Letter; Virtu Comment 

Letter; AIMA Comment Letter II; ADAM Comment 

Letter; SIFMA AMG Comment Letter; SIFMA 

Comment Letter I; Fried Frank Comment Letter; 

Element Comment Letter; T. Rowe Price Comment 

Letter. 

44See, e.g., AIMA Comment Letter II; FIA PTG 

Comment Letter I; Virtu Comment Letter; McIntyre 

Comment Letter II; Alphaworks Comment Letter; 

MMI Comment Letter; Schulte Roth Comment 

Letter; IDTA Comment Letter; NAPFM Comment 

Letter; Comment Letter of Federal Regulation of 

Securities Committee of the Business Law Section 

of the American Bar Association (May 27, 2022) 

(‘‘ABA Comment Letter’’); Fried Frank Comment 

Letter; MFA Comment Letter I; Element Comment 

Letter; Citadel Comment Letter; Morgan Lewis 

Comment Letter; DeFi Fund Comment Letter; Scott 

Comment Letter. 

45With respect to the Commission’s authority to 

adopt the final rules, some commenters asserted 

that the major questions doctrine is implicated. See, 

e.g., Comment Letter of Consensys Software Inc. 

(May 26, 2022) (‘‘Consensys Comment Letter’’); 

Comment Letter of American Investment Council 

(Aug. 8, 2023) (‘‘AIC Comment Letter’’). In further 

defining what it means to be engaged in the 

business of buying and selling securities ‘‘as a part 

of a regular business’’ within the definitions of 

‘‘dealer’’ and ‘‘government securities dealer’’ under 

the Exchange Act, the Commission did not claim an 

‘‘[e]xtraordinary grant[ ] of regulatory authority’’ 

based on ‘‘vague,’’ ‘‘cryptic,’’ ‘‘ancillary,’’ or 

‘‘modest’’ statutory language. West Virginia v. EPA, 

142 S. Ct. 2587, 2608–10 (2022) (quotation omitted). 

Nor did it assert authority that falls outside its 

‘‘particular domain.’’ Alabama Ass’n of Realtors v. 

HHS, 141 S. Ct. 2485, 2489 (2021) (per curiam). 

Congress granted the SEC authority to oversee and 

regulate dealers, and the Exchange Act empowers 

the SEC with authority to define statutory terms. 

46See Proposing Release at 23072 (stating that the 

quantitative standard was ‘‘designed to make clear 

the Commission’s view that a person engaged in 

this regular volume of buying and selling activity 

is engaged in the buying and selling of government 

securities for its own account as part of a regular 

business, and therefore, should be subject to the 

same regulatory requirements as other dealers’’). 

inappropriately apply the dealer regime 

to private funds and registered 

investment advisers, and that the 

proposed exclusion for registered 

investment companies should be 

expanded to registered investment 

advisers and to private funds managed 

by registered investment advisers.40

Commenters in the crypto asset industry 

also opposed the proposal, stating that 

the dealer framework should not apply 

to entities that transact in crypto assets 

that are securities.41

Further, many commenters believed 

that the economic analysis did not 

adequately address economic 

implications of the proposed rules.42

Commenters also stated that the 

proposed rules were largely unnecessary 

because of existing regulatory 

obligations, stating that the Commission 

has other tools to accomplish its stated 

goals of improving transparency 

including, for example, the 

Consolidated Audit Trail (‘‘CAT’’), the 

Trade Reporting and Compliance Engine 

(‘‘TRACE’’) and large trader reporting,43

and that the proposed rules could have 

a negative effect on liquidity.44

B. Overview of the Final Rules and 

Modifications to the Proposal 

After careful review of comments 

received and upon further 

consideration, the Commission is 

adopting Rules 3a5–4 and 3a44–2 as 

revised. As discussed below, while the 

Commission is generally retaining the 

overall structure of the proposed rules, 

we are making certain modifications to 

the text of the rules and also are 

providing guidance to address concerns 

raised during the comment process. In 

particular, the modifications we have 

made to more appropriately tailor the 

scope of the final rules will address 

various concerns raised by commenters 

and appropriately require only entities 

engaging in de facto market making 

activity to register as dealers.45 Overall, 

the final rules will achieve the 

Commission’s important goals of 

protecting investors and supporting fair, 

orderly, and efficient markets. 

An overview of the changes from the 

proposal follows: 

Modification and Streamlining of the 

Qualitative Standard—The Commission 

has modified the proposed qualitative 

factors to: (1) eliminate the proposed 

qualitative factor that would have 

captured persons engaging in liquidity 

provision by routinely making roughly 

comparable purchases and sales of the 

same or substantially similar securities 

in a day (‘‘proposed first qualitative 

factor’’); (2) more closely track the 

statutory language of the Exchange Act 

by referring to ‘‘regular’’ rather than the 

proposed ‘‘routine’’ patterns of behavior 

that have the effect of providing 

liquidity to other market participants; 

and (3) add the phrase ‘‘for the same 

security’’ to the factor relating to the 

expression of trading interests to clarify 

that it will apply only when a person is 

on both sides of the market for the same 

security. While the proposed first 

qualitative factor was intended to 

capture persons whose pattern of 

trading indicates that their liquidity 

provision forms a part of a regular 

business and to distinguish them from 

persons engaging in isolated or sporadic 

securities transactions (and therefore 

not engaging in such a regularity of 

participation), commenters raised a 

number of concerns with this factor, in 

particular that it was overinclusive and 

would capture activity that was not 

dealing, but rather investing in the 

ordinary course. After consideration of 

comments, the Commission has decided 

to eliminate this factor from the final 

rules. As discussed below, the 

qualitative factors as modified, together 

with the statutory definition and related 

precedent and interpretations, 

appropriately describe the 

circumstances in which a person would 

be deemed to engage in a ‘‘regular’’ 

pattern of buying and selling securities 

that has the effect of providing liquidity 

to other market participants, including 

in the U.S. Treasury market. 

Deletion of the Quantitative 

Standard—The Commission proposed a 

bright line test under which persons 

engaged in certain levels of activity in 

the U.S. Treasury market would be 

defined to be buying and selling 

securities ‘‘as part of a regular 

business,’’ regardless of whether they 

meet any of the qualitative factors. The 

quantitative standard was intended as a 

backstop to the qualitative factors to 

capture the most significant Treasury 

market participants.46 While the 

proposed trading volume threshold was 

intended to provide an easily 

measurable and non-discretionary 

standard, commenters raised concerns 

regarding the application of this 

standard, in particular with respect to 

investment activities that might trigger 

the quantitative threshold. After 

consideration of these comments, the 

Commission has decided to eliminate 


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47The proposed second qualitative factor has 

been modified to change the term ‘‘trading 

interests’’ to ‘‘trading interest’’ and the words ‘‘are’’ 

to ‘‘is’’ and ‘‘they’’ to ‘‘it.’’ This is a non-substantive 

modification to align the term with common usage. 

48The proposed third qualitative factor has been 

modified to change the term ‘‘trading interests’’ to 

‘‘trading interest.’’ This is a non-substantive 

modification to align the term with common usage. 

49See infra note 297 and accompanying text. 

Further, the Commission is removing the 

definitions of ‘‘control’’ and ‘‘parallel account 

structure.’’ 

50See, e.g., Foreign Broker-Dealer Adopting 

Release at 30017 (‘‘the Commission uses an entity 

approach with respect to registered brokerdealers’’). See infra note 326 and accompanying 

text. 

51See section II.A.4. 

52See section II.A.3. As discussed further below, 

the less than $50 million exclusion is not an 

exclusion from the ‘‘dealer’’ definition for all 

purposes, but only for purposes of the final rules 

that focus on de facto market making. Outside of 

this context, the question of whether any person, 

including a person that has or controls less than $50 

million in total assets, is acting as a dealer, as 

opposed to a trader, will remain a facts and 

circumstances determination. 

53See section II.A.3.b. 

54Comments requesting that the proposed rules 

not apply specifically to crypto asset securities are 

discussed further in section II.A.3. 

55See Eastside Church of Christ v. National Plan, 

Inc., 391 F.2d 357 (5th Cir. 1968). 

56 15 U.S.C. 78c(a)(4)(A). 

57Charles H. Meyer, Securities Exchange Act of 

1934 Analyzed and Explained 33–34 (1934) 

(emphasis added). 

58See 2002 Release at 67498–67500. 

59See, e.g., 17 CFR 240.15c3–1(a)(6) (‘‘Rule 15c3– 

1(a)(6)’’) (requiring firms relying on this provision 

to transact only with other brokers and dealers and 

prohibiting such firms from carrying customer 

accounts); Rule 15b9–1 (exempting brokers-dealers 

from becoming members of a national securities 

association if they are a member of an exchange, do 

not carry customer accounts, and any securities 

transactions that they effect elsewhere than an 

exchange of which they are a member meet certain 

exceptions). 

60See Further Definition of ‘‘Swap Dealer,’’ 

‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap 

Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant,’’ 

Exchange Act Release No. 66868 (Apr. 27, 2012), 77 

FR 30596, (May 23, 2012) (‘‘Entities Release’’) 

the quantitative standard from the final 

rules. As discussed below, the 

qualitative factors as modified, and 

otherwise applicable court precedent 

and Commission interpretations, 

appropriately describe the 

circumstances in which a person would 

be deemed to engage in a ‘‘regular’’ 

pattern of buying and selling securities 

that has the effect of providing liquidity 

to other market participants, including 

in the U.S. Treasury market. 

As a result of these modifications, the 

final rules establish two non-exclusive 

ways in which a person will be 

determined to be engaged in a regular 

pattern of providing liquidity to other 

market participants ‘‘as part of a regular 

business’’: 

• Regularly expressing trading 

interest that is at or near the best 

available prices on both sides of the 

market for the same security, and that is 

communicated and represented in a way 

that makes it accessible to other market 

participants (‘‘expressing trading 

interest factor’’); 47 or 

• Earning revenue primarily from 

capturing bid-ask spreads, by buying at 

the bid and selling at the offer, or from 

capturing any incentives offered by 

trading venues to liquidity-supplying 

trading interest (‘‘primary revenue 

factor’’).48

Revision of ‘‘Own Account’’ Definition 

and Addition of Anti-Evasion 

Provision—The Commission had 

proposed to define ‘‘own account’’ to 

include accounts ‘‘held in the name of 

a person over whom that person 

exercises control or with whom that 

person is under common control’’ (‘‘the 

aggregation provision’’).49 Upon 

consideration of the comments, the 

Commission has revised the definition 

so that the final rules define ‘‘own 

account’’ to mean an account: (i) held in 

the name of that person; or (ii) held for 

the benefit of that person. The rules as 

adopted thus are consistent with the 

Commission’s historical ‘‘entity’’ 

approach to broker-dealer regulation.50

However, with a view to deterring the 

establishment of multiple legal entities 

or accounts to evade appropriate 

regulation, the final rules include an 

anti-evasion provision that prohibits 

persons from evading the registration 

requirements by: (1) engaging in 

activities indirectly that would satisfy 

the qualitative factors; or (2) 

disaggregating accounts. The changes 

from the proposed rules address 

concerns about the scope of the 

proposed rules as raised by commenters 

while enhancing the Commission’s 

current ability to prevent and address 

potentially evasive behavior.51

Exclusions—The Commission is 

providing an exclusion for ‘‘central 

banks,’’ ‘‘sovereign entities,’’ and 

‘‘international financial institutions,’’ all 

as defined in the final rules. The 

exclusion is appropriate in view of the 

unique roles played by these entities. 

The Commission also is adopting as 

proposed the exclusions from the final 

rules for registered investment 

companies and persons that have or 

control less than $50 million in total 

assets.52

The Commission is not adopting 

certain commenters’ suggestions for 

additional exclusions. Among other 

things, as discussed more fully below, 

the Commission is not excluding private 

funds or registered investment advisers 

from the final rules because an 

investment adviser or private fund 

could be acting as a dealer depending 

upon the particular activities in which 

it is engaged. The final rules do, 

however, include several modifications 

and clarifications to address many of the 

compliance and other concerns raised 

by certain commenters, including those 

raised by private funds and registered 

investment advisers.53

In addition, as discussed in more 

detail below, the Commission is not 

excluding certain types of securities, 

specifically crypto asset securities, from 

the application of the final rules.54 As 

stated in the Proposing Release, the 

proposed rules would apply to any 

‘‘security’’ as defined in section 3(a)(10) 

or ‘‘government security’’ as defined in 

section 3(a)(44) of the Exchange Act. 

The dealer framework is a functional 

analysis based on the securities trading 

activities undertaken by a person, not 

the type of security being traded. 

Accordingly, the final rules will apply 

with respect to any crypto asset that is 

a ‘‘security’’ or ‘‘government security’’ 

within the meaning of the Exchange 

Act. 

Further, the Commission disagrees 

with the argument that certain market 

participants, including PTFs, are not 

dealers because they do not have 

customers.55 There is no requirement in 

the statutory text of either section 3(a)(5) 

or section 3(a)(44) that dealers have 

customers. In comparison, the Exchange 

Act’s definition of ‘‘broker’’ is ‘‘any 

person in the business of effecting 

transactions in securities for the account 

of others,’’ which includes (but is not 

limited to) customers.56 The dealer 

definition includes no such limiting 

language and, since its enactment, the 

dealer definition was understood to 

cover ‘‘the operations of a trader . . . 

who has no customers but merely trades 

for his own account through a broker’’ 

so long as those operations ‘‘are 

sufficiently extensive to be regarded as 

a regular business . . . .’’ 57 Likewise, 

many of the factors that the Commission 

identified in its 2002 Release do not 

presume a dealer is acting for a 

customer.58 Indeed, a number of 

Exchange Act rules applicable to dealers 

presuppose that there are dealers 

without customers and are tailored for 

that business model.59

Further, a helpful analogy can be 

drawn to the Commission’s rulemaking 

further defining who is a ‘‘securitybased swap dealer’’—a definition that 

closely parallels the statutory definition 

of ‘‘dealer,’’ particularly with respect to 

the exclusion of activities that are not 

part of a regular business.60 In that 


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(‘‘Although commenters have expressed the view 

that a person that engaged in security-based swap 

activities on an organized market should not be 

deemed to be a dealer unless it engaged in those 

activities with customers, we do not agree.’’). 61 Id. at n.282. 62See ABA Comment Letter at 9–12; ADAM 

Comment Letter at 16; AIMA Comment Letter II at 

11–13; Comment Letter of Alternative Investment 

Management Association (Nov. 17, 2022) (‘‘AIMA 

Comment Letter III’’) at 3 and 8; Alphaworks 

Comment Letter at 6; Andreessen Horowitz 

Comment Letter at 10 and 13; Blockchain 

Association Comment Letter at 7; Citadel Comment 

Letter at 7–8; Comment Letter of Committee on 

Capital Markets (Oct. 19, 2022) (‘‘Committee on 

Capital Markets Comment Letter’’) at 3; DeFi Fund 

Comment Letter at 14; Element Comment Letter at 

5; FIA PTG Comment Letter I at 2–10; Fried Frank 

Comment Letter at 8–11; Comment Letter of Gretz 

Consilium LLC (May 26, 2022) (‘‘Gretz Comment 

Letter’’) at 18; ICI Comment Letter at 7–8; McIntyre 

Comment Letter II at 2; MFA Comment Letter I at 

12; Comment Letter of Managed Funds Association 

(Dec. 5, 2022) (‘‘Lewis Study’’) at 2; Morgan Lewis 

Comment Letter at 2 and 14; NAPFM Comment 

Letter at 5; Overdahl Comment Letter at 16–23; 

Schulte Roth Comment Letter at 2; SIFMA 

Comment Letter I at 8; SIFMA AMG Comment 

Letter at 16–17; Two Sigma Comment Letter at 2 

and 9; Virtu Comment Letter at 3–4. 

63See sections 3(a)(5)(A) and (B) of the Exchange 

Act, 15 U.S.C. 78c(a)(5)(A) and (B); section 3(a)(44) 

of the Exchange Act, 15 U.S.C. 78c(a)(44). 

64See Rules 3a5–4(c) and 3a44–2(c) (providing 

that no presumption shall arise that a person is not 

a dealer or government securities dealer solely 

because that person does not satisfy the standards 

of the final rules). See also section II.A.5. 

65See supra note 16. 66See, e.g., 2002 Release at 67499. 

matter, in comparing ‘‘counterparties’’ 

with ‘‘customers,’’ the Commission 

stated that ‘‘any interpretation of the 

‘security-based swap dealer’ definition 

that is predicated on the existence of a 

customer relationship may lead to an 

overly narrow construction of the 

definition.’’ 61 Accordingly, in this 

regard, these commenters have read a 

limitation into the statute where none 

exists. 

As stated above, some commenters 

suggested that the final rules are 

unnecessary because the SEC has other 

tools to accomplish the goals of the 

rulemaking, including large trader 

reporting, TRACE, and CAT. Certain 

commenters urged the Commission to 

take additional or different regulatory 

actions for entities covered by the 

Investment Advisers Act of 1940 

(‘‘Advisers Act’’) than the approach we 

have adopted, including leveraging 

existing data from Form PF filings or 

making amendments to the existing 

regulatory regime under the Advisers 

Act. However, as discussed below, 

dealer registration is tailored to provide 

specific protections to address potential 

risks associated with dealer activity, and 

the aforementioned tools do not provide 

sufficient regulatory oversight and 

transparency into the trading activity of 

entities that are not otherwise registered 

as dealers. 

Commenters expressed the view that 

the proposed rules could have a 

negative impact on liquidity or may 

cause many market participants to 

cease, modify, or curtail their trading 

activity to avoid being required to 

register as a dealer.62 However, as 

discussed further below, we have made 

various modifications to appropriately 

tailor the scope of the final rules to 

address concerns raised by commenters 

about effects on liquidity. The 

Commission has crafted the final rules 

to draw upon established concepts and 

to expand upon prior Commission 

statements to identify more specifically 

the activities of certain market 

participants who act as dealers by 

‘‘providing liquidity’’ to other market 

participants, and to establish a more 

level regulatory playing field for these 

types of significant liquidity providers. 

The test established in the Exchange Act 

to determine if a person is a dealer is 

whether the person is engaged in the 

business of buying and selling securities 

for its own account ‘‘as part of a regular 

business.’’ 63 The final rules are thus 

intended to reflect the longstanding 

distinction between so-called 

‘‘traders’’—whose liquidity provision is 

only incidental to their trading 

activities—and persons who are ‘‘in the 

business’’ of providing liquidity as part 

of a ‘‘regular business,’’ and so are 

‘‘dealers’’ and ‘‘government securities 

dealers’’ under the Exchange Act. Under 

the final rules, a person is deemed to be 

engaged in buying and selling securities 

for its own account as part of a regular 

business—and therefore within the 

definition of ‘‘dealer’’ or ‘‘government 

securities dealer’’—if that person is 

engaged in a ‘‘regular pattern of buying 

and selling securities that has the effect 

of providing liquidity to other market 

participants.’’ 

The final rules are not the exclusive 

means of establishing that a person is a 

dealer or government securities dealer; 

otherwise applicable Commission 

interpretations and precedent will 

continue to apply.64 In other words, 

these rules address one way in which a 

person can be engaged in the regular 

business of buying and selling securities 

for its own account, but these rules do 

not displace, modify, or substitute for 

otherwise applicable Commission 

interpretations and court precedent. A 

person engaging in other activities that 

satisfy the definition of dealer under 

otherwise applicable interpretations and 

precedent, such as underwriting, will 

still be a dealer even though those 

activities are not addressed by the two 

qualitative factors.65

The final rules, as modified, 

appropriately balance the concerns of 

the various commenters in a way that 

will best achieve the Commission’s 

important goals to protect investors and 

support fair, orderly, and resilient 

markets through the complete and 

consistent application of dealer 

regulations. Further, the modifications 

we have made to tailor the scope of the 

final rules, including the persons 

scoped into the final rules, will address 

various concerns raised by commenters 

and appropriately require only entities 

engaging in dealing activity to register 

as dealers. 

II. Discussion of Final Rules 

A. Component Parts 

1. Qualitative Standard 

The qualitative standard in the 

proposed rules was intended to build on 

existing statements by the Commission 

and the courts regarding ‘‘dealer’’ 

activity to further define certain factors 

for determining when a person is 

engaged in buying and selling securities 

for its own account ‘‘as part of a regular 

business’’ as that phrase is used in 

sections 3(a)(5) and 3(a)(44) of the 

Exchange Act. Under paragraph (a)(1) of 

the proposed rules, a person would be 

engaged in buying and selling securities 

for its own account ‘‘as a part of a 

regular business’’ and so would be a 

dealer or a government securities dealer, 

if that person engages in a routine 

pattern of buying and selling securities 

(or government securities) that has the 

effect of providing liquidity to other 

market participants. Under this 

standard, as supplemented by the 

qualitative factors, when the frequency 

and nature of a person’s securities 

trading is such that the person assumes 

a role—whether described as marketmaking, de facto market-making, or 

liquidity-providing—similar to the role 

that historically has been performed by 

a registered dealer, that person would be 

deemed to be a dealer or government 

securities dealer.66 The proposed rules 

would have further defined three types 

of activities that would be considered to 

have the effect of providing liquidity to 

other market participants: (i) routinely 

making roughly comparable purchases 

and sales of the same or substantially 

similar securities (or government 

securities) in a day; or (ii) routinely 

expressing trading interests that are at or 

near the best available prices on both 

sides of the market and that are 

communicated and represented in a way 

that makes them accessible to other 

market participants; or (iii) earning 


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14946 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

67See, e.g., ADAM Comment Letter; Element 

Comment Letter; Morgan Lewis Comment Letter; 

Consensys Comment Letter; MFA Comment Letter 

I; NAPFM Comment Letter; SIFMA AMG Comment 

Letter. 

68See 15 U.S.C. 78c(a)(5) and 78c(a)(44). 

69As discussed below, the Commission is adding 

the phrase ‘‘for the same security’’ so that the 

proposed second qualitative factor applies to 

expressing trading interest on both sides of the 

market for the same security. The Commission has 

also modified, as appropriate, the remaining 

qualitative factors to replace the term ‘‘routinely’’ 

with ‘‘regularly.’’ 

70See Proposing Release at 23066. 71See id. 

72See also supra notes 37–38 and accompanying 

text. 

73See, e.g., AIMA Comment Letter II; MFA 

Comment Letter I; Element Comment Letter; SIFMA 

Comment Letter II; FIA PTG Comment Letter II; 

MFA Comment Letter V. For example, one 

commenter stated that ‘‘[w]ithout revision to, and 

clarification of, these vague terms, this Qualitative 

Standard will clearly capture many short-term 

investment strategies engaged in by traders that are 

not indicative of dealer functions.’’ Element 

Comment Letter. Another stated that ‘‘Qualitative 

Standard 1 would capture many common hedge 

fund strategies that have never been, and should not 

now be, considered dealing, including fixed-income 

arbitrage, convertible bond arbitrage and capital 

structure arbitrage, as well as a number of relative 

value or quantitative strategies.’’ AIMA Comment 

Letter II. 

74SIFMA Comment Letter II. 

75See, e.g., MFA Comment Letter I; SIFMA AMG 

Comment Letter; T. Rowe Price Comment Letter; 

MFA Comment Letter V. 

76MFA Comment Letter I (‘‘We have considered 

this proposed test and strongly believe that it will 

be unworkable for market participants—as 

described in detail below—and we therefore urge 

the Commission not to include Qualitative Test 1 

in any final rule.’’). See also AIMA Comment Letter 

II (‘‘We believe the Commission should limit its 

qualitative standards to only Qualitative Standard 

3.’’). In addition, one commenter suggested that the 

Commission replace the first and second proposed 

qualitative factors with a test defining a person 

acting as a bona fide market maker under 

Regulation SHO as a dealer. See MFA Comment 

Letter I. As discussed below, the Commission is 

removing the proposed first qualitative standard 

and declines to replace the proposed second 

qualitative factor with a test defining a person 

acting as a bona fide market maker under 

Regulation SHO. See section II.A.1.b. 

revenue primarily from capturing bidask spreads, by buying at the bid and 

selling at the offer, or from capturing 

any incentives offered by trading venues 

to liquidity-supplying trading interests. 

Commenters stated that the terms 

‘‘routine’’ and ‘‘routinely’’ in the 

proposed rules were unclear and would 

lead to inconsistent interpretations.67 In 

response to the comments and upon 

further consideration, the Commission 

has replaced the term ‘‘routine’’ with 

‘‘regular’’ in 17 CFR 240.3a5–4(a)(1) and 

240.3a44–2(a)(1) so that a person will be 

engaged in buying and selling securities 

for its own account ‘‘as a part of a 

regular business’’—and so be a dealer or 

a government securities dealer—if that 

person engages in a regular pattern of 

buying and selling securities (or 

government securities) that has the 

effect of providing liquidity to other 

market participants. As discussed more 

fully below, ‘‘regular’’ participation in 

the securities markets is part of the 

statutory definition of ‘‘dealer’’ in the 

Exchange Act and therefore is a concept 

that should be familiar to market 

participants.68

In addition, as discussed below, after 

further consideration, the Commission 

has revised the qualitative standard by 

eliminating the proposed first 

qualitative factor and modifying the 

remaining two qualitative factors. These 

changes are designed to more 

appropriately tailor the rule to the 

nature of dealing in today’s securities 

markets.69 As a result of these 

modifications, the final rules establish 

two non-exclusive ways in which a 

person will be deemed to be engaged in 

providing liquidity as part of a regular 

business: 

• Regularly expressing trading 

interest that is at or near the best 

available prices on both sides of the 

market for the same security, and that is 

communicated and represented in a way 

that makes it accessible to other market 

participants; or 

• Earning revenue primarily from 

capturing bid-ask spreads, by buying at 

the bid and selling at the offer, or from 

capturing any incentives offered by 

trading venues to liquidity-supplying 

trading interest. 

a. Elimination of the Proposed First 

Qualitative Factor 

As discussed in the Proposing 

Release, the proposed first qualitative 

factor was intended to capture a 

person’s pattern of trading, the 

consistency and regularity of which 

indicate that its liquidity provision 

forms a part of a regular business.70

Specifically, under proposed 17 CFR 

240.3a5–1(a)(1)(i) and 240.3a44– 

2(a)(1)(i), a person that, trading for its 

own account, ‘‘routinely mak[es] 

roughly comparable purchases and sales 

of the same or substantially similar 

securities in a day’’ would be engaged 

in a pattern of trading that ‘‘has the 

effect of providing liquidity to other 

market participants,’’ and therefore 

engaged in buying and selling securities 

or government securities ‘‘as part of a 

regular business’’ as a dealer or 

government securities dealer.71 The 

proposed first qualitative factor was 

intended to separate persons engaging 

in isolated or sporadic securities 

transactions from persons whose 

regularity of participation in securities 

transactions demonstrates that they are 

acting as dealers. 

Commenters raised a number of 

concerns about the proposed first 

qualitative factor.72 As a general matter, 

commenters contended that the 

proposed first qualitative factor would 

capture activity that was not dealing, 

but rather investing in the ordinary 

course.73 One commenter recommended 

that certain specific activities be 

explicitly excluded from the rule, 

including asset liability management, 

liquidity and collateral management, 

and activities ancillary to exempt dealer 

activity.74 As discussed further below, 

commenters also expressed concerns 

about certain terms used in the 

proposed first qualitative factor, the 

manner in which they would be 

interpreted, and the compliance 

challenges that they might present, 

focusing in particular on the use of the 

terms ‘‘routinely,’’ ‘‘substantially 

similar,’’ ‘‘roughly comparable,’’ and ‘‘in 

a day.’’ 75 As a result of these concerns, 

some commenters stated that the 

Commission should remove the first 

proposed qualitative factor.76

After further consideration and in 

light of commenters’ concerns, the 

Commission has decided to eliminate 

the proposed first qualitative factor. The 

Commission agrees with commenters 

that the proposed first qualitative factor 

could capture more than dealing activity 

intended to be captured by the rule. 

Accordingly, the Commission is not 

adopting the first factor. 

The Commission emphasizes that the 

elimination of this factor does not mean 

that the conduct that would have been 

captured by the proposed factor is not 

dealing activity. This conduct may be de 

facto market making under the other 

two qualitative factors or dealer activity 

under otherwise applicable precedent. 

In this regard, as discussed in section 

II.A.5, no presumption shall arise that a 

person is not a dealer or government 

securities dealer as defined by the 

Exchange Act solely because that person 

does not satisfy the standard set forth in 

the final rules. 

b. Expressing Trading Interest Factor 

The Commission proposed a second 

qualitative factor to identify activity that 

‘‘has the effect of providing liquidity to 

other market participants’’ focused on 

the expression of trading interests. 

Specifically, under proposed 17 CFR 

240.3a5–4(a)(1)(ii) and 240.3a44– 

2(a)(1)(ii), a person that, trading for its 

own account, ‘‘routinely express[es] 

trading interests that are at or near the 

best available prices on both sides of the 

market and that are communicated and 

represented in a way that makes them 


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77As discussed below, the Commission is adding 

the phrase ‘‘for the same security’’ to the expressing 

trading interest factor to specify that this factor 

applies to expressing trading interest on both sides 

of the market for the same security. 

78Proposing Release at 23068. 

79 Id. 

80 Id. 

81SIFMA Comment Letter I. 

82 Id. 

83See, e.g., MFA Comment Letter I; SIFMA AMG 

Comment Letter; AIMA Comment Letter II. 

84See, e.g., MFA Comment Letter I; McIntyre 

Comment Letter II; Consensys Comment Letter; 

Gretz Comment Letter; FIA PTG Comment Letter I; 

Blockchain Comment Letter; NAPFM Comment 

Letter; ADAM Comment Letter; SIFMA AMG 

Comment Letter; Comment Letter of Managed 

Funds Association (July 21, 2023) (‘‘MFA Comment 

Letter II’’); Element Comment Letter; Morgan Lewis 

Comment Letter; ABA Comment Letter. 

85See 15 U.S.C. 78c(a)(5) and 78c(a)(44). 

86Proposing Release at 23068. 

87 Id. 

88 Id. 

89See, e.g., MFA Comment Letter I; McIntyre 

Comment Letter II; Consensys Comment Letter; 

Gretz Comment Letter; FIA PTG Comment Letter I; 

Blockchain Comment Letter; NAPFM Comment 

Letter; ADAM Comment Letter; SIFMA AMG 

Comment Letter; MFA Comment Letter II; Element 

Comment Letter; Morgan Lewis Comment Letter; 

ABA Comment Letter. 

90See, e.g., MFA Comment Letter I; Element 

Comment Letter; ADAM Comment Letter; Morgan 

Lewis Comment Letter; SIFMA AMG Comment 

Letter. 

91MFA Comment Letter I. 

92 Id. See also Element Comment Letter 

(‘‘‘routine’ trading can indicate market making, 

which implies a dealer function, but can also 

indicate the day-to-day activity of a private fund’s 

trading desk.’’). 

93ADAM Comment Letter. See also SIFMA AMG 

Comment Letter. 

94See, e.g., ADAM Comment Letter; Morgan 

Lewis Comment Letter; SIFMA AMG Comment 

Letter; see also Proposing Release at n.132. 

accessible to other market participants’’ 

would be engaging in a routine pattern 

of trading that has the effect of 

providing liquidity to other market 

participants, and as a result, would be 

a dealer under the proposed rules.77 As 

the Commission stated in the Proposing 

Release, this factor ‘‘would update the 

longstanding understanding that regular 

or continuous quotation is a hallmark of 

market making or de facto market 

making (and, hence, dealer) activity, to 

reflect technological changes to the 

ways in which buyers and sellers of 

securities are brought together.’’ 78

The Commission explained in the 

Proposing Release the meanings of 

certain key terms used in the proposed 

second qualitative factor.79 Specifically, 

as discussed in more detail below, the 

Commission explained the terms 

‘‘routinely,’’ ‘‘trading interests’’ and 

‘‘best available prices on both sides of 

the market.’’ 80

The Commission received a range of 

comments on the proposed second 

qualitative factor. One commenter 

explicitly supported the proposed 

second qualitative factor, voicing 

support for the policy goal of requiring 

PTFs in the government securities 

market to register as government 

securities dealers.81 The commenter 

stated that it believed that the second 

qualitative factor would achieve this 

goal.82 As discussed below, a number of 

commenters opposed the proposed 

second qualitative factor, contending 

that the factor would capture activity 

that was not dealing,83 and expressing 

concerns about certain terms used in 

this factor (i.e., ‘‘routinely,’’ ‘‘trading 

interests,’’ ‘‘both sides of the market,’’ 

‘‘accessible to other market 

participants’’), as well as addressing 

other issues.84

Advancements in the securities 

markets have altered the way in which 

market participants interact with the 

markets. Certain market participants 

continue to perform important dealer 

functions as providers of liquidity to 

other market participants by expressing 

trading interest on both sides of the 

market for a security to other market 

participants. The expressing trading 

interest factor takes these changes into 

account, while also allowing for 

flexibility in its application in the 

markets for different securities, based on 

the wide variance in liquidity, depth, or 

other traits. 

In adopting the proposed second 

qualitative factor as the expressing 

trading interest factor, the Commission 

is replacing the term ‘‘routinely’’ with 

‘‘regularly.’’ The Commission is also 

revising the rule text to explicitly 

provide that the test applies with 

respect to the expression of trading 

interest in the ‘‘same’’ security. Other 

than these changes, and certain nonsubstantive changes, for the reasons set 

forth below, the Commission is adopting 

this factor as proposed. Accordingly, 

under the expressing trading interest 

factor, a person ‘‘regularly expressing 

trading interest that is at or near the best 

available prices on both sides of the 

market for the same security and that is 

communicated and represented in a way 

that makes it accessible to other market 

participants’’ is engaged in buying and 

selling securities for its own account ‘‘as 

a part of a regular business’’ as the 

phrase is used in sections 3(a)(5)(B) and 

3(a)(44)(A) of the Exchange Act. The 

expressing trading interest factor will 

appropriately capture those market 

participants who are engaging in 

liquidity-providing activities similar to 

those traditionally performed by dealers 

or government securities dealers as 

defined under sections 3(a)(5) and 

3(a)(44) of the Exchange Act.85

Regularly 

The Proposing Release stated that the 

term ‘‘routinely’’ as used in the 

proposed second qualitative factor 

meant that a person must express 

trading interests more frequently than 

occasionally, but not necessarily 

continuously, both intraday and across 

time.86 The use of the term ‘‘routinely’’ 

in the proposed second qualitative 

factor was thus intended to capture 

significant liquidity providers who 

express trading interests at a high 

enough frequency to play a significant 

role in price discovery and the 

provision of market liquidity, even if 

their liquidity provision may not be 

continuous like that of some traditional 

dealers.87 The Proposing Release stated 

that the liquidity providers that would 

be covered by the proposed second 

qualitative factor are very active in the 

markets—their participation is very 

routine—as demonstrated by the ‘‘key 

role’’ they play ‘‘in price discovery and 

the provision of market liquidity’’ in 

both the interdealer U.S. Treasury 

market and the equity markets.88

A number of commenters expressed 

concerns related to the use of the term 

‘‘routinely.’’ 89 Several commenters 

stated that the term ‘‘routinely’’ was 

unclear, which would make it difficult 

or impossible for market participants to 

determine whether their activities 

would be captured by the proposed 

second qualitative factor.90 For 

example, one commenter stated that the 

term ‘‘routinely’’ is ‘‘unclear, defined 

with reference to another undefined 

concept (‘occasional’) and distinguished 

from a concept (‘continuous’) that 

market participants actually understand 

and have experience applying.’’ 91 As a 

result, the commenter stated this factor 

‘‘would ultimately be unworkable for 

market participants who will have to 

make subjective determinations, on at 

least a daily basis, about whether they 

are ‘routinely’ engaging in the activity 

described in [the proposed rules].’’ 92

Another commenter asserted that use of 

the term ‘‘routinely’’ ‘‘will lead to 

inconsistent application across market 

participants.’’ 93 Commenters also raised 

questions about the Proposing Release’s 

analogy to the approach in the 

Commission’s joint rulemaking with the 

Commodity Futures Trading 

Commission regarding, among other 

things, the definitions of ‘‘swap dealer’’ 

and ‘‘security-based swap dealer.’’ 94 In 

particular, commenters stated that the 

reference was inappropriate because of 

the different nature of the markets for 


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95See, e.g., ADAM Comment Letter; Morgan 

Lewis Comment Letter; SIFMA AMG Comment 

Letter. 

96SIFMA AMG Comment Letter; Comment Letter 

of BlackRock (Mar. 16, 2023) (‘‘BlackRock Comment 

Letter’’). 

97MFA Comment Letter I (‘‘. . .but query, was 

‘nearly continuous’ considered? Or ‘regular’?’’); 

McIntyre Comment Letter II (stating that the 

Proposed Rule ‘‘replaces the statutory text of 

‘‘regular’’ and ‘‘continuous’’ with an amorphous 

notion of ‘‘routine’’ patterns of providing 

liquidity.’’). 

98As proposed, the term ‘‘routinely’’ would have 

meant both repeatedly within a day and repeatedly 

over time. See Proposing Release at 23068. 

99See supra note 97. 

100 15 U.S.C. 78c(a)(5). 

101See, e.g., Iqbal v. United States Citizenship & 

Immigr. Servs., 397 F. Supp. 3d 273, 283 (W.D.N.Y. 

2019) (quoting Merriam-Webster, https://www.

merriam-webster.com/dictionary/continuous (Aug. 

22, 2019)); see also Axia Inc. v. Jarke Corp., No. 87 

C 8024, 1989 WL 39722, at *3 (N.D. Ill. Apr. 20, 

1989) (explaining that ‘‘continuous’’ is commonly 

understood as ‘‘uninterrupted’’ in the context of an 

interpretation of a patent claim). 

102See Remarks of Lorie K. Logan, Executive Vice 

President of the Federal Reserve Bank of New York, 

at the Brookings-Chicago Booth Task Force on 

Financial Stability, available at https://www.

newyorkfed.org/newsevents/speeches/2020/ 

log201023; Remarks of Deputy Secretary Justin 

Muzinich at the 2020 U.S. Treasury Market 

Conference | U.S. Department of the Treasury; see 

also Treasury Market Liquidity during the COVID– 

19 Crisis—Liberty Street Economics 

(newyorkfed.org). See also 2015 IAWG Report 

(when conducting an algorithm-level analysis from 

the event window on Oct. 15, 2014, the IAWG 

found ‘‘the analysis suggests that multiple types of 

trading strategies were deployed by PTFs during the 

event window. Some PTF algorithms appear to 

explain the considerable amount of net passive 

market making activity that was witnessed across 

cash and futures over the event window and likely 

was an important contributing factor to the absence 

of price gapping despite the unprecedented large 

price swings. Another, and equally significant, 

group of PTF strategies appears to have aggressively 

traded in the direction of price moves during the 

event window, accounting for the bulk of the 

overall aggressive trading imbalance observed.’’). 

103See Proposing Release at 23055. 

104See Proposing Release at 23058 (stating ‘‘[t]he 

‘regularity’ of participation in securities 

transactions necessary to find that a person is a 

‘dealer’ ’’ has not been quantified, but involves 

engaging in ‘more than a few isolated’ securities 

transactions.’’) (citing SEC v. Am. Inst. Counselors, 

Inc., Fed. Sec. L. Rep. (CCH) ¶ 95388 (D.D.C. 1975)); 

see also supra note 98. 

105See Concept Release on Equity Market 

Structure, Exchange Act Release No. 61358 (Jan. 14, 

2010), 75 FR 3594 (Jan. 21, 2010) (‘‘2010 Equity 

Market Structure Concept Release’’) at 3607–08. 

106See Amended Rule 15b9–1 Adopting Release 

at n.8. 

107 2010 Equity Market Structure Concept Release 

at 3607–08. 

108Proposing Release at 23068. 

109 Id. 

cash securities and security-based 

swaps.95

As an alternative to ‘‘routinely,’’ some 

commenters suggested using a different 

term, with most such commenters 

suggesting ‘‘continuous.’’ 96 Some 

commenters asked whether the 

Commission had considered using 

‘‘regularly,’’ stating that the statute uses 

the term ‘‘regular.’’ 97

After further consideration, the 

Commission has replaced the term 

‘‘routinely’’ with ‘‘regularly.’’ As with 

the term ‘‘routinely’’ in the Proposing 

Release, the term ‘‘regularly’’ in the final 

rules will apply to a person’s expression 

of trading interest both within a trading 

day and over time.98 This requirement 

distinguishes persons engaging in 

isolated or sporadic expressions of 

trading interest from persons whose 

regularity of expression of trading 

interest demonstrates that they are 

acting as dealers. As some commenters 

expressly stated,99 the term ‘‘regular’’ is 

part of the statutory definition of 

‘‘dealer’’ in the Exchange Act.100 The 

term ‘‘regular’’ captures persons 

operating as dealers through their 

expression of trading interest on both 

sides of the market for the same security 

in a manner consistent with this 

statutory text. 

A market participant does not need to 

be continuously expressing trading 

interest to be engaging in a ‘‘regular’’ 

business. The Exchange Act’s 

definitions of ‘‘dealer’’ and ‘‘government 

securities dealer’’ do not include a 

requirement of continuous 

participation. The ordinary meaning of 

‘‘continuous’’ is ‘‘characterized by 

continuity; extending in space without 

interruption of substance; having not 

interstices or breaks; having its parts in 

immediate connection; connected, 

unbroken’’ and ‘‘marked by 

uninterrupted extension in space, time, 

or sequence,’’ as defined by the Oxford 

English and the Merriam-Webster 

dictionaries, respectively.101 While such 

‘‘continuous’’ expression of trading 

interest would be indicative of dealer 

activity, a continuous standard would 

not be appropriate because it would be 

too limited in markets for securities that 

exhibit varying degrees of depth and 

liquidity.102

Whether a person’s activity is 

‘‘regular’’ will depend on the liquidity 

and depth of the relevant market for the 

security. For example, in markets that 

have significant liquidity and market 

depth, and have experienced 

advancements in technology and 

electronic trading, like the U.S. Treasury 

market,103 expressing trading interest on 

both sides of the market for the same 

security as part of an investment 

strategy on a one-off basis would not be 

sufficiently regular to be caught by the 

expressing trading interest factor. 

Rather, ‘‘regular’’ in the most liquid 

markets would mean more frequent 

periods of expressing trading interest on 

both sides of the market both intraday 

and across days given the efficiency in 

which securities can be bought and sold 

and the market’s ability to absorb orders 

without significantly impacting the 

price of the security.104 In contrast, if 

the market for a security is less liquid, 

and it is difficult to execute orders in 

that security or large orders can 

dramatically affect the price of the 

security, the term ‘‘regular’’ would 

account for the possibility of more 

interruptions or wider spreads for the 

best available prices. 

The expressing trading interest factor 

captures the hallmark de facto market 

making activity in which dealers make 

a market in a security, standing ready to 

trade on both sides of the market on the 

same security on a regular ongoing 

basis.105 Those market participants that 

have established themselves as 

significant market intermediaries—and 

critical sources of liquidity—in a market 

by employing automated, algorithmic 

trading strategies that rely on high 

frequency trading strategies to generate 

a large volume of orders and 

transactions would be captured by the 

expressing trading interest factor.106

This would include market participants 

that, for example, employ passive 

market making strategies involving the 

submission of non-marketable resting 

orders (bids and offers) that provide 

liquidity to the marketplace at specified 

prices.107 Accordingly, the term 

‘‘regularly’’ will capture those market 

participants that engage in the activity 

described in the expressing trading 

interest factor on a frequent enough 

basis (both within a trading day and 

over time) that they do so as part of a 

regular business. 

Trading Interest 

The proposed second qualitative 

factor in the proposed rules would have 

applied to ‘‘trading interests.’’ The 

Proposing Release stated that the use of 

the broader term ‘‘trading interests’’ in 

the proposed second qualitative factor, 

rather than the term ‘‘quotations,’’ 

would reflect the prevalence of non-firm 

trading interest offered by marketplaces 

today, and account for the varied ways 

in which developing technologies 

permit market participants to hold 

themselves out as willing to buy or sell 

securities, or otherwise communicate 

their willingness to trade, and to 

effectively make markets.108 As 

explained in the Proposing Release, the 

broader term was intended to capture 

the traditional quoting engaged in by 

dealer liquidity providers, new and 

developing quoting equivalents, and the 

orders that actually result in the 

provision of liquidity.109 In other words, 


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110 Id. The Commission has stated previously that 

a market maker engaged in bona-fide market making 

is a ‘‘broker-dealer that deals on a regular basis with 

other broker-dealers, actively buying and selling the 

subject security as well as regularly and 

continuously placing quotations in a quotation 

medium on both the bid and ask side of the 

market.’’ See, e.g., Exchange Act Release No. 32632 

(July 14, 1993), 58 FR 39072, 39074 (July 21, 1993). 

111Proposing Release at 23068. 

112See, e.g., MFA Comment Letter I; SIFMA AMG 

Comment Letter; AIMA Comment Letter II. A 

number of other commenters objected to the 

Proposing Release’s use of the term ‘‘trading 

interests’’ on the grounds that the term is the 

subject of another proposed rule. See, e.g., ABA 

Comment Letter; SIFMA AMG Comment Letter; 

SIFMA Comment Letter I; MFA Comment Letter I. 

As discussed below, it is appropriate for the final 

rules to use the term ‘‘trading interest.’’ The 

Commission is adopting the term ‘‘trading interest’’ 

as explained herein for purposes of the final rules. 

113MFA Comment Letter I. 

114MFA Comment Letter II; see also MFA 

Comment Letter I. 

115SIFMA AMG Comment Letter. 

116 Id.; MFA Comment Letter I. 

117SIFMA AMG Comment Letter. 

118 Id.; AIMA Comment Letter II. 

119McIntyre Comment Letter II. 

120See AIMA Comment Letter II (explaining, for 

example, that some asset managers may have funds 

with active fixed-income strategies that may be 

captured by the proposed second qualitative factor). 

121AIMA Comment Letter II. 

122Fried Frank Comment Letter. As discussed 

below, whether a person meets the definition of 

‘‘dealer’’ is not contingent upon whether that 

person has customers. 

123 DeFi Fund Comment Letter. 124Rule 3b–16(c) states that ‘‘the term order 

means any firm indication of a willingness to buy 

or sell a security, as either principal or agent, 

including any bid or offer quotation, market order, 

limit order, or other priced order.’’ The Proposing 

Release previously referenced the definition of 

‘‘order’’ under 17 CFR 242.300. Proposing Release 

at 23068. This release refers to Rule 3b–16(c), which 

defines the term ‘‘order’’ identically and is further 

discussed in the release adopting 17 CFR 242.300 

through 242.304 (‘‘Regulation ATS’’). See 

Regulation of Exchanges and Alternative Trading 

Systems, Exchange Act Release No. 40760 (Dec. 8, 

1998), 63 FR 70844 (Dec. 22, 1998). 

125See Proposing Release at 23068. 

the proposed use of the term ‘‘trading 

interests’’ was intended to update the 

Commission’s longstanding 

understanding that regular or 

continuous ‘‘quotation’’ is a hallmark of 

market making or de facto market 

making (and, hence, dealer) activity, to 

reflect the various and evolving ways in 

which buyers and sellers of securities 

are brought together.110 Using the term 

‘‘trading interests,’’ rather than 

‘‘quotations,’’ the Commission stated, 

would also allow for clear and 

consistent application of the definition 

of ‘‘dealer’’ and ‘‘government securities 

dealer.’’ 111

A number of commenters objected to 

the use of the term ‘‘trading interests’’ 

on various grounds including, among 

others, the difficulty in applying the 

term and the breadth of the term 

purportedly causing non-dealing trading 

activity to be captured.112 One 

commenter explained that it would be 

challenging for firms to assess whether 

non-firm trading interest actually is at or 

near the best available price because 

non-firm trading interest often is not 

executed given that firms are not 

required to execute non-firm trading 

interest, even if matched.113 The 

commenter also stated that nearly any 

active investor or trader might express 

trading interests on both sides of the 

market to get best execution, and 

suggested limiting the factor instead to 

‘‘firm two-sided quotations’’ expressed 

on a ‘‘continuous or near continuous 

basis.’’ 114 Another commenter similarly 

requested that the term ‘‘trading 

interest’’ be replaced with a quotation 

and order-based standard.115

Two commenters stated that applying 

the proposed second qualitative factor 

to investment advisers would 

inappropriately subject them to 

potential dealer status simply for 

exercising their fiduciary duties.116 For 

example, one commenter stated that an 

investment adviser may have to submit 

trading interests throughout a trading 

day in order to obtain best execution 

and meet other fiduciary obligations 

acting for their clients, or to use specific 

trading protocols available in the 

market, such as the order book.117

Similarly, other commenters stated 

that the proposed second qualitative 

factor could require firms, including 

unregistered funds excluded from the 

Investment Company Act and registered 

investment advisers, to register as 

dealers for engaging in activity that has 

not historically been considered to be 

dealer activity.118 One commenter, for 

example, questioned whether portfolio 

managers, by taking long/short positions 

or seeking arbitrage opportunities, 

would be required to register as dealers 

under the proposed second qualitative 

factor.119 Another commenter stated 

that some asset managers have funds 

with active fixed-income trading 

strategies involving indications of 

interest to trade bonds, as well as swaps, 

on similar or even identical underlying 

issuers in order to take advantage of 

mispricing or to create a unique nondirectional risk profile in a trade.120

According to this commenter, although 

this activity entails communicating and 

indicating interest on such trades to a 

number of counterparties, it has never 

been considered dealing.121 Yet another 

commenter stated that firms that, as a 

primary element of their trading 

strategy, simultaneously and 

continuously post bids and offers in a 

specific instrument at or near the 

national best bid and offer, have not 

historically been treated as having 

engaged in dealer activity where the 

firm posting quotes did not hold itself 

out to customers.122 One commenter 

asked for clarity on how the proposed 

second qualitative factor would apply in 

the digital assets space, and in 

particular whether participants in a 

digital asset liquidity pool, by leaving 

their assets in the pool and thereby 

exposing those assets to sale at the 

pool’s prevailing exchange rate, are 

expressing a ‘‘trading interest.’’ 123

After consideration of the comments, 

the Commission has determined to 

adopt the proposed second qualitative 

factor with minor, non-substantive 

modifications to the term ‘‘trading 

interest.’’ The term ‘‘trading interest’’ 

means: (i) an ‘‘order’’ as the term is 

defined under 17 CFR 240.3b–16(c) 

(‘‘Rule 3b–16(c)’’); 124 or (ii) any nonfirm indication of a willingness to buy 

or sell a security that identifies the 

security and at least one of the 

following: quantity, direction (buy or 

sell), or price. A standard of ‘‘firm twosided quotations’’ expressed on a 

‘‘continuous or near continuous basis,’’ 

while captured by the existing 

understanding of ‘‘dealer’’ under 

Exchange Act section 3(a)(5), does not 

account for the full range of liquidityproviding dealer activity undertaken in 

today’s security markets.125 The term 

‘‘trading interest’’ accounts for the 

varied mechanisms that permit market 

participants to effectively make markets. 

These include, but are not limited to, 

the use of streaming quotes, request for 

quotes (‘‘RFQs’’), or order books. To be 

captured by the expressing trading 

interest factor depends less on the 

method used to communicate trading 

interest, and more on whether the 

person is expressing trading interest on 

both sides of the market for the same 

security that has the effect of providing 

liquidity in the same security to other 

market participants. 

At the same time, expressing trading 

interest is not, standing alone, enough to 

demonstrate engaging in a ‘‘regular 

pattern of buying and selling securities 

that has the effect of providing liquidity 

to other market participants’’ under the 

final rules. Specifically, under the final 

rules, a person will be engaged in 

activity as part of a regular business if 

that person ‘‘[e]ngages in a regular 

pattern of buying and selling securities 

that has the effect of providing liquidity 

to other market participants by . . . 

[r]egularly expressing trading interest 

that is at or near the best available 

prices on both sides of the market for 


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14950 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

126See Rules 3a5–4(a)(1)(ii) and 3a44–2(a)(1)(ii). 

127See SIFMA AMG Comment Letter. See also 

section II.A.4. 

128Furthermore, as discussed in section II.A.3, 

the Commission declines to include an exclusion 

from the final rules for registered investment 

advisers and private funds and continues to believe 

that when engaged in dealer activity, including by 

expressing trading interest as set forth in the factor, 

registered investment advisers and private funds 

should be subject to the dealer regulatory regime, 

which includes not only registration obligations, 

but also comprehensive regulatory requirements 

and oversight that broadly focus on market 

functionality—that is, the impact of dealing activity 

on the market as a whole. 

129See supra notes 55–59 and accompanying text. 

130See id.; 15 U.S.C. 78c(a)(5); 15 U.S.C. 

78c(a)(44)(A). In fact, the definition of ‘‘broker’’ 

presumes that a person is effectuating securities 

transactions on behalf of customers. See 15 U.S.C. 

78c(a)(4) (stating that a broker means ‘‘any person 

engaged in the business of effecting transactions in 

securities for the account of others’’) (emphasis 

added). 

131 DeFi Fund Comment Letter. 

132A threshold question in determining the 

applicability of the final rules is whether a person 

engaging with products, structures, or activities in 

the so-called DeFi market has or controls total 

assets of less than $50 million. See 17 CFR 240.3a5– 

4(a)(2)(i) (‘‘Rule 3a5–4(a)(2)(i)’’); 17 CFR 240.3a44– 

2(a)(2)(i) (‘‘Rule 3a44–2(a)(2)(i)’’); section II.A.3. If 

so, that person would not be captured by the final 

rules. See also 17 CFR 240.3a5–4(d); 17 CFR 

240.3a44–2(d) (providing that a person not meeting 

the conditions set forth in the final rules may 

nonetheless be a dealer if it otherwise engages in 

a regular business of buying and selling securities 

for its own account); infra note 284 and 

accompanying text (citing examples where persons 

engaging in crypto asset securities transactions are 

operating as dealers as defined under section 

3(a)(5)). If this exclusion cannot be relied upon, 

then the expressing trading interest factor could 

apply. Furthermore, as discussed in section II.A.3.a, 

the exclusion for persons having or controlling less 

than $50 million in total assets applies to the final 

rules and does not modify existing applicable court 

precedent and Commission interpretations. 

133See, e.g., ADAM Comment Letter (stating ‘‘the 

blanket application of the dealer and government 

securities dealer regulatory framework to digital 

assets would be premature and imprudent.’’); see 

also Consensys Comment Letter; DeFi Fund 

Comment Letter; Chamber of Digital Commerce 

Comment Letter; Blockchain Association Comment 

Letter. 

134The application of the final rules turns on 

whether a particular crypto asset is a security, as 

defined under the U.S. Federal securities laws. The 

term ‘‘security’’ includes an ‘‘investment contract,’’ 

as well as other instruments. To the extent there is 

a question as to whether a particular crypto asset 

is an investment contract that is a security, the 

analysis is governed by the test first articulated by 

the Supreme Court in SEC v. W.J. Howey Co., 328 

U.S. 293, 301 (1946). See, e.g., SEC v. Terraform 

Labs PTE, Ltd., No. 23–cv–1346, 2023 WL 8944860 

(S.D.N.Y. Dec. 28, 2023 (stating that Howey was and 

remains a binding statement of law and that there 

was no genuine dispute that the elements of the 

Howey test had been met)); SEC v. Kik Interactive 

Inc., 492 F. Supp. 3d 169, 177–180 (S.D.N.Y. 2020) 

(applying Howey in granting the Commission’s 

motion for summary judgment finding Kik’s sale of 

Kin tokens to the public was a sale of a security and 

required a registration statement); SEC v. LBRY, No. 

21–CV–260–PB, 2022 WL 16744741 (D.N.H. Nov. 7, 

2022) (applying Howey in granting the 

Commission’s motion for summary judgment 

finding ‘‘no reasonable trier of fact could reject the 

SEC’s contention that LBRY offered LBC [a crypto 

asset] as a security.’’); Report of Investigation 

Pursuant to Section 21(a) of the Securities Exchange 

Act of 1934: The DAO, Exchange Act Release No. 

81207 (July 25, 2017) (‘‘DAO 21(a) Report’’) 

(describing how DAO tokens were securities under 

Howey). 

135See sections II.A.3, III.D.6; see also Policy 

Recommendations for Crypto and Digital Asset 

Markets Final Report, Board of the International 

Organization of Securities Commissions (Nov. 2023) 

(stating that ‘‘the regulatory frameworks (existing or 

new) should seek to achieve regulatory outcomes 

for investor protection and market integrity that are 

the same as, or consistent with, those required in 

traditional financial markets in order to facilitate a 

level-playing field between crypto-assets and 

traditional financial markets and help reduce the 

risk of regulatory arbitrage’’), https://www.iosco.org/ 

library/pubdocs/pdf/IOSCOPD747.pdf; Final Report 

with Policy Recommendations for Decentralized 

Finance (DeFi), Board of the International 

Organization of Securities Commissions (Dec. 

2023), https://www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD754.pdf. 

136Proposing Release at 23068. 

137 Id. (emphasis added). 

138 Id. 

the same security and that is 

communicated and represented in a way 

that makes it accessible to other market 

participants (emphasis added).’’ 126 A 

market participant seeking price 

information by requesting quotes on a 

security, without including prices, on 

both sides of the market would 

generally not satisfy this qualitative 

factor because that trading interest, 

absent more, would not be ‘‘at or near 

the best available price.’’ With respect to 

the commenter’s statement that 

investment advisers’ fiduciary duties 

may require them to submit ‘‘trading 

interests’’ throughout a trading day, the 

final rules have been modified so that 

the definition of ‘‘own account’’ applies 

to accounts in which the person holds 

the account in its name or the account 

is held for the benefit of that person.127

As such, the trading interest expressed 

by investment advisers for purposes of 

their fiduciary duty to their clients and 

their clients’ accounts, such as when 

investment advisers place orders or 

request quotations on behalf of their 

clients, would not be activity captured 

by the expressing trading interest factor, 

unless the investment adviser itself is 

the account holder or the account is 

held for the benefit of the investment 

adviser.128 Moreover, as discussed 

above, persons engaging in the activity 

described in the qualitative standard are 

acting as dealers regardless of whether 

the person engaging in such dealer 

activity has or holds itself out to 

customers.129 The statutory definitions 

of ‘‘dealer’’ and ‘‘government securities 

dealer’’ distinguish between a dealer 

and a trader on the basis of whether a 

person is in the ‘‘regular business’’ of 

buying and selling securities for one’s 

own account—not whether the person is 

doing so to effectuate customer 

orders.130

One commenter questioned how to 

apply the term ‘‘trading interest’’ to 

certain types of products, structures, or 

activities in the so-called decentralized 

finance (‘‘DeFi’’) market to provide 

crypto asset securities liquidity.131

Whether a particular activity in the 

crypto asset securities market, including 

in the so-called DeFi market, gives rise 

to dealer activity requires an analysis of 

the totality of the particular 

circumstances against all elements of 

the expressing trading interest factor.132

Commenters argued that crypto assets 

should not be covered by the final 

rules.133 However, the Commission is 

not excluding any particular type of 

securities, including crypto asset 

securities, from the application of the 

final rules. The dealer framework is a 

functional analysis based on the 

securities trading activities undertaken 

by a person, not the type of security 

being traded. Persons, including persons 

using so-called ‘‘automated market 

makers,’’ that are engaged in buying and 

selling securities for their own account 

must consider whether they are dealers 

under the final rules, and thus subject 

to dealer registration requirements.134

As discussed below, the final rules 

build off existing legal standards and, as 

discussed throughout this release, are 

designed to address where market 

participants are engaging in de facto 

market making and required to register 

as dealers or government securities 

dealers, regardless of which such 

technology is used.135 As explained 

throughout this release, the application 

of the dealer regulatory regime to such 

persons will promote the Commission’s 

longstanding mission. 

Both Sides of the Market 

Under the proposed rules, in order to 

come within the proposed second 

qualitative factor, the expression of 

trading interests would need to be ‘‘at or 

near the best available prices on both 

sides of the market.’’ 136 As discussed in 

the Proposing Release, the phrase ‘‘at or 

near the best available prices on both 

sides of the market’’ describes ‘‘the 

activity of liquidity-providing dealers, 

which help determine the spread 

between the best available bid price and 

the best available ask price for a given 

security.’’ 137 The Proposing Release 

further explained that, by competing to 

both buy and sell at the best available 

prices, liquidity providers help to 

narrow bid-ask spreads.138 The 

Commission also stated that the 

proposed second qualitative factor 

helped to emphasize that a liquidity 


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139 Id. 

140See, e.g., SIFMA AMG Comment Letter; AIMA 

Comment Letter II; MFA Comment Letter I; Citadel 

Comment Letter. 

141 Id. For instance, according to one commenter, 

there are examples of where market participants 

using a CLOB routinely express trading interests on 

both sides of the market in various instruments over 

the course of a trading day, and CLOBs can benefit 

both market liquidity and competition. See Citadel 

Comment Letter. 

142See MFA Comment Letter I; Citadel Comment 

Letter. 

143MFA Comment Letter I. 

144See, e.g., Citadel Comment Letter; Lewis 

Study; MFA Comment Letter I; MFA Comment 

Letter II. 

145MFA Comment Letter II. 

146Proposing Release at 23068 (stating ‘‘[t]he 

phrase ‘best available prices on both sides of the 

market’ more specifically and clearly describes the 

activity of liquidity-providing dealers, which help 

determine the spread between the best available bid 

price and the best available ask price for a given 

security’’) (emphasis added). The phrase ‘‘same 

security’’ is to be interpreted as that phrase is used 

in the Proposing Release. See Proposing Release at 

23067 (stating ‘‘ ‘the same’ securities means that the 

securities bought and sold are securities of the same 

class and having the same terms, conditions, and 

rights [, and] securities bearing the same Committee 

on Uniform Securities Identification Procedures 

(‘CUSIP’) number, for example, would be 

considered ‘the same.’ ’’). 

147See 2010 Equity Market Structure Concept 

Release at 3608 (stating that ‘‘proprietary traders are 

analogous to OTC [over-the-counter] market makers 

in that they have considerable flexibility in trading 

without significant negative or affirmative 

obligations for overall market quality’’). 

148See, e.g., Disclosure of Order Execution and 

Routing Practices, Exchange Act Release No. 43590 

(Nov. 17, 2000), 65 FR 75414, 75418 (Dec. 1, 2000) 

(stating that quotation information contained in the 

public quotation system must be considered in 

seeking best execution of customer orders). 

149 Id. 

150Proposing Release at 23068. 

151 Id. 

152MFA Comment Letter I. 

153 Id. 

provider, to come within the rules, must 

both buy and sell securities.139

Several commenters requested 

clarification as to how to apply the 

phrase ‘‘on both sides of the market,’’ 

particularly, with regard to what period 

of time to use when evaluating orders 

placed on both sides of the market, and 

as to whether the phrase applies to the 

market for a single security or related 

instruments.140 Some commenters 

asserted that the absence of a time 

limitation could prevent market 

participants from using all available 

trading strategies in a market, including 

active trading strategies where a person 

would post resting offers and bids on a 

central limit order book (‘‘CLOB’’), 

without registering as a dealer.141 Two 

of these commenters urged the 

Commission to modify the proposed 

second qualitative factor to clarify that 

the trading interest must be expressed 

on both sides of the market 

simultaneously.142 According to one 

commenter, if the proposed second 

qualitative factor does not require that 

the trading interest be expressed on both 

sides of the market simultaneously, it 

‘‘would result in this test capturing 

trading that is not consistent with dealer 

activity.’’ 143 Commenters also urged the 

Commission to clarify that the phrase 

‘‘both sides of the market’’ applied to 

the same security.144 One commenter 

suggested that the Commission modify 

the proposed second qualitative factor 

to add the phrase ‘‘for the same 

security.’’ 145

Consistent with the Proposing Release 

which explained that the proposed 

second qualitative factor applies to 

persons expressing trading interests on 

both sides of the market in a given 

security, the Commission is modifying 

the rule text to add the phrase ‘‘for the 

same security’’ to the second qualitative 

factor.146

The Commission is not adopting a 

requirement that the trading interest be 

expressed simultaneously on both sides 

of the market. Limiting the expressing 

trading interest factor to the 

simultaneous expression of trading 

interests could exclude other regular 

expressions of trading interest that 

constitute dealer activity by providing 

liquidity to other market participants. 

While simultaneously expressing 

trading interest on both sides of the 

market in the same security is indicative 

of dealer activity, market participants 

also can be acting as dealers by regularly 

providing liquidity even where the 

expressions of trading interest on both 

sides of the market for the same security 

are not simultaneous, particularly 

because the markets for different 

securities have varying structures, 

trading volume, and liquidity.147

Further, adding a simultaneity 

condition could lead to behavior where 

a dealer might, for example, express 

trading interest to buy and sell in 

alternate moments in time to evade the 

requirement to register. Accordingly, the 

Commission is not conditioning the 

application of the expressing trading 

interest factor on trading interests being 

expressed simultaneously. Due to the 

differences between markets, 

participants will need to assess the 

totality of their trading activity to 

determine if they are expressing trading 

interests on both sides of the market for 

the same security sufficiently close in 

time to have the effect of providing 

liquidity in the same security to other 

market participants. 

The Commission recognizes that nonfirm trading interest (and firm 

quotations for that matter) need not be 

executed, even if matched. Nonetheless, 

it will be possible to assess whether a 

non-firm trading interest is actually ‘‘at 

or near the best available price,’’ using 

the similar information that market 

participants use to make bids and offers, 

including recently completed purchases 

and sales and the totality of indications 

of willingness to buy or sell at specified 

prices.148 For example, market 

participants can use similar information 

to that used by registered broker-dealers 

to assess whether a customer order was 

executed at the best available price.149

Finally, as discussed above in 

connection with the term ‘‘trading 

interest,’’ to come within this factor, a 

person expressing trading interest 

(including through a CLOB) must be 

buying and selling securities, and it 

must engage in such activity 

‘‘regularly.’’ 

Accessible to Other Market Participants 

Under the proposed rules, market 

participants would have had to 

routinely express trading interests 

accessible to other market participants 

to be considered to have engaged in a 

routine pattern of trading that has the 

effect of providing liquidity to other 

market participants.150 In the Proposing 

Release, the Commission explained that 

the proposed second qualitative factor 

would apply only when the expressed 

trading interests that are at or near the 

best available prices on both sides of the 

market are ‘‘communicated and 

represented in a way that makes them 

accessible to other market 

participants.’’ 151

One commenter objected to the 

proposed second qualitative factor’s 

phrase ‘‘communicated and represented 

in a way that makes them accessible to 

other market participants,’’ stating that 

the Proposing Release does not make 

clear whether trading interests made 

available to a limited group of 

participants via a RFQ would trigger the 

factor, versus trading interests 

published on a broadly accessible order 

book. The commenter stated further that 

the vagueness of the standard would 

prevent market participants from 

applying it with confidence and might 

encourage market participants to choose 

execution venues and order types that 

are not transparent or accessible.152 This 

commenter recommended adopting a 

test defining a person acting as a bona 

fide market maker under 17 CFR 

242.200 through 242.204 (‘‘Regulation 

SHO’’) as a dealer, in lieu of the first and 

second proposed qualitative factors.153

The phrase ‘‘accessible to other 

market participants’’ reflects the plain 


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154On the other hand, when an investor seeking 

liquidity sends a single, one-sided RFQ to a number 

of potential liquidity providers, this action by itself 

does not generally trigger the expressing trading 

interest factor because it is on one side of the 

market in an isolated instance. 

155Short Sales, Exchange Act Release No. 48709 

(Oct. 28, 2003), 68 FR 62972, 62977 (Nov. 6, 2003); 

see also Short Position and Short Activity Reporting 

by Institutional Investment Managers, Exchange Act 

Release No. 98738 (Oct. 13, 2023), 88 FR 75100, 

75136 (Nov. 1, 2023) (stating ‘‘a market maker must 

also be a market maker in the security being sold, 

and must be engaged in bona-fide market making 

in that security at the time of the short sale.’’). 

156The determination of eligibility for the bonafide market-making exceptions in Regulation SHO 

is distinct from the determination of whether the 

effect of a person’s trading activity indicates that 

such person is acting as a dealer. Proposing Release 

at n.131. 

157Comment Letter of Two Sigma (Mar. 31, 2023) 

(‘‘Two Sigma Comment Letter II’’). 

158Order Competition Rule, Exchange Act 

Release No. 96495 (Dec. 14, 2022), 88 FR 128 (Jan. 

3, 2023). 

159See section III.B. 

160Proposing Release at 23069. 

161 Id. 

162 Id. 

163 Id. 

164 Id. 

165 Id. 

166 Id. at 23069–70. As discussed in the Proposing 

Release, the term ‘‘trading venue’’ was designed to 

capture the variety and breadth of different venues 

resulting from market evolution. Id. To the extent 

meaning that a person expresses trading 

interests to more than one market 

participant. For example, where a 

person makes a trading interest 

available (such as streaming two-way 

indicative quotes) to more than one 

market participant, even if the person 

made that trading interest available 

through individual communications, 

that person would be expressing trading 

interest accessible to other market 

participants.154 Again, the expressing 

trading interest factor does not hinge on 

any particular method of 

communication and representation (e.g., 

RFQ, indications of interest, or 

streaming quotes); it depends on the 

totality of the trading activity to 

determine if the person is expressing 

trading interests on both sides of the 

market for the same security to have the 

effect of providing liquidity in the same 

security to other market participants. 

The Commission is not adopting the 

suggestion to replace this factor with a 

test defining a dealer as a person 

engaging in bona fide market making 

activities under Regulation SHO. The 

bona fide market making exception 

under Regulation SHO applies to a 

specific subset of dealer activity. As the 

Commission previously stated when 

proposing Regulation SHO, ‘‘a narrow 

exception for market makers and 

specialists engaged in bona fide market 

making activities is necessary because 

they may need to facilitate customer 

orders in a fast moving market without 

possible delays associated with 

complying with the proposed ‘locate’ 

rule.’’ 155 For example, a broker-dealer 

must claim the bona fide market making 

exception from the locate requirement 

of Regulation SHO at the time of the 

short sale in a particular security.156

Accordingly, limiting the applicability 

of the final rules to those persons 

eligible for Regulation SHO’s bona-fide 

market-making exception would 

exclude persons engaged in other 

liquidity-providing dealer activity. 

One commenter stated that the 

proposed second qualitative factor 

would impact the Commission’s Order 

Competition Rule proposal.157 On 

December 14, 2022, the Commission 

proposed a rule that would require 

certain orders of individual investors to 

be exposed to competition in fair and 

open auctions before such orders could 

be executed internally by any trading 

center that restricts order-by-order 

competition.158 As discussed below, the 

Commission has considered the current 

regulatory landscape in presenting the 

baseline. To the extent the proposed 

Order Competition Rule is adopted, the 

baseline in that rulemaking will reflect 

the regulatory landscape that is current 

at that time.159

In sum, the Commission has 

determined to replace the term 

‘‘routinely’’ with ‘‘regularly,’’ add the 

phrase ‘‘for the same security,’’ and 

make non-substantive modifications to 

this factor, but otherwise is adopting 

this factor as proposed. 

c. Primary Revenue Factor 

Finally, the Commission proposed a 

third qualitative factor encompassing 

activity that ‘‘has the effect of providing 

liquidity to other market participants.’’ 

Specifically, under proposed 17 CFR 

240.3a5–4(a)(1)(iii) and 240.3a44– 

2(a)(1)(iii), a person that, trading for its 

own account, ‘‘earn[ed] revenue 

primarily from capturing bid-ask 

spreads, by buying at the bid and selling 

at the offer, or from capturing any 

incentives offered by trading venues to 

liquidity-supplying trading interests,’’ 

would have been engaging in a routine 

pattern of trading that has the effect of 

providing liquidity to other market 

participants, and as a result, would have 

been a dealer under the proposed rules. 

The Commission explained in the 

Proposing Release that one fundamental 

characteristic typical of market makers 

and liquidity providers—and one that 

has historically been viewed as dealer 

activity—is trading in a manner 

designed to profit from bid-ask spreads 

or liquidity incentives rather than with 

a view toward appreciation in value.160

We stated that persons engaged in such 

activity are ‘‘in the business’’ of 

providing liquidity because (1) they 

routinely supply it and (2) the revenue 

they earn through bid-ask spreads or 

liquidity incentives is their primary 

source of revenue.161

The proposed third qualitative factor 

accounted for both forms of revenue. As 

to the first—capturing bid-ask spreads— 

the Commission stated that when a 

liquidity provider routinely buys and 

sells securities in a manner designed to 

capture a spread with such frequency 

and consistency that its revenue is made 

up primarily of this form of 

compensation, it would be considered 

to be engaged in a routine pattern of 

providing liquidity as a service and 

would fall within the scope of the 

rules.162 As to the second, the 

Commission stated that when a liquidity 

provider, as a result of its routine 

purchases and sales of securities, 

captures ‘‘incentives offered by trading 

venues to liquidity-supplying trading 

interests’’ with such frequency and 

consistency that its revenue is made up 

primarily of this form of compensation, 

it would be considered to be engaged in 

a routine pattern of providing liquidity 

as a service and generally standing 

ready to buy or sell securities, and so 

would fall within the scope of the 

proposed rules.163

In the Proposing Release, the 

Commission explained the meaning of 

certain key terms in the proposed third 

qualitative factor. The Commission 

stated that the factor used the phrase 

‘‘earn revenue’’—rather than, for 

example, ‘‘profit from’’—to make clear 

that a person’s trading strategies would 

not need to be profitable to bring them 

within the rule.164 Dealer activity is 

dealer activity regardless of whether it 

is profitable. With respect to the term 

‘‘primarily,’’ the Commission further 

stated that, generally speaking, although 

the Commission has not established a 

bright-line test, if a person derives the 

majority of its revenue from either of the 

sources described in the proposed third 

qualitative standard, it would likely be 

in a regular business of buying and 

selling securities or government 

securities for its own account.165

Finally, with respect to the term 

‘‘trading venues,’’ the Commission 

stated that market evolution has given 

rise to a variety of venues in which 

liquidity providers can express trading 

interests, and the term ‘‘trading venues’’ 

is designed to capture the breadth of 

these different venues.166 In explaining 


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new systems develop as a result of technological 

advancements that offer market participants the 

ability to provide liquidity in a security for other 

market participants, the term ‘‘trading venue’’ 

would apply to such systems. Id. 

167 Id. Whether an entity is or is not registered 

with the Commission does not affect the 

determination of whether that entity is a trading 

venue for purposes of the final rules. For example, 

a person operating a platform for executing trading 

interest internally would likely be operating as a 

broker or dealer, regardless of whether that person 

is registered as such, and the receipt of incentives 

from that person could be captured by the factor. 

See 15 U.S.C. 78o(a)(1) (absent an exemption, 

persons meeting the definition of broker or dealer 

must register with the Commission). 

168Proposing Release at 23070 (emphasis added). 

169 Id. 

170SIFMA Comment Letter I (stating that 

‘‘[s]ubject to our additional comments on the 

application of the proposed rules to bank holding 

companies, we believe that the qualitative standard 

in proposed . . . Rule 3a44–2(iii) [is] generally a 

good step forward to address this long-standing 

asymmetric regulatory treatment for similar 

[dealing] activities.’’); see also AIMA Comment 

Letter II (requesting the Commission to limit the 

qualitative standard to the third factor alone). 

171AIMA Comment Letter II. 

172See MFA Comment Letter I; see also MFA 

Comment Letter II. Another commenter stated it 

shared many of the comments raised by MFA with 

respect to the proposed third qualitative test. See 

BlackRock Comment Letter. See also ICI Comment 

Letter (stating ‘‘[t]o avoid unintentionally capturing 

ordinary investment and trading strategies, the 

Commission should limit the qualitative test to 

capture persons trading only in the same 

securities—where this purpose is clear—rather than 

trading in merely similar securities.’’). 

173See MFA Comment Letter I. 

174See id. 

175See id. 

176 Id. See also ABA Comment Letter (‘‘the 

proposed tests for the definition of ‘‘dealer’’ 

requires interpreting terms that are not yet settled 

because they are concurrently being commented on 

in a proposed form.’’); DeFi Fund Comment Letter 

(stating ‘‘whether a DeFi protocol constitutes a 

‘trading venue’ is likely to turn on the outcome of 

the Commission’s pending proposal to expand its 

‘exchange’ definition, which we strongly oppose.’’). 

As discussed below, the Commission believes it is 

appropriate for the final rules to use the term 

‘‘trading venues.’’ The Commission has proposed an 

amendment to Form ATS–N to change the term 

‘‘Trading Centers’’ to ‘‘trading venue’’ and has 

proposed the term to mean a national securities 

exchange or national securities association that 

operates an SRO trading facility, an ATS, an 

exchange market maker, an OTC market maker, a 

futures or options market, or any other broker- or 

dealer-operated platform for executing trading 

interest internally by trading as principal or 

crossing orders as agent. See Amendments 

regarding the Definition of ‘‘Exchange’’ and 

Alternative Trading Systems (ATSs) that Trade U.S. 

Treasury and Agency Securities, National Market 

System (NMS) Stocks, and Other Securities, 

Exchange Act Release No. 94062 (Jan. 26, 2022), 87 

FR 15496, 15539–40 (Mar. 18, 2022). Although the 

term ‘‘trading venue’’ is used in the final rules and 

the proposed amendment to Form ATS–N, the 

adoption of the term as discussed above is 

appropriate for the final rules. 

177MFA Comment Letter I. 

178 Id. 

179See, e.g., FIA PTG Comment Letter II. 

180See, e.g., Gretz Comment Letter; McIntyre 

Comment Letter II; Element Comment Letter; 

SIFMA AMG Comment Letter; ICI Comment Letter; 

MFA Comment Letter I. 

181 Gretz Comment Letter. 

182McIntyre Comment Letter II. 

183 Id. 

184Element Comment Letter. 

185 Id. 

186See, e.g., ADAM Comment Letter (stating that 

‘‘the third qualitative factor does not account for 

‘staking’ and the way in which some blockchains 

use the proof-of-stake consensus mechanism to 

Continued 

the term ‘‘trading venue’’ the Proposing 

Release referenced a definition of 

‘‘trading venue’’ that described it to 

mean ‘‘a national securities exchange or 

national securities association that 

operates an SRO trading facility, an 

ATS, an exchange market maker, an 

OTC market maker, a futures or options 

market, or any other broker- or dealeroperated platform for executing trading 

interest internally by trading as 

principal or crossing orders as 

agent.’’ 167 The Commission further 

stated that the third proposed 

qualitative standard was designed to 

capture dealer activity wherever that 

activity occurs, ‘‘whether on a national 

securities exchange, an ATS . . . or 

another form of trading venue.’’ 168 The 

Commission also stated that for 

purposes of the proposed rules, the 

particular venue mattered less than the 

fact that a market participant provides 

liquidity on it.169

Of the three proposed qualitative 

factors, this factor received the fewest 

comments. Two commenters supported 

the third qualitative factor as 

proposed.170 According to one of the 

commenters, capturing bid-ask spreads 

or earning revenue from liquidity 

incentives have traditionally been 

indicative of dealing activity and the 

proposed third qualitative standard 

would be less likely to capture certain 

funds, advisers, and trading strategies 

that the commenter believed would be 

inappropriately captured by the first 

and second qualitative factors.171

Another commenter stated the 

proposed third qualitative factor was 

‘‘workable,’’ assuming two 

modifications.172 First, the commenter 

stated that the proposed third 

qualitative factor should turn on 

‘‘profit,’’ rather than ‘‘revenue.’’ 173 In 

the commenter’s view, because dealers 

are in the business of profiting from 

their market-making activities, they are 

unlikely to be (or stay) engaged in 

markets if they are not profiting from 

their dealer activities.174 As a result, the 

commenter believed that a person 

otherwise meeting the factor but failing 

to earn profits in doing so is better 

viewed as a trader than a dealer.175

Second, the commenter stated that the 

proposed third qualitative factor should 

be limited to ‘‘national securities 

exchanges and ATSs,’’ rather than 

‘‘trading venues.’’ 176 In the 

commenter’s view, to reduce the 

compliance burdens on market 

participants while capturing the most 

significant trading activity, the rule 

should be limited to the most liquid 

trading venues, including those where 

liquidity incentives are most likely to be 

offered and where trading to profit from 

the spread occurs most often.177 The 

commenter stated that this change 

would avoid difficult and unworkable 

line-drawing questions, such as when 

pricing offered by an OTC market maker 

to its customer would constitute an 

‘‘incentive’’ captured by the rule.178

Some commenters objected to the 

proposed third qualitative factor,179

expressing concerns about the lack of 

clarity as to, and breadth of, its 

application.180 One of these commenters 

stated that the term ‘‘primarily’’ is 

potentially vague because a person 

might earn more revenue from 

appreciation in the value of its 

inventory of securities than from 

capturing bid-ask spreads or trading 

incentives.181 Another commenter 

explained that certain portfolio 

management and trading strategies, like 

hedging and arbitrage strategies, among 

other things, seek to derive value, 

positive fund performance, and 

portfolio-trading revenues by taking 

advantage of pricing differentials in bidask spreads.182 The commenter stated 

that such strategies have not 

traditionally been viewed as dealer 

activity and questioned whether they 

would be captured by the proposed 

third qualitative factor.183 Another 

commenter stated that trading 

incentives are often organized in a 

manner that allows traders or their 

investment advisers to reduce overall 

commissions and fees paid by directing 

liquidity-providing trades to specific 

venues.184 In the commenter’s view, the 

‘‘optimization of commission costs by 

an investment adviser on behalf of 

investors, or by a trader acting on his or 

her own behalf, should not by itself 

require registration as a dealer for a 

person who is otherwise a trader.’’ 185

Finally, some commenters objected that 

the proposed third qualitative factor’s 

application in the crypto asset securities 

market may not be clear, including how 

the factor applies to so-called DeFi 

market products, structures, and 

activities such as so-called 

decentralized exchange (‘‘DEX’’) and 

‘‘automated market maker’’ activities, as 

well as activities related to blockchain 

consensus and validation.186


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validate transactions, leaving unclear whether 

certain ‘validators’ might be captured by the third 

qualitative factor.’’); DeFi Fund Comment Letter 

(questioning if the ‘‘liquidity provider tokens’’ 

participants in digital asset liquidity pools receive 

in proportion to the amount of liquidity they 

contribute to the pool constitute an ‘‘incentive . . . 

for liquidity-supplying trading interests’’). 

187See Proposing Release at 23069. 

188Whether a particular structure or activity in 

the crypto asset securities market, including the socalled DeFi market, involves a trading venue is a 

facts and circumstances determination. 

189See Proposing Release at 23069. 

190See Proposing Release at 23055. 

191Proposing Release at 23069. 

192See Gretz Comment Letter (stating ‘‘ ‘Primarily’ 

might be a bit vague. Technically, an entity could 

earn more revenues by price increases on the 

securities being held in stock for trading than by 

catching bid-ask spreads.’’). 

193See DeFi Fund Comment Letter; ADAM 

Comment Letter. A commenter explained that ‘‘a 

blockchain utilizing proof-of-stake validation lets 

users participate in verifying the blockchain by 

staking the native token, providing a reward if they 

propose and approve valid smart contracts.’’ ADAM 

Comment Letter. 

194See section II.A.1.b. 

195As discussed above, a threshold question is 

whether the person has or controls total assets of 

less than $50 million, and if so, the person would 

not be captured by the final rules. See supra note 

132 and accompanying text. 

196See section II.A.3. 

197Proposing Release at 23069. The Commission 

has previously identified a person’s seeking, 

through its presence in the market, compensation 

through spreads or fees, or other compensation not 

attributable to changes in the value of the security 

traded, as a factor indicating dealer activity. See 

Entities Release at 30609. 

198See Proposing Release at 23071, n.165. 

After consideration of the comments, 

the Commission has determined to 

adopt, as the primary revenue factor, the 

third qualitative factor as proposed, 

with a non-substantive change. The 

final rules continue to use the phrase 

‘‘earn revenue’’ rather than ‘‘earn 

profit.’’ While the Commission 

acknowledges the possibility that 

persons whose liquidity provision fails 

to turn a profit may ultimately seek out 

more profitable lines of business, dealer 

status requires only that a person be ‘‘in 

the business,’’ not that that business be 

profitable.187

The term ‘‘trading venues’’ is 

intended to accommodate the variety of 

venues in which market participants 

today engage in liquidity-providing 

dealer activity. In addition, the use of 

this term is intended to capture venues 

as they evolve, wherever that activity 

occurs, whether on a national securities 

exchange, an ATS, any other broker- or 

dealer-operated platform for executing 

trading interest internally by trading as 

principal or crossing orders as agent, or 

any other platform performing a similar 

function.188 The particular venue 

matters less than the fact that a market 

participant provides liquidity on it.189

As discussed in the Proposing Release, 

there have been notable technological 

enhancements affecting securities 

trading across markets and asset 

classes.190 Accordingly, the term 

‘‘trading venues’’ is designed to capture 

current trading venues that use a variety 

of technologies, as well as trading 

venues that use technologies and venues 

that may develop over time. The term 

‘‘trading venues’’ is designed to help 

ensure that, as innovation and 

technology used by such venues evolve, 

the final rules remain effective at 

supporting market stability and 

resiliency, protecting investors, and 

promoting competition across the U.S. 

Treasury and other securities markets. 

For these reasons, the Commission 

declines to limit the scope of this factor 

to trading venues that are national 

securities exchanges or ATSs. 

Regarding the term ‘‘primarily’’ as 

used in the primary revenue factor, the 

Proposing Release stated that if a person 

derives the majority of its revenue from 

the sources described in paragraph 

(a)(3)(iii), it would likely be in a regular 

business of buying and selling securities 

or government securities for its own 

account.191 Further, in response to one 

commenter’s example,192 while the 

analysis of this specific scenario would 

depend on the totality of circumstances, 

as a general matter, it is unlikely that a 

person who regularly earns more 

revenue from an appreciation in the 

value of its inventory of securities than 

from capturing bid-ask spreads or 

incentive payment for liquidity 

provision, would be considered to earn 

revenue ‘‘primarily’’ from capturing bidask spreads or trading incentives. 

A commenter stated that the 

Proposing Release did not account for 

how the primary revenue factor would 

apply to market participants transacting 

in the crypto asset securities market; as 

commenters have pointed out, the 

crypto asset securities market has 

structures, products and activities that 

may implicate dealer registration.193

Whether a particular activity in the 

crypto asset securities market, including 

in the so-called DeFi market, gives rise 

to dealer activity will require an 

analysis of the totality of the particular 

facts and circumstances. As discussed 

above, any person engaged in buying 

and selling securities for its own 

account must consider whether it is a 

dealer, including under the final rules, 

and so subject to dealer registration 

requirements.194 Accordingly, the 

primary revenue factor will capture 

market participants that are primarily 

earning revenue from capturing spreads 

or liquidity incentives offered by trading 

venues, including trading venues that 

support transacting in crypto asset 

securities.195

With respect to portfolio management 

and trading strategies that for varying 

reasons may seek to take advantage of 

pricing differentials in bid-ask spreads, 

as stated above, persons who engage in 

a pattern of trading for their own 

account having the effect of providing 

liquidity to other market participants 

should be subject to the dealer 

regulatory regime, even if they are also 

registered investment advisers or private 

funds. As discussed below, the 

important protections provided by the 

dealer regulatory framework differ from 

those under the private fund and private 

fund advisers regulatory scheme 

established by the Advisers Act.196 The 

primary revenue factor, as with the 

expressing trading interest standard, 

focuses on activity rather than label or 

status. Market participants will need to 

determine, based on their trading 

activities, whether their portfolio 

management and trading strategies meet 

this standard. 

To summarize, one fundamental and 

historically recognized view of dealer 

activity is trading in a manner designed 

to profit from spreads or liquidity 

incentives.197 Under the final rules, 

persons providing liquidity because 

they regularly supply it and the revenue 

they earn as a result through bid-ask 

spreads or liquidity incentives as their 

primary source of revenue are ‘‘in the 

business’’ of dealing, and such persons 

regularly undertaking this liquidityproviding role for their own account in 

overall trading and market activity must 

register as dealers and be subject to the 

dealer regulatory regime. 

2. Quantitative Standard 

The Commission proposed a 

quantitative standard that would 

establish a bright-line test under which 

persons engaging in certain specified 

levels of activity in the U.S. Treasury 

market would be defined to be buying 

and selling government securities ‘‘as a 

part of a regular business,’’ regardless of 

whether they meet any of the qualitative 

factors.198 Specifically, proposed 17 

CFR 240.3a44–2(a)(2) (proposed ‘‘Rule 

3a44–2(a)(2)’’) provided that a person 

engaged in buying and selling 

government securities for its own 

account would be engaged in such 

activity ‘‘as a part of a regular business’’ 

if that person in each of four out of the 

last six calendar months, engaged in 

buying and selling more than $25 

billion of trading volume in government 


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199 Proposed Rule 3a44–2(a)(2); Proposing 

Release at 23071. 200See Better Markets Comment Letter (stating 

that the ‘‘quantitative standards for government 

securities markets, coupled with the proposed 

qualitative standards, will help to capture the highfrequency trading firms trading in significant 

volumes of U.S. Treasury bonds that are not 

currently registered with the Commission.’’); see 

also FINRA Comment Letter. 201Better Markets Comment Letter. 202See, e.g., Element Comment Letter; MMI 

Comment Letter; Two Sigma Comment Letter I; FIA 

PTG Comment Letter I; NAPFM Comment Letter; 

AIMA Comment Letter II; ADAM Comment Letter; 

SIFMA AMG Comment Letter; McIntyre Comment 

Letter II; SIFMA Comment Letter I; Overdahl 

Comment Letter; Fried Frank Comment Letter; MFA 

Comment Letter I; ICI Comment Letter; Morgan 

Lewis Comment Letter; T. Rowe Price Comment 

Letter; Citadel Comment Letter; DeFi Fund 

Comment Letter; Comment Letter of Investment 

Advisers Association (June 6, 2022) (‘‘IAA 

Comment Letter I’’); BlackRock Comment Letter; 

FIA PTG Comment Letter II; Comment Letter of 

Darrell Duffie (Jan. 10, 2024) (‘‘Duffie Comment 

Letter’’). 

203See, e.g., AIMA Comment Letter II; ICI 

Comment Letter; T. Rowe Price Comment Letter. 

204See, e.g., FIA PTG Comment Letter I; SIFMA 

AMG Comment Letter; Morgan Lewis Comment 

Letter; MMI Comment Letter; Two Sigma Comment 

Letter I; NAPFM Comment Letter; AIMA Comment 

Letter II; MFA Comment Letter I; McIntyre 

Comment Letter II; Element Comment Letter; ICI 

Comment Letter; Citadel Comment Letter; T. Rowe 

Price Comment Letter; Fried Frank Comment Letter; 

Consensys Comment Letter; ADAM Comment 

Letter; SIFMA Comment Letter I; Overdahl 

Comment Letter. 

205See, e.g., Two Sigma Comment Letter I; FIA 

PTG Comment Letter I; Element Comment Letter; 

MFA Comment Letter II. One commenter agreed 

that repurchase and reverse repurchase transactions 

should be excluded from counting towards the 

quantitative standard threshold. See ACLI Comment 

Letter. 

206See section II.A.5. 

207The Commission has determined to create 

bright-line exclusions for certain persons from the 

scope of the final rules for policy reasons specific 

to these types of persons as further defined below. 

This is in contrast to various exclusions requested 

by commenters related to, among other things, 

specific securities activities that market participants 

may engage in (such as certain trading strategies or 

asset classes). Because these specific securities 

activities and specific types of securities cannot be 

viewed in isolation, and could constitute in whole 

or in part liquidity-providing activity that these 

rules are designed to address, the Commission is 

not adding these categorical exclusions. Rather, as 

with any other securities activities, whether these 

specific securities activities result in triggering the 

provisions of the final rules requires a facts and 

circumstances analysis of the totality of a person’s 

activities. The Commission, however, has 

significantly refined its proposal (including, 

notably, the aggregation provision) so that persons 

whose securities activities may have been captured 

may no longer be within the scope of the rules as 

adopted. 

208As noted below, the term ‘‘person’’ has the 

same meaning as prescribed in section 3(a)(9) of the 

Exchange Act: ‘‘a natural person, company, 

government, or political subdivision, agency, or 

instrumentality of a government.’’ 

209Proposing Release at 23062. 

210One commenter also raised practical issues 

about how the exclusion would operate in 

connection with the proposed aggregation 

provision; however, these concerns have been 

mooted with the removal of the aggregation 

provision. See ICI Comment Letter. 

211See, e.g., MMI Comment Letter; SIFMA AMG 

Comment Letter; Consensys Comment Letter. 

212See Defi Fund Comment Letter; Element 

Comment Letter; Gretz Comment Letter; Consensys 

Comment Letter. See also section III.B.2. 

213See Gretz Comment Letter. 

securities as defined in section 

3(a)(42)(A) of the Exchange Act.199

Some commenters generally 

supported inclusion of the quantitative 

standard.200 One commenter stated that 

‘‘quantitative standard[ ] build[s] upon 

and [is] consistent with past 

Commission regulations and case law 

for defining a dealer.’’ 201 The majority 

of commenters, however, urged that the 

Commission remove the quantitative 

standard, raising various issues and 

concerns with establishing a test based 

solely on trading volume.202

Many commenters maintained that 

the quantitative standard was arbitrary 

and overly broad, and opined that a 

volume standard alone could not 

distinguish between a dealer and a 

trader.203 Several commenters stated 

that the quantitative standard would 

capture persons engaging in non-dealing 

trading activity.204 Some commenters 

also stated that the trading volume 

threshold was too low in light of the 

size of the U.S. Treasury market and 

that the Proposing Release failed to 

provide sufficient detail on how the 

proposed trading volume would be 

measured and implemented.205

After consideration of the comments, 

the Commission has decided to 

eliminate the quantitative standard from 

the final rules. While a trading volume 

threshold could provide a bright-line 

test under which persons engaging in 

certain specified levels of activity in the 

U.S. Treasury market would be defined 

to be buying and selling securities ‘‘as 

a part of a regular business,’’ the 

Commission has concluded such a 

bright-line test is unnecessary. The 

modified qualitative factors and 

otherwise applicable court precedent 

and Commission interpretations will 

appropriately address when market 

participants are acting as government 

securities dealers in the U.S. Treasury 

market by engaging in a ‘‘regular’’ 

pattern of buying and selling securities 

that has the effect of providing liquidity 

to other market participants. Therefore, 

the Commission has decided to delete 

the quantitative standard from the final 

rules. 

In addition, as discussed in section 

II.A.5, no presumption shall arise that a 

person is not a government securities 

dealer as defined by the Exchange Act 

solely because that person does not 

satisfy Rule 3a44–2(a).206 Thus, market 

participants acting similarly to 

traditional dealers that are buying and 

selling U.S. Treasuries as part of a 

regular business may still meet the 

definition of government securities 

dealer even absent the activity 

identified in the qualitative standard. 

3. Exclusions 

The proposed rules provided 

exclusions for certain market 

participants that the Commission 

determined do not provide liquidity to 

the markets in a manner requiring 

dealer registration or are subject to a 

comparable regulatory structure which 

addresses the types of concerns that the 

proposed rules were intended to 

address. The Commission is adopting 

these exclusions as proposed. In 

addition, the Commission is adding 

exclusions for central banks, sovereign 

entities, and international financial 

institutions, as defined in the final 

rules. Each of these exclusions is 

discussed in more detail below.207

a. Person That Has or Controls Assets of 

Less Than $50 Million 

In the Proposing Release, the 

Commission proposed to exclude from 

the proposed rules ‘‘[a] person 208 that 

has or controls total assets of less than 

$50 million.’’ The Commission stated 

that providing an exception was 

appropriate because, even though a 

person that has or controls less than $50 

million in assets may be engaged in the 

activities identified in the qualitative 

standard, the frequency and nature of 

such a person’s securities trading are 

less likely to pose the types of financial 

and operational risks to the market that 

may be associated with the significant 

dealer activity that the rules were 

designed to address.209

Commenters that addressed this 

exclusion raised a number of 

concerns.210 Some commenters stated 

that it was arbitrary or inconsistent with 

the plain reading of the ‘‘dealer’’ 

definition.211 A few commenters stated 

that the threshold was too low.212

However, one of those commenters also 

said that the threshold could be too high 

for some securities.213

After consideration of comments, the 

Commission is adopting this exclusion 

as proposed. While we appreciate 

commenters’ concerns, as indicated in 

the Proposing Release, the final rules are 

intended to capture market participants 

not registered as dealers that serve a 

critical dealer role in the securities and 

government securities markets through 

their liquidity provision or significant 

and regular trading activity in the 

market. These smaller market 

participants are unlikely to engage in 

the significant liquidity provision that is 


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214See Proposing Release at 23062. 

215Under FINRA rules, a ‘‘retail’’ account is 

distinguished from an ‘‘institutional’’ account that 

is defined, in part, as belonging to ‘‘a person 

(whether a natural person, corporation, partnership, 

trust, or otherwise) with total assets of at least $50 

million.’’ FINRA Rule 4512(c)(3); see also Business 

Conduct Standards for Security-Based Swap Dealers 

and Major Security-Based Swap Participants, 

Exchange Act Release No. 77617 (Apr. 14, 2016), 81 

FR 29959, 29995 n.462 (May 13, 2016) (adopting a 

similar threshold in connection with security-based 

swap dealers, for purposes of 17 CFR 240.15Fh– 

3(f)(4). The Commission considered but is not using 

the definition of ‘‘retail customer’’ adopted as part 

of Regulation Best Interest, as the policy 

considerations behind that definition are different 

than those presented here: the focus of Regulation 

Best Interest is the regulatory protections provided 

to customers who receive recommendations from 

broker-dealers, whereas the focus of this rulemaking 

is the regulation of persons engaging in certain 

dealer-like activities. See Regulation Best Interest: 

The Broker-Dealer Standard of Conduct, Exchange 

Act Release No. 86031 (June 5, 2019), 84 FR 33318 

(July 12, 2019). 

216See supra note 254 and accompanying text. 

217See proposed 17 CFR 240.3a5–4(a)(2)(ii) and 

240.3a44–2(a)(3)(ii). 

218Registered investment companies are subject 

to a regulatory framework under the Investment 

Company Act and rules thereunder, which imposes 

requirements regarding capital structure, custody of 

assets, investment activities, transactions with 

affiliates and other conflicts of interest, and the 

duties and independence of boards of directors, 

among other things. Moreover, registered 

investment companies are subject to statutory limits 

on indebtedness and rules that limit leverage risk. 

In addition, registered investment companies must 

adopt, implement, and review at least annually 

written policies and procedures reasonably 

designed to prevent violations of the Federal 

securities laws by the fund. Proposing Release at 

23063. 

219Proposing Release at 23083. 

220 Id. 

221Proposing Release at 23073–74. 

222See, e.g., ICI Comment Letter; MFA Comment 

Letter II; Element Comment Letter; McIntyre 

Comment Letter II; IAA Comment Letter I. 

223See, e.g., SIFMA Comment Letter I; SIFMA 

AMG Comment Letter; IAA Comment Letter I; 

Comment Letter of Investment Adviser Association 

(Oct. 17, 2023) (‘‘IAA Comment Letter II’’). 

224See, e.g., MFA Comment Letter I 

(recommending that the exclusion for registered 

investment companies be expanded ‘‘to cover any 

person registered as an investment adviser (or 

exempt or excluded from registration other than as 

a family office), as well as any private fund client 

of such adviser (and any affiliated general partner, 

managing member, or similar control person of the 

private fund client), with respect to trading done by 

the person with or through a registered brokerdealer’’); Element Comment Letter; McIntyre 

Comment Letter II; IAA Comment Letter I; T. Rowe 

Price Comment Letter; IAA Comment Letter II. 

225See, e.g., MFA Comment Letter I (‘‘Advisers 

and the private funds they manage are already 

subject, directly or indirectly, to comprehensive 

regulation, which is sufficient to address the 

objectives of the Proposal without subjecting them 

to dealer registration.’’). 

226See, e.g., T. Rowe Price Comment Letter (‘‘It 

appears the SEC’s rationale for excluding registered 

investment companies is that they are subject to 

various requirements, including those related to 

custody, conflicts of interest, books and records, 

policies and procedures, and designation of a chief 

compliance officer. RIAs should also be excluded 

as they are subject to similar requirements, as well 

as a robust registration regime, and must act in 

accordance with their fiduciary duties.’’); McIntyre 

Comment Letter II (‘‘[T]he Commission notes that 

the ‘regulatory framework’ to which registered 

investment companies are subject justifies the 

exclusion of these entities. However, [we believe] 

that the current regulatory environment and 

framework for registered investment advisers is also 

very robust. . .’’). See also Scott Comment Letter. 

227See, e.g., Citadel Comment Letter (‘‘The 

disparate treatment of private funds and mutual 

funds . . . further highlights the lack of justification 

for requiring private funds to register as dealers . . . 

Moreover, the Commission’s logic for exempting 

RICs equally applies to private funds.’’). 

228See, e.g., MFA Comment Letter I (stating that 

the Net Capital Rule functions more like a 

restriction on the types of investments and trading 

a firm can engage in than a restriction on leverage 

and that the requirements would impede investors’ 

highly negotiated liquidity rights); Citadel 

Comment Letter (stating that the Net Capital Rules 

would impose substantial costs and finding ‘‘the 

absurdity of applying these rules to private funds, 

which do not hold customer securities’’). See also 

AIMA Comment Letter II; Morgan Lewis Comment 

Letter; Fried Frank Comment Letter; T. Rowe Price 

Comment Letter; IAA Comment Letter I; Element 

Comment Letter. 

229See, e.g., Two Sigma Comment Letter I; MFA 

Comment Letter I; NAPFM Comment Letter; AIMA 

Comment Letter II. 

230See, e.g., Schulte Roth Comment Letter. 

the focus of the final rules.214

Importantly, we disagree that the $50 

million threshold is arbitrary or too low 

or too high because, as stated in the 

Proposing Release, this exception 

parallels an established and well 

understood standard for distinguishing 

between ‘‘retail’’ and ‘‘institutional’’ 

accounts for purposes of broker-dealer 

regulation.215 In the context of the final 

rules, persons that have or control assets 

of $50 million or more—so-called 

‘‘institutional’’ accounts—are more 

likely to have a significant impact on 

the market as opposed to ‘‘retail’’ 

accounts of smaller market participants 

who are less likely to pose financial and 

operational risks to the markets. 

Further, in response to the commenter 

who raised practical issues about how 

the exclusion would operate in 

connection with investment advisers’ 

separately managed accounts, as 

discussed in more detail below, the 

Commission has removed the 

aggregation provision, which should 

address those concerns.216 Finally, we 

reiterate that this is not an exclusion 

from the ‘‘dealer’’ definition for all 

purposes, but only for purposes of the 

final rules, which focus on de facto 

market making. Outside of the context 

of these rules, the question of whether 

any person, including a person that has 

or controls less than $50 million in total 

assets, is acting as a dealer, as opposed 

to a trader, will remain a facts and 

circumstances determination. For 

example, an underwriter with assets 

below $50 million could still be 

required to register as a dealer. 

b. Registered Investment Companies, 

Private Funds, and Registered 

Investment Advisers 

The Commission also proposed to 

exclude registered investment 

companies registered under the 

Investment Company Act from the 

application of the rules.217 In proposing 

the exclusion, the Commission cited to 

the comprehensive regulatory 

framework under the Investment 

Company Act and its extensive 

oversight and broad insight into the 

operations and activities of registered 

investment companies.218 In contrast, 

the proposed rules did not exclude 

private funds, instead discussing 

differences between the regulatory 

regime that applies to registered 

advisers to private funds, and the one 

that applies to dealers, including 

leverage constraints and reporting.219 As 

explained in the Proposing Release, 

private funds are not subject to the 

extensive regulatory framework of the 

Investment Company Act.220 Further, 

the Commission did not propose to 

create a blanket exclusion for registered 

investment advisers because a registered 

investment adviser trading for its ‘‘own 

account’’ could nevertheless meet the 

definition of a ‘‘dealer’’ and therefore 

should be required to register.221

Many commenters agreed with the 

proposed exclusion for registered 

investment companies.222 However, 

most of these commenters also stated 

that the exclusion should be expanded 

to registered investment advisers 223 and 

private funds managed by registered 

investment advisers.224 Commenters 

cited to the regulatory regime under the 

Advisers Act.225 Some commenters 

stated that some of the reasons 

supporting an exclusion for registered 

investment companies also would 

support an exclusion for registered 

advisers,226 or an exclusion for private 

funds.227

In addition, many commenters stated 

that imposing dealer requirements—and 

in particular net capital 

requirements 228—on private funds 

would be inappropriate and 

untenable,229 and could in turn 

significantly and negatively affect 

liquidity if private funds were to modify 

or cease their trading activity.230 As 

support for an exclusion for private 

funds, many commenters cited to Form 

PF, which requires certain registered 

advisers that have at least $150 million 

in private fund assets under 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14957 

231See, e.g., MFA Comment Letter I; T. Rowe 

Price Comment Letter; AIMA Comment Letter II; see 

also 17 CFR 279.9. 

232See, e.g., AIMA Comment Letter II; see also 

ABA Comment Letter. 

233See, e.g., ICI Comment Letter; SIFMA AMG 

Comment Letter (‘‘In addition, the Proposal fails to 

consider how the principal trading prohibitions in 

the Advisers Act would impact an investment 

adviser that comes within the meaning of the term 

dealer solely because of its managed accounts.’’). 

234See BlackRock Comment Letter. 

235Rather than ‘‘counterparty,’’ FINRA Rule 5310 

applies to ‘‘any transaction for or with a customer 

or a customer of another broker-dealer’’ (emphases 

added). The commenter did not specify what would 

constitute an ‘‘all-to-all trading protocol.’’ However, 

a dealer simply posting an order on a fully 

anonymous platform or providing a price in 

response to a bid request or bid list presented to the 

dealer or other competitive bidding process would 

likely not be subject to a best execution obligation 

since the dealer has not accepted a customer order 

for the purpose of facilitating the handling and 

execution of such order; this situation is analogous 

to Supplementary Material .04 to FINRA Rule 5310 

which draws a distinction between those situations 

in which a firm acts solely as the buyer or seller 

in connection with an order presented against the 

firm’s quote as opposed to accepting an order for 

handling and execution. See FINRA Regulatory 

Notice 15–46. See also infra notes 599–601 and 

accompanying text. 

236See, e.g., ABA Comment Letter; MFA 

Comment Letter I; AIMA Comment Letter II. 

237Proposing Release at 23096 (‘‘Excluding these 

funds would guarantee that the dealer regime 

would fail to capture this type of securities dealing 

activity. Furthermore, a blanket exclusion for hedge 

funds may provide an opportunity for regulatory 

arbitrage. For example, PTFs may seek to 

restructure themselves as private funds, thus 

preempting the intended benefits of the proposed 

rules.’’). 

238See AIMA Comment Letter II; MFA Comment 

Letter I; IAA Comment Letter I; see also T. Rowe 

Price Comment Letter. 

239See AIMA Comment Letter II (‘‘Indeed, the 

Commission’s view expressed in the Proposal is 

that the only differences between the regulatory 

regime for private fund advisers and securities 

dealers are leverage constraints and reporting, yet 

the Commission has chosen to include both private 

funds and their advisers within the scope of the 

Proposal.’’). 

240See Element Comment Letter (identifying, in 

part, licensing of personnel who structure private 

placements on behalf of Required Registrants with 

the Series 79 license; application of Reg NMS Rule 

611 to cross-trades effected on behalf of a Required 

Registrant by its investment adviser; application of 

the Net Capital Rule to Required Registrants; and 

application of the possession and control 

requirements of the customer protection rule, 17 

CFR 240.15c3–3 (‘‘Rule 15c3–3’’), in situations 

where hypothecation of securities may be in the 

best interests of an investment advisory client). 

241See, e.g., IAA Comment Letter I (‘‘Unlike 

brokers or dealers, advisers are prohibited from 

holding client assets or from taking client assets 

onto their balance sheets. To the extent that 

advisers trade securities, they do so through a 

broker or dealer intermediary, generally on behalf 

of and for the benefit of their clients’’); see also T. 

Rowe Price Comment Letter (‘‘We also are 

concerned that the SEC has not adequately assessed 

the feasibility and impact of an RIA being regulated 

as a dealer while also being subject to the [Advisers 

Act] for the same activities, nor does the Proposal 

detail how an entity could practically comply with 

both regimes.’’). 

242See IAA Comment Letter I. 

243See supra note 218 and accompanying text. 

244See, e.g., In the Matter of Murchinson Ltd., 

Marc Bistricer, and Paul Zogala, Exchange Act 

Release No. 92684 (Aug. 17, 2021) (settled matter). 

In Murchinson, the Commission charged the 

principals of a hedge fund with causing dealer 

violations under section 15(a). 

245Proposing Release at 23078–79. 

246 Dealers and government securities dealers are 

subject to extensive regulation and oversight and 

generally must: (i) register with the Commission 

and become members of an SRO; and (ii) comply 

with Commission and SRO rules, including certain 

financial responsibility and risk management rules, 

transaction and other reporting requirements, 

operational integrity rules, and books and records 

requirements, all of which help to enhance market 

stability by giving regulators increased insight into 

firm-level and aggregate trading activity. See section 

I.A. 

247Proposing Release at 23056. See also id. at 

23078–79 (describing the regulatory requirements of 

registered dealers and government securities 

dealers). 

management to report certain 

confidential information about their 

private funds.231

Some commenters described potential 

practical difficulties with applying the 

dealer regulatory framework to private 

fund advisers and private funds 232 and 

with having a managed account register 

as a dealer.233 One comment letter 

suggested that if a fund or separately 

managed account was required to 

register as a dealer, a conflict could arise 

between the fund’s or separately 

managed account’s adviser’s fiduciary 

duty to achieve best execution and a 

best execution obligation to a 

counterparty ‘‘when participating in allto-all trading protocols where they may 

match with another end-user.’’ 234 We 

do not believe that such a conflict 

would arise in this scenario.235

As support for such potential 

practical difficulties, some commenters 

stated that private funds are merely 

pools of assets that rely on fund 

managers for all functions and therefore 

do not have personnel or infrastructure 

to meet the dealer regulatory 

requirements.236 A few commenters 

questioned the Commission’s 

concern 237 that exempting private funds 

and private fund advisers from the 

proposed rules would produce negative 

outcomes with respect to PTFs,238 with 

one of these commenters citing to 

‘‘leverage constraints and reporting’’ as 

the ‘‘only two differences’’ between the 

private funds and dealer regulatory 

framework as noted in the Proposing 

Release.239 Another commenter 

identified possible exceptions from the 

application of certain SEC and FINRA 

rules that may be necessary if registered 

investment advisers and/or the private 

funds they advise were required to 

register as dealers.240 Some commenters 

identified issues with imposing a dealer 

regulatory framework on investment 

advisers,241 with one commenter stating 

that the ‘‘unsuitability of the dealer 

regime for advisers is highlighted by the 

inconsistency of an adviser needing to 

stand ready as a dealer to provide 

liquidity to, i.e., trade as principal with, 

the market, potentially through its 

clients’ accounts, while being 

prohibited from acting in that capacity 

with its clients.’’ 242

After consideration of the comments 

and for the reasons stated here and in 

the Proposing Release,243 the 

Commission is adopting the exclusion 

for registered investment companies as 

proposed. As stated above, many 

commenters generally supported the 

exclusion and did not suggest specific 

changes for registered investment 

companies but instead requested that 

the Commission expand the scope of the 

exclusions to include registered 

investment advisers and private funds. 

The Commission, however, is not 

including an express exclusion for 

private funds or registered investment 

advisers. Depending on the totality of 

the facts, a private fund may be engaged 

in the business of buying and selling 

securities for its own account.244

Similarly, a registered investment 

adviser that is trading for its ‘‘own 

account’’ could implicate dealer 

registration requirements. Further, as 

stated in the Proposing Release, market 

actors that are engaged in dealing 

activity should be subject to the dealer 

regulatory regime, which includes not 

only registration obligations, but also 

regulatory requirements specific to 

dealer activity and oversight that 

broadly focus on the dealer market 

functionality—that is, the impact of 

dealing activity on the market as a 

whole.245

Entities engaging in dealing activity 

that meet the qualitative standard are 

required to register as dealers and 

comply with regulatory requirements 

that are applicable to dealer activity. 

Dealer regulatory requirements address 

related but distinct concerns from 

investment adviser regulation. In 

addition, dealer registration enhances 

regulatory oversight 246 of market 

participants’ trading activities and 

interactions with the market overall. In 

this regard, dealer regulatory 

requirements focus broadly on market 

functionality (along with protecting 

investors under principles of fair 

dealing between parties).247

However, the Commission is mindful 

of concerns raised by commenters 

regarding the application of the dealer 

regime to registered investment advisers 

and private funds and as such has made 

significant changes to the definition of 

‘‘own account’’ to remove the 


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248Proposing Release at 23083. 249 Id. 250 Id. 251 17 CFR 279.9. See section III.C.1.c for a 

discussion of the benefits of additional regulatory 

reporting. 

252See section I.A (citing to the benefits of dealer 

registration). 

253Proposing Release at 23083. See also section 

III.B.2.b (stating that private funds and investment 

advisers do not have to comply with the Net Capital 

Rule or with any other direct, regulatory constraint 

on leverage). 

254See section III.C. 

255See, e.g., Standards for Covered Clearing 

Agencies for U.S. Treasury Securities and 

Application of the Broker-Dealer Customer 

Protection Rule With Respect to U.S. Treasury 

Securities, Exchange Act Release No. 99149 (Dec. 

13, 2023). 

256See BIS, About BIS—Overview, https://

www.bis.org/about/index.htm (noting that ‘‘the BIS 

is owned by 63 central banks, representing 

countries from around the world that together 

account for about 95% of world GDP.’’). 

257Cf. 17 CFR 50.76(b) (the Commodity Futures 

Trading Commission (‘‘CFTC’’) definition of 

international financial institution for purposes of 

exemptions from swap clearing requirement). 

aggregation standard in order to 

appropriately tailor the scope of persons 

captured by the final rules. 

Further, there are material differences 

between the private fund and dealer 

regulatory frameworks, and dealer 

registration offers important benefits 

and regulatory protections to address 

the risks related to dealing activities.248

As explained in the Proposing Release, 

registered private fund advisers are 

regulated under the Advisers Act and 

information on private fund activities is 

reported by registered private fund 

advisers on Form PF. The information 

the Commission obtains on certain 

private funds through its regulation of 

registered investment advisers, 

however, differs from that the 

Commission collects for the purposes of 

dealer regulation.249 Private funds also 

do not have the same level of reporting 

of their securities transactions. For 

example, fixed income transactions 

between private funds are not directly 

reported in TRACE. If their fixedincome trade is with a broker-dealer and 

reported by the broker-dealer, private 

funds appear anonymously in 

TRACE.250

Although, as commenters noted, the 

Commission collects some information 

about certain private funds through 

Form PF, this reporting alone is not a 

sufficient substitute for the 

comprehensive dealer requirements 

because the dealer requirements are 

specific to dealer activity. For example, 

Form PF only requires reporting related 

to a subset of the private fund industry 

and does not include individual trade 

reporting details, which would give 

regulators greater insight into securities 

trading patterns, including the ability to 

more efficiently match trades to market 

participants.251

In response to commenters who stated 

that private funds are merely pools of 

assets that rely on fund managers for all 

functions and therefore do not have 

personnel or infrastructure to meet the 

dealer regulatory requirements, to the 

extent that a private fund engages in 

activities that trigger dealer registration 

under the final rules, such private funds 

would need similarly to establish 

means, whether by contract or 

otherwise, of complying with the 

obligations for registered dealers, just as 

the fund must do to comply with any 

other regulatory obligation. 

In response to the commenter who 

suggested there were ‘‘only two 

differences’’ between the dealer and 

private fund regulatory regimes, the 

examples provided in the Proposing 

Release (i.e., leverage constraints and 

reporting requirements) were nonexhaustive examples.252 As discussed in 

the Proposing Release, registered 

dealers’ leverage is limited by net 

capital requirements, which must be 

maintained at all times, while private 

funds have no formal leverage 

constraints.253 Further, in response to 

commenters who raised concerns about 

the application of certain SEC and 

FINRA rules or stated that certain dealer 

requirements were untenable or 

inappropriate, while the Commission 

acknowledges that complying with a 

new rule set may require market 

participants to revise their business 

models, as discussed further in the 

economic analysis, appropriate 

regulation of dealer activities, and the 

benefits associated with enhancements 

to investor protection and orderly 

markets, justifies these associated costs 

and difficulties associated with 

registration.254

Finally, while not excluding 

registered investment advisers and 

private funds, the Commission is, 

however, modifying the definition of 

‘‘own account’’ to mean an account held 

in the name of, or for the benefit of, that 

person and removing the proposed first 

qualitative factor. These changes will 

respond to concerns related to 

separately managed accounts and 

investment advisers trading on behalf of 

their clients, including those exercising 

discretion; these investment advisers 

generally will not be captured by the 

final rules because they would not be 

buying and selling for their ‘‘own 

account.’’ Private funds that are buying 

and selling for their ‘‘own account’’ in 

a way that meets the qualitative 

standard could be captured by the final 

rules. To the extent that private funds or 

investment advisers trigger application 

of the final rules, they would need to 

comply with the dealer registration 

requirements or cease engaging in dealer 

activity. 

c. Official Sector Exclusions 

The Commission is adopting express 

exclusions for central banks, sovereign 

entities, and international financial 

institutions, as defined in the final 

rules. Together, these exclusions are 

referred to as the ‘‘Official Sector 

Exclusions.’’ 

The Official Sector Exclusions are 

designed to permit central banks, 

sovereign entities, and international 

financial institutions to continue to 

pursue important policy goals, and to be 

consistent with principles of 

international comity and the privileges 

and immunities granted to foreign 

central banks, foreign sovereigns and 

sovereign entities, and certain 

international financial institutions 

under U.S. Federal law.255

For purposes of the Official Sector 

Exclusion, the final rules define a 

‘‘central bank’’ as a reserve bank or 

monetary authority of a central 

government (including the Board of 

Governors of the Federal Reserve 

System or any of the Federal Reserve 

Banks). This definition also includes the 

Bank for International Settlements 

(‘‘BIS’’). The BIS is owned by central 

banks,256 so it is appropriate to include 

the BIS in the final rules’ definition of 

central bank. The final rules define a 

‘‘sovereign entity’’ as a central 

government (including the U.S. 

Government), or an agency, department, 

or ministry of a central government. 

Finally, the final rules define an 

‘‘international financial institution’’ by 

identifying specific entities and 

providing that an ‘‘international 

financial institution’’ also includes any 

other entity that provides financing for 

national or regional development in 

which the United States government is 

a shareholder or contributing 

member.257 The following entities are 

specifically identified as an 

‘‘international financial institution’’ 

under the final rule: (1) African 

Development Bank; (2) African 

Development Fund; (3) Asian 

Development Bank; (4) Banco 

Centroamericano de Integracio ́n 

Econo ́mica; (5) Bank for Economic 

Cooperation and Development in the 

Middle East and North Africa; (6) 

Caribbean Development Bank; (7) 

Corporacio ́n Andina de Fomento; (8) 

Council of Europe Development Bank; 

(9) European Bank for Reconstruction 


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258Regulators already have insight into the 

activities of the Federal Reserve System, and the 

Federal Reserve Banks already consider market 

integrity and resiliency issues. See, e.g., Enhancing 

the Resilience of the U.S. Treasury Market 2022 

Staff Progress Report (Nov. 10, 2022) at 1, available 

at https://home.treasury.gov/system/files/136/2022- 

IAWG-Treasury-Report.pdf (stating that the InterAgency Working Group for Treasury Market 

Surveillance ‘‘was formed by the Treasury 

Department, SEC, and Federal Reserve Board in 

1992 to improve monitoring and surveillance and 

strengthen interagency coordination with respect to 

the Treasury markets . . .’’). 

259 12 U.S.C. 225a (defining goals of monetary 

policy); see also Federal Reserve Bank; Monetary 

Policy: What Are Its Goals? How Does It Work? 

available at https://www.federalreserve.gov/ 

monetarypolicy/monetary-policy-what-are-its-goalshow-does-it-work.htm. 

260See Federal Reserve Bank; Monetary Policy 

Implementation, available at https://www.newyork

fed.org/markets/domestic-market-operations/ 

monetary-policy-implementation. 

261 Id. 

262See Order Exempting the Federal Reserve 

Bank of New York, Maiden Lane LLC, Exchange Act 

Release No. 61884 (Apr. 9, 2010) (granting 

exemptions to the Federal Reserve Bank of New 

York, Maiden Lane LLC and the Maiden Lane 

Commercial Mortgage Backed Securities Trust 

2008–1 in connection with restructuring of debt 

instruments acquired by the Federal Reserve Bank 

of New York when it facilitated the acquisition of 

the Bear Stearns Companies Inc. by JP Morgan 

Chase & Co., including permitting receipt of 

compensation that is calculated by reference to 

underwriting fees received by other parties to the 

restructuring). Congress similarly exempted 

transactions in which one counterparty is a member 

of the Federal Reserve System from the regulation 

of swaps and security-based swaps in Title VII of 

the Dodd-Frank Act. See 15 U.S.C. 78c(a)(68)(A) 

(stating that a security-based swap is a swap, as 

defined in 7 U.S.C. 1a(47), subject to certain other 

conditions); 7 U.S.C. 1a(47)(B)(ix) (excluding from 

the definition of swap any transaction in which one 

counterparty ‘‘is a Federal Reserve bank, the 

Federal Government, or a Federal agency that is 

expressly backed by the full faith and credit of the 

United States’’). 

263The authorizing statutes generally provide that 

the government owns all or part of the capital stock 

or equity interest of the central bank. See, e.g., 

Capital of the ECB Protocol on the Statute of the 

European System of Central Banks and of the 

European Central Bank (‘‘ECB Protocol’’), Article 

28.2, available at https://www.ecb.europa.eu/ecb/ 

legal/pdf/en_statute_2.pdf. 

264See, e.g., ECB Protocol, supra note 263, Article 

3.1; Bank of Japan Act, Articles 1 and 2, available 

at https://www.boj.or.jp/en/about/boj_law/ 

index.htm/#p01. 

265For similar reasons, the CFTC has similarly 

determined to exempt swap transactions involving 

foreign central banks, sovereign entities, and 

international financial institutions from the 

statutory requirement that swap transactions be 

cleared with a Derivatives Clearing Organization. 

See 17 CFR 50.75, 50.76; Swap Clearing 

Exemptions, 85 FR 76428, 76429–30, 76432 (Nov. 

30, 2020). 

266The United States has taken actions to 

implement international obligations with respect to 

such immunities and privileges. See, e.g., 

International Bank for Reconstruction and 

Development (‘‘World Bank’’) and International 

Monetary Fund (22 U.S.C. 286g and 22 U.S.C. 

286h), the European Bank for Reconstruction and 

Development (22 U.S.C. 290l–6), the Multilateral 

Investment Guarantee Agency (22 U.S.C. 290k–10), 

the Africa Development Bank (22 U.S.C. 290–8), the 

African Development Fund (22 U.S.C. 290g–7), the 

Asian Development Bank (22 U.S.C. 285g), the 

Inter-American Development Bank (22 U.S.C. 283g), 

the Bank for Economic Cooperation and 

Development in the Middle East and North Africa 

(22 U.S.C. 290o), and the Inter-American 

Investment Corporation (22 U.S.C. 283hh). See also 

the International Organization and Immunities Act 

(22 U.S.C. 288) and the Foreign Sovereign 

Immunities Act (28 U.S.C. 1602) (‘‘FSIA’’) (the FSIA 

is an exception from the general principle of 

sovereign immunity, which derives from customary 

international law). 

267See Proposing Release at 23057. 

268See id. at n.36. 

269See, e.g., Consensys Comment Letter; ADAM 

Comment Letter; Andreessen Horowitz Comment 

Letter; Blockchain Comment Letter; Comment Letter 

of Global Digital Asset and Cryptocurrency 

Association (May 27, 2022) (‘‘GDCA Comment 

Letter’’); U.S. Reps Comment Letter; Chamber of 

Digital Commerce Comment Letter; DeFi Fund 

Comment Letter. In addition to the comments 

discussed in section II.A.1, many of the commenters 

that represent participants of the crypto asset 

industry expressed concerns that mirror those of 

other commenters. For example, compare GDCA 

Comment Letter (stating that the ‘‘the proposed oneyear compliance period is wholly impractical’’) 

with MFA Comment Letter I. In these 

circumstances, those comments are addressed in 

Continued 

and Development; (10) European 

Investment Bank; (11) European 

Investment Fund; (12) European 

Stability Mechanism; (13) InterAmerican Development Bank; (14) InterAmerican Investment Corporation; (15) 

International Bank for Reconstruction 

and Development; (16) International 

Development Association; (17) 

International Finance Corporation; (18) 

International Monetary Fund; (19) 

Islamic Development Bank; (20) 

Multilateral Investment Guarantee 

Agency; (21) Nordic Investment Bank; 

(22) North American Development 

Bank. 

The exclusion is appropriate for the 

Federal Reserve System—the central 

bank of the United States—both because 

excluding the Federal Reserve System 

will not contravene any of the 

Commission’s goals in adopting the 

final rules and because of the Federal 

Reserve System’s unique role in the U.S. 

Treasury market and the U.S. economy. 

Entities that constitute part of the 

Federal Reserve System should be 

excluded from dealer registration 

because requiring them to register as 

dealers would not address the primary 

concerns animating the final rules.258

Moreover, transactions in U.S. Treasury 

securities are an important tool in the 

fiscal and monetary policy of the United 

States.259 In particular, cash and repo 

transactions in U.S. Treasury securities 

are one of the primary tools used by the 

Federal Reserve Bank of New York to 

conduct open market transactions at the 

direction of the Federal Open Market 

Committee.260 The System Open Market 

Account, which is managed by the 

Federal Reserve Bank of New York’s 

System Open Market Trading Desk, is 

‘‘the largest asset on the Federal 

Reserve’s balance sheet.’’ 261 In light of 

the key role of open market operations 

conducted by the Federal Reserve Bank 

of New York in the monetary policy of 

the United States, an exemption from 

the final rules is appropriate for the 

Federal Reserve System.262

With respect to central banks 

generally, central banks are typically 

created by statute and are part of, or 

aligned with, a central government.263

Further, as with the Federal Reserve 

System in the United States, the 

purpose of a central bank is generally to 

effectuate monetary policy for its 

respective nation.264 In light of ongoing 

expectations that Federal Reserve Banks 

and agencies of the Federal government 

would not be subject to foreign 

regulatory requirements in their 

transactions in the sovereign debt of 

other nations, the principles of 

international comity counsel in favor of 

exempting foreign central banks—as 

well as sovereign entities and 

international financial institutions.265

Finally, Congress has granted foreign 

central banks, other foreign sovereign 

entities, and certain international 

financial institutions special privileges 

and immunities under U.S. Federal 

law,266 and thus in these circumstances 

the Commission is not including these 

entities in the final rules. 

d. Other Requests for Exclusions 

The Commission received a number 

of comments about how the proposed 

rules would apply to crypto assets. In 

the Proposing Release, the Commission 

explained that the definition of ‘‘dealer’’ 

and the accompanying registration 

requirements of the Exchange Act were 

drawn broadly by Congress to 

encompass a wide range of activities 

involving securities markets and 

participants in those markets.267 The 

Commission further stated that 

proposed Rules 3a5–4 and 3a44–2 

would apply to any crypto asset that is 

a ‘‘security’’ as defined by section 

3(a)(10) of the Exchange Act or a 

‘‘government security’’ as defined by 

section 3(a)(42) of the Exchange Act, 

respectively.268

The Commission received several 

comments concerning the application of 

the proposed rules to crypto assets that 

are securities that trade through 

centralized trading platforms or trade in 

the so-called DeFi market, and to 

persons who trade crypto asset 

securities. Many opposed applying the 

proposed rules to persons transacting in 

crypto asset securities.269 Commenters 


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their respective section in this Adopting Release. 

See, e.g., section II.B. 270See, e.g., ADAM Comment Letter; Chamber 

Digital Commerce Comment Letter; Blockchain 

Comment Letter; Andreessen Horowitz Comment 

Letter. 271See, e.g., GDCA Comment Letter; ADAM 

Comment Letter; DeFi Fund Comment Letter; 

Consensys Comment Letter; Blockchain Comment 

Letter; U.S. Reps Comment Letter; American 

Blockchain PAC Comment Letter; Andreessen 

Horowitz Comment Letter; ABA Comment Letter. 272See, e.g., GDCA Comment Letter; ABA 

Comment Letter. 273See, e.g., Andreessen Horowitz Comment 

Letter; DeFi Foundation Comment Letter; ADAM 

Comment Letter. Similarly, one commenter 

recommended that the application to businesses in 

crypto assets be narrow. See also Gretz Comment 

Letter (stating ‘‘based on the principle of ‘same 

business, same risks, same rules’ we’d recommend 

to have the applicability on digital asset related 

businesses in narrow scope’’). 

274See Better Markets Comment Letter. 

275See id. 

276See, e.g., Andreessen Horowitz Comment 

Letter; DeFi Fund Comment Letter; Consensys 

Comment Letter. 

277See Consensys Comment Letter. 

278See, e.g., DeFi Fund Comment Letter; 

Andreessen Horowitz Comment Letter. 

279See, e.g., DeFi Fund Comment Letter; 

Andreessen Horowitz Comment Letter. 

280See, e.g., Consensys Comment Letter; 

Andreessen Horowitz Comment Letter. 

281See Consensys Comment Letter (stating that 

the rules might apply to ‘‘retailers’’ or ‘‘merchants’’ 

that accept crypto assets as payment for goods and 

as an ancillary part of their business, exchange the 

crypto assets for more traditional forms of 

currency). The final rules apply only to trading 

activities involving crypto assets that are securities. 

As the rules apply only to crypto assets that are 

securities, commenter’s view as to the treatment of 

trading in crypto assets that are not securities are 

not relevant to the analysis. 

282Proposing Release at 23057, n.36. 

283See supra note 135. 284See, e.g., SEC v. Beaxy Digital, Ltd., et al., No. 

23–cv–1962 (N.D. Ill. Mar. 29, 2023) (Docket Entries 

1, 4) (final judgment entered on consent enjoining 

crypto asset trading platform from operating an 

unregistered exchange, broker, dealer, and clearing 

agency). The President’s Executive Order on 

Ensuring Responsible Development of Digital 

Assets recognized that ‘‘many activities involving 

digital assets are within the scope of existing 

domestic laws and regulations’’ and ‘‘[d]igital asset 

. . . intermediaries whose activities may increase 

risks to financial stability, should, as appropriate, 

be subject to and in compliance with regulatory and 

supervisory standards that govern traditional 

market infrastructures and financial firms.’’ See 

President’s Executive Order on Ensuring 

Responsible Development of Digital Assets, dated 

Mar. 9, 2022, available at https://www.whitehouse.

gov/briefing-room/presidential-actions/2022/03/09/ 

executive-order-on-ensuring-responsibledevelopment-of-digital-assets/. As discussed below, 

these intermediaries perform a wide range of 

functions, many of which may already qualify them 

as dealers under the Exchange Act. See section 

III.B.2.c. 

expressed their concern that they do not 

understand which crypto assets are 

securities under the Federal securities 

laws and believe it would be 

inappropriate for the dealer regulatory 

framework to apply to persons 

transacting in crypto assets that are 

securities.270 In addition, certain of 

these commenters expressed their view 

that there were aspects of the dealer 

regulatory framework, including 

registration, that could substantially 

raise the costs, or would be unworkable, 

for crypto asset security participants, 

and could hinder U.S. innovation in the 

crypto asset market.271 For example, 

some commenters contended that the 

Commission has provided no viable 

path forward by which a Commissionregistered broker-dealer can custody 

digital assets.272 Commenters requested 

that if the Commission were to move 

forward with adopting the proposed 

rules, the Commission revise the final 

rules to carve out or tailor the 

application to persons transacting in 

crypto assets that are securities.273

One commenter supported applying 

the proposed rules to all securities, 

including crypto asset securities, and 

asked the Commission to resist 

suggestions from other commenters to 

carve out any types of assets that are 

securities from the ‘‘dealer’’ 

definition.274 The commenter urged that 

the Commission apply securities 

regulation ‘‘equally to all securities 

regardless of how novel, ‘innovative,’ 

popular, or profitable such offerings 

may be.’’ 275

The Commission also received 

comments about the application of the 

proposed rules to so-called DeFi 

products, structures, and activities, and 

users and participants thereof.276 One 

commenter asserted that it is 

unreasonable for the proposed rules to 

apply to so-called DeFi products, 

structures and activities because they 

assert that these do not have a central 

controlling body and are just software, 

and that they do not raise the concerns 

identified by Congress when enacting 

the Exchange Act.277 Other commenters 

questioned whether the proposed rules 

would apply to participants in so-called 

DeFi products, structures and activities, 

including those involving the use of 

smart contracts, automated market 

makers, or other ‘‘all-to-all’’ or peer-topeer execution protocols.278

Commenters expressed concerns that 

the uncertainty of whether the proposed 

rules applied to such users or 

participants could lead to less liquidity 

in the crypto asset markets.279

Commenters requested that the 

Commission clarify that the adopted 

rules would not apply to so-called DeFi 

products, structures or activities, or 

users or participants thereof.280 One 

commenter also asserted that crypto 

assets were currency, and not securities, 

and asked that the Commission clarify 

that the proposed rules would not apply 

to ‘‘retailers’’ or ‘‘merchants’’ that accept 

payment for goods and services in 

crypto assets and exchange that crypto 

asset for fiat currency.281

As stated in the Proposing Release, as 

a threshold matter, the definitions of 

‘‘dealer’’ and ‘‘government securities 

dealer’’ under sections 3(a)(5) and 

3(a)(44) of the Exchange Act, and the 

requirement that dealers and 

government securities dealers register 

with the Commission pursuant to 

sections 15 and 15C of the Exchange 

Act, apply with respect to the buying 

and selling of all securities or 

government securities.282 Therefore, 

Rules 3a5–4 and 3a44–2 as adopted 

apply to any person transacting in 

securities or government securities, 

regardless of where the security or 

government security trades. 

The dealer framework is a functional 

analysis based on the securities trading 

activities undertaken by a person, not 

the type of security being traded. The 

final rules apply to the buying and 

selling of all securities, including crypto 

assets that are securities or government 

securities within the meaning of the 

Exchange Act. While some commenters 

stated that the proposed rules should 

not apply to so called DeFi, whether 

there is a dealer involved in any 

particular transaction or structure 

(whether or not referred to as so-called 

DeFi) is a facts and circumstances 

analysis. There is nothing about the 

technology used, including distributed 

ledger technology-based protocols using 

smart contracts, that would preclude 

crypto asset securities activities from 

falling within the scope of dealer 

activity.283 Accordingly, certain persons 

engaging in crypto asset securities 

transactions may be operating as dealers 

as defined under the Exchange Act.284

Rules 3a5–4 and 3a44–2 apply to 

persons transacting in crypto assets that 

meet the definition of ‘‘securities’’ or 

‘‘government securities’’ under the 

Exchange Act. If a person’s trading 

activities in crypto asset securities, 

including products, structures and 

activities involved in the so-called DeFi 

market, meet the definition of ‘‘as part 

of a regular business’’ as set forth in the 

final rules (i.e., the person engages in a 

regular pattern of buying and selling 

crypto asset securities that has the effect 

of providing liquidity to other market 

participants as stated in the qualitative 

standard), and no exception or 

exclusion applies, that person would be 

required to register as a dealer or 

government securities dealer under the 

Exchange Act and comply with the 

requirements applicable to dealers and 

government securities dealers. Contrary 


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285See 15 U.S.C. 78o(a); see generally DAO 21(a) 

Report, available at https://www.sec.gov/litigation/ 

investreport/34-81207.pdf (addressing the 

obligation to comply with the registration 

provisions of the Federal securities laws with 

respect to products and platforms involving 

emerging technologies and new investor interfaces). 

286See section III.C.1 (discussing benefits of 

dealer regulatory framework). 

287See SIFMA Comment Letter I. 

288 Id. SIFMA suggested that the Commission 

modify the text of the proposed second qualitative 

factor to clarify the treatment of inter-affiliate 

transactions by adding that the relevant expressions 

of trading interests are those made to other market 

participants ‘‘not controlling, controlled by or 

under common control with the person.’’ See 

Comment Letter of Securities Industry and 

Financial Markets Association (Oct. 5, 2022) 

(‘‘SIFMA Comment Letter III’’). 

289See section II.A.4 (discussing the deletion 

from the definition of ‘‘own account’’ any accounts 

held in the name of a person over whom that person 

exercises control or with whom that person is under 

common control and corresponding exclusions). 

290 In addition, the Commission analyzes the 

activities of each entity in determining brokerdealer registration status. See, e.g., Foreign BrokerDealer Adopting Release at 30017 (stating ‘‘the 

Commission uses an entity approach with respect 

to registered broker-dealers. Under this approach, if 

a foreign broker-dealer physically operates a branch 

in the United States, and thus becomes subject to 

U.S. registration requirements, the registration 

requirements and the regulatory system governing 

U.S. broker-dealers would apply to the entire 

foreign broker-dealer entity.’’) 

291 Id. 

292Comment Letter of Marcie Frost, Chief 

Executive Officer, California Public Employees 

Retirement System; Anastasia Titarchuk, Chief 

Investment Officer and Deputy Comptroller for 

Pension Investment & Cash Management, New York 

State Common Retirement Fund; Jase R. Auby, 

Chief Investment Officer, Teacher Retirement 

System of Texas; and Steven Meier, Chief 

Investment Officer and Deputy Comptroller for 

Asset Management, Office of the Comptroller of the 

City of New York (Nov. 3, 2023) (‘‘Public Pension 

Fund Comment Letter’’); Comment Letter of Lamar 

Taylor, Interim Executive Director & CIO, State 

Board of Administration of Florida (Nov. 1, 2023) 

(‘‘Florida State Board Comment Letter’’). 

293Florida State Board Comment Letter. 

294See section I.B. 

295 15 U.S.C. 78c(a)(5) (‘‘The term ‘dealer’ means 

any person engaged in the business of buying and 

selling securities . . . for such person’s own 

account through a broker or otherwise.’’) (emphasis 

added); 15 U.S.C. 78c(a)(44) (‘‘The term 

‘government securities dealer’ means any person 

engaged in the business of buying and selling 

government securities for his own account, through 

a broker or otherwise . . .’’) (emphasis added). 

296Paragraph (b)(1) of the proposed rules 

provided that the term ‘‘person’’ has the same 

meaning as prescribed in section 3(a)(9) of the 

Exchange Act. Section 3(a)(9) of the Exchange Act 

defines a ‘‘person’’ as ‘‘a natural person, company, 

government, or political subdivision, agency, or 

instrumentality of a government.’’ See 15 U.S.C. 

78c(a)(9). 

297When using the terms ‘‘aggregation provision’’ 

and ‘‘aggregation,’’ the Commission is referring to 

the following language in the definition of ‘‘own 

account’’ that was included in the proposed rules: 

‘‘held in the name of a person over whom that 

person exercises control or with whom that person 

is under common control.’’ The removal of this 

provision eliminated the inclusion of entities under 

control or common control as set forth in the 

definition of ‘‘own account’’ under the proposed 

rules. 

298Proposing Release at 23062. For purposes of 

paragraph (b)(2)(ii), the proposed rules incorporated 

the definition of ‘‘control’’ under 17 CFR 240.13h– 

1 (‘‘Rule 13h–l’’). 

299Proposed 17 CFR 240.3a5–4(b)(2)(ii)(A) and 

240.3a44–2(b)(2)(ii)(A). 

300Proposed 17 CFR 240.3a5–4(b)(2)(ii)(B) and 

240.3a44–2(b)(2)(ii)(B). 

301Proposed 17 CFR 240. 3a5–4(b)(2)(ii)(C) and 

240.3a44–2(b)(2)(ii)(C). The Commission proposed 

to define parallel account structure to mean ‘‘a 

structure in which one or more private funds (each 

Continued 

to what some commenters have stated, 

unless an exemption or exception 

applies, the Exchange Act requires the 

Commission to register and regulate 

persons acting as dealers in 

securities.285 Regardless of the 

technology used to engage in crypto 

asset securities trading and transactions, 

if a person meets the qualitative 

standard in the final rule, or otherwise 

meets the definition of dealer under the 

Exchange Act, that person is subject to 

registration as a dealer, and the 

application of the dealer regulatory 

regime to its activities.286

In addition to the commenters 

requesting additional exclusions for 

private funds and advisers and for 

market participants transacting in 

crypto asset securities, a commenter 

stated that the Commission should 

exclude from the scope of the proposed 

rules inter-affiliate transactions used by 

banking institutions to centrally manage 

cash or risk throughout their 

organizations.287 In the context of 

discussing its concerns with the 

proposed aggregation provision, the 

commenter stated that, consistent with 

exclusions for inter-affiliate transactions 

in the security-based swaps context, as 

well as with the language of the 

proposed rules, which focus on 

transactions that have ‘‘the effect of 

providing liquidity to other market 

participants,’’ inter-affiliate transactions 

should be excluded.288

The Commission is not adding an 

exclusion for inter-affiliate transactions 

because the Commission is removing 

the aggregation provision, and the final 

rules have been modified to focus on the 

trading activity of a person for an 

account in the name of, or for the 

benefit of, that person.289 In the context 

of whether a person is acting as a dealer, 

the Commission continues to believe 

each person must independently 

consider its own trading activities to 

determine whether its activities require 

dealer registration.290 Accordingly, the 

Commission is not excluding interaffiliate transactions.291

Further, some commenters requested 

clarification that the proposed rules 

would not apply to a governmental 

plan, including public pensions, nor to 

state administrators managing state 

funds or to city administrators managing 

the city pension funds through an 

exclusion from the proposed rules.292

One of these commenters specifically 

raised concerns that the proposed 

quantitative standard could subject state 

boards and similar investment 

fiduciaries and/or administrators of 

state pension funds to the rules.293 The 

Commission is not adding an exclusion 

for such arrangements because the rules 

have been significantly modified, 

including by removal of the quantitative 

standard and the proposed first 

qualitative standard, such that the final 

rules should not capture these 

arrangements.294

4. Definitions and Anti-Evasion 

As noted in the Proposing Release, the 

Exchange Act defines a ‘‘dealer’’ or 

‘‘government securities dealer’’ as a 

person engaged in the business of 

buying and selling securities for its 

‘‘own account.’’ 295 The proposed rules 

included definitions for the terms 

‘‘person,’’ 296 ‘‘own account,’’ ‘‘control,’’ 

and ‘‘parallel account structure.’’ 

The proposed rules would have 

broadly defined a person’s ‘‘own 

account’’ to mean any account that is: 

‘‘held in the name of that person,’’ or 

‘‘held in the name of a person over 

whom that person exercises control or 

with whom that person is under 

common control,’’ 297 or ‘‘held for the 

benefit of those persons,’’ subject to 

certain exclusions.298

The proposed rules would have 

excluded from the definition of ‘‘own 

account’’: (A) an account in the name of 

a registered broker, dealer, or 

government securities dealer, or an 

investment company registered under 

the Investment Company Act of 

1940; 299 (B) with respect to an 

investment adviser registered under the 

Investment Advisers Act of 1940, an 

account held in the name of a client of 

the adviser unless the adviser controlled 

the client as a result of the adviser’s 

right to vote or direct the vote of voting 

securities of the client, the adviser’s 

right to sell or direct the sale of voting 

securities of the client, or the adviser’s 

capital contributions to or rights to 

amounts upon dissolution of the 

client; 300 and (C) with respect to any 

person, an account in the name of 

another person that was under common 

control with that person solely because 

both persons are clients of an 

investment adviser registered under the 

Advisers Act unless those accounts 

constituted a parallel account 

structure.301


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a ‘parallel fund’), accounts, or other pools of assets 

(each a ‘parallel managed account’) managed by the 

same investment adviser pursue substantially the 

same investment objective and strategy and invest 

side-by-side in substantially the same positions as 

another parallel fund or parallel managed account.’’ 

See Proposing Release at 23075. 

302Proposing Release at 23074. 303 17 CFR 240.13h–1(c)(2) (‘‘Rule 13h–1(c)(2)’’). 

Rule 13h–1(c)(2) provides that under no 

circumstances shall a person disaggregate accounts 

to avoid the identification requirements of the 

section. 304While we received letters from a variety of 

commenters, these letters primarily represented the 

asset management industry. 

305See, e.g., SIFMA Comment Letter I; Fried 

Frank Comment Letter; Two Sigma Comment Letter 

I; ICI Comment Letter; AIMA Comment Letter II; 

ADAM Comment Letter; FIA PTG Comment Letter 

I; MFA Comment Letter I; T. Rowe Price Comment 

Letter. See also IAA Comment Letter I; SIFMA AMG 

Comment Letter; AIMA Comment Letter II (‘‘If the 

Commission is going to subject private funds and 

private fund advisers to the Proposal, it should 

provide some clarity regarding its application and 

remove the aggregation requirements (including the 

‘under common control’ element)’’). While many 

commenters raised concerns with the definitions of 

‘‘own account’’ and ‘‘control,’’ most commenters 

did not specifically address the definition of 

‘‘person.’’ But see MFA Comment Letter I (‘‘The 

Commission should define the term ‘person’ to 

recognize disaggregation by independent portfolio 

managers. The Proposal appears based on an 

assumption that all trading activity taking place 

within a single legal entity or commonly controlled 

group of legal entities takes place on an integrated 

and coordinated basis. However, it is quite common 

that a single entity (including a fund) or group of 

entities engage in trading through substantially (for 

all relevant purposes) independent portfolio 

managers. . . . To avoid this issue, the 

Commission should adopt a definition of ‘person’ 

that treats separately trading activity conducted by 

separate decision-makers without coordination of 

trading or cooperation among or between them. 

This treatment would be consistent with the 

treatment of truly separate accounts for other 

securities law purposes.’’). 306See, e.g., ADAM Comment Letter; SIFMA 

AMG Comment Letter. 

307See, e.g., Morgan Lewis Comment Letter; 

ADAM Comment Letter; SIFMA AMG Comment 

Letter. 

308See SIFMA Comment Letter I (‘‘Instead of the 

Aggregation Rule, the Commission should adopt a 

targeted anti-evasion standard prohibiting a person 

from willfully evading dealer or government 

securities dealer status (under the existing 

definition and guidance) through coordinated 

trading activity across commonly controlled entities 

over which the person exercises investment 

discretion.’’). See also ICI Comment Letter 

(‘‘[I]nstead of a blanket exclusion for parallel 

account structures from the exception for 

commonly managed accounts, we believe a general 

anti-evasion provision similar to Rule 13h–1(c)(2) 

under the Exchange Act is more appropriate.’’); IAA 

Comment Letter I (‘‘The Commission should focus 

on general anti-evasion principles rather than 

imposing dealer regulation on advisers and their 

clients out of concern that some persons could 

theoretically evade regulation.’’); T. Rowe Price 

Comment Letter (‘‘A better way to address potential 

abusive situations is to simply have an anti-evasion 

clause.’’); MFA Comment Letter I; Two Sigma 

Comment Letter I; IAA Comment Letter II. 

309SIFMA AMG Comment Letter. 

310Morgan Lewis Comment Letter. 

311See SIFMA Comment Letter I (‘‘In addition, 

the Aggregation Rule would undermine statutory 

and regulatory limits on the scope of dealer and 

government securities dealer registration.’’); 

Committee on Capital Markets Regulation Comment 

Letter. See also ICI Comment Letter; SIFMA AMG 

Comment Letter; Morgan Lewis Comment Letter; 

MFA Comment Letter I. 

312AIMA Comment Letter II. 

313See Comment Letter of Managed Funds 

Association (Apr. 6, 2023) (‘‘MFA Comment Letter 

IV’’). 

314See IAA Comment Letter I. 

315See MFA Comment Letter IV. 

316See, e.g., ADAM Comment Letter; Schulte 

Roth Comment Letter; SIFMA AMG Comment 

Letter; McIntyre Comment Letter II; MFA Comment 

Letter I; Andreessen Horowitz Comment Letter; 

Morgan Lewis Comment Letter; BlackRock 

Comment Letter. See also IAA Comment Letter I 

(‘‘We are concerned that these overbroad provisions 

would sweep in separately-managed accounts and 

pooled investment vehicles managed in the 

ordinary course by the same adviser but that have 

no relationship with one another other than having 

the same adviser’’); McIntyre Comment Letter II 

(‘‘The proposals construct a complex regime of 

aggregation and attribution principles in order to 

address a manufactured concern of avoidance 

structuring, which has the effect of casting a wide 

net to capture accounts at the ‘legal-entity level,’ 

presumably meaning accounts under common 

control in a fund complex.’’). 

317See Schulte Roth Comment Letter. 

318See SIFMA AMG Comment Letter; BlackRock 

Comment Letter (‘‘As discussed in SIFMA AMG’s 

and ICI’s respective comment letters, we are 

concerned that the Proposal’s definition of ‘own 

account’ is overly broad and could require that 

separately managed accounts (‘SMAs’) register as 

dealers based on the activity of their unaffiliated 

advisers acting as their agents.’’). 

The Proposing Release explained that 

the proposed definitions were intended 

to avoid incentivizing market 

participants to change their corporate 

structures for the purpose of avoiding 

registration.302 The Proposing Release 

sought comment generally on this 

aspect of the proposed rules, and also 

asked whether the Commission should 

include an anti-evasion provision 

similar to Rule 13h–1(c)(2) under the 

Exchange Act.303

The Commission received extensive 

comment on the definitions included in 

the Proposing Release.304 Most 

commenters did not support the 

definitions, and in particular, suggested 

eliminating the aggregation provision 

set forth in the definitions of ‘‘own 

account’’ and ‘‘control.’’ 305 Commenters 

stated that the proposed rules 

represented a departure from the 

Commission’s historical ‘‘entity’’ 

approach to broker-dealer regulation.306

Many commenters stated that the 

Commission should maintain an entity 

approach to registration, focusing on 

activity on an entity-by-entity basis,307

and suggested that instead of 

aggregating the trading activities of 

entities within a corporate structure, the 

Commission should adopt an antievasion standard.308 In particular, one 

commenter stated that the Commission 

should apply the principles of the entity 

approach to broker-dealer registration 

that it articulated in the adopting release 

to 17 CFR 240. 15a–6 (‘‘Rule 15a–6’’) 

where registration activities are assessed 

on an entity-by-entity basis, rather than 

across affiliated entities.309 Another 

commenter also cited to Rule 15a–6, 

stating that, in assessing whether a 

person has to register as a government 

securities dealer, such commenter 

believed that Congress intended that the 

Commission should focus on activity on 

an entity-by-entity basis rather than on 

an aggregated basis.310

Regarding the proposed aggregation 

standard, many commenters raised 

concerns that trading activities of 

entities, including banks and bank 

holding companies, that may be 

excepted or exempted from dealer 

registration would nonetheless need to 

be aggregated with, and potentially 

trigger registration of, commonly 

controlled persons under the proposed 

rules, contrary to policy decisions 

Congress and the Commission has made 

to not require these entities to register 

as dealers.311 One commenter stated 

that the proposed aggregation provisions 

would force market participants to 

constantly monitor their trading 

activities and their volume (for 

government securities) across all 

subsidiaries and clients to determine 

whether either the qualitative or 

quantitative standards are triggered.312

One commenter questioned why the 

Commission’s aggregation approach 

departs substantially from established 

Commission precedent under 

Regulation M and section 13 reporting 

requirements.313

One commenter stated that the 

Commission has not explained how 

dealer registration would work if 

unrelated client accounts needed to be 

aggregated.314 One commenter 

specifically raised concerns with the 

‘‘common control’’ provision stating 

that: ‘‘Combining the securities buying 

of one entity and the securities selling 

of another entity when they are under 

common control is plainly not 

indicative of dealing activity when it is 

not coordinated or integrated.’’ 315

As noted above, many commenters 

did not support the definitions, 

specifically the definition of ‘‘own 

account,’’ which they stated was 

overbroad.316 One of these commenters 

stated that there is no connection 

between controlling—but not owning— 

an account and that account being the 

party’s ‘‘own account.’’ 317 Some 

commenters stated that all managed 

accounts should be excluded from the 

definition.318

Similarly, many commenters also did 

not support the definition of ‘‘control’’ 


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319See, e.g., ADAM Comment Letter; Schulte 

Roth Comment Letter; T. Rowe Price Comment 

Letter; SIFMA Comment Letter I; MFA Comment 

Letter I; AIMA Comment Letter II; McIntyre 

Comment Letter II; IAA Comment Letter I. See also 

SIFMA AMG Comment Letter (‘‘The Commission’s 

definition of ‘own account,’ and the reference to the 

definition of ‘control’ in the large trader reporting 

regime is inappropriate, exceedingly broad, and 

will capture a number of accounts and 

arrangements that were otherwise not contemplated 

as encompassing traditional dealer activity.’’). 

320See IAA Comment Letter I; IAA Comment 

Letter II. 

321See, e.g., ICI Comment Letter (‘‘The 

Commission’s proposed definition of a ‘parallel 

account structure’ in this context is overly broad 

and would inappropriately result in aggregation 

among separately owned client accounts that follow 

substantially the same investment objectives and 

strategies but are managed by the same registered 

investment adviser in the ordinary course of 

business, rather than for purposes of evading dealer 

registration requirements.’’). See also ABA 

Comment Letter; SIFMA AMG Comment Letter; 

IAA Comment Letter I; T Rowe Price Comment 

Letter. 

322MFA Comment Letter I. 

323As discussed below, the Commission has not 

made changes to the definition of ‘‘person,’’ but has 

made conforming edits to delete the definitions of 

‘‘control’’ and ‘‘parallel account structure’’ due to 

deletion of the aggregation standard. 

324See MFA Comment Letter I. 

325Section 3(a)(9) of the Exchange Act defines a 

‘‘person’’ as ‘‘a natural person, company, 

government, or political subdivision, agency, or 

instrumentality of a government.’’ See 15 U.S.C. 

78c(a)(9). Under section 3(a)(19) of the Exchange 

Act, the term ‘‘company’’ has the same meaning as 

in the Investment Company Act of 1940. See 15 

U.S.C. 78c(a)(19). 

326See supra note 290. 

327The use of an anti-evasion approach was also 

suggested by commenters. See supra note 308 and 

accompanying text. 

328Nothing in these final rules or this release 

affects the Commission’s ability to pursue unlawful 

unregistered dealer activity under any other 

applicable provision of the Federal securities laws. 

329See Proposing Release at 23078. See, e.g., ICI 

Comment Letter; T. Rowe Price Comment Letter. 

because they believed the definition was 

too broad by capturing too many types 

of arrangements.319 One commenter 

stated that the Commission should make 

clear that advisers do not control their 

clients merely because they manage 

those clients’ accounts on a 

discretionary or other basis.320 Many 

commenters also opposed the ‘‘parallel 

account structure’’ definition, also 

finding that it was overbroad and 

impractical.321 While commenters 

generally did not comment on the 

definition of ‘‘person,’’ one commenter 

suggested adopting a definition that 

treats separately trading activity 

conducted by separate decision-makers 

without coordination of trading or 

cooperation among or between them, 

stating that this treatment would be 

consistent with the treatment of separate 

accounts for other securities law 

purposes.322

After careful review of these 

comments and upon further 

consideration, the Commission 

acknowledges the concerns raised by 

commenters and has determined that for 

the purpose of assessing dealer status 

under the final rules, an anti-evasion 

approach is appropriate. The 

Commission is revising the rule text to 

delete from the definition of ‘‘own 

account’’ any accounts held in the name 

of a person over whom that person 

exercises control or with whom that 

person is under common control and 

corresponding exclusions. Accordingly, 

under the rules as adopted, ‘‘own 

account’’ thus means any account: (a) 

held in the name of that person; or (b) 

held for the benefit of that person.323 At 

the same time, in order to prevent 

potentially evasive behavior and in 

response to comments, the Commission 

is adding an anti-evasion provision 

providing that no person shall evade the 

registration requirements of this section 

by: (1) engaging in activities indirectly 

that would satisfy the qualitative 

standard; or (2) disaggregating accounts. 

Each of these changes is discussed in 

more detail below. 

Definition of ‘‘Person’’ 

The Commission is adopting the 

definition of ‘‘person’’ as proposed. 

Removal of the aggregation provision 

adequately addresses the comment 

mentioned above 324 suggesting 

adoption of a definition of ‘‘person’’ that 

treats separately trading activity 

conducted by separate decision-makers 

without coordination of trading or 

cooperation among or between them. 

Further, the adopted definition of 

‘‘person’’ is well-established and has the 

same meaning as prescribed in section 

3(a)(9) of the Exchange Act and under 

applicable dealer precedent.325

Definition of ‘‘Own Account’’ 

As stated above, the Commission is 

adopting the definition of ‘‘own 

account’’ under paragraph (b)(2) to 

mean any account: (i) held in the name 

of that person; or (ii) held for the benefit 

of that person. Further, the Commission 

is removing the definitions of ‘‘control’’ 

and ‘‘parallel account structure’’ as the 

corresponding language in the 

aggregation provisions of the proposed 

rules has been removed, and the 

definitions are no longer relevant. 

In response to concerns raised by 

commenters related to, among other 

things, the breadth of the proposed 

rule’s aggregation approach, the 

Commission has determined to focus in 

the first instance on an analysis of 

activity on an entity-by-entity basis, 

rather than aggregating accounts across 

entities that are controlled by or are 

under common control with an 

entity.326

Anti-Evasion Provision 

Although the Commission has 

determined to eliminate the proposed 

rule’s aggregation provision, the 

Commission nevertheless remains 

concerned that some persons may seek 

to structure their business for the 

purpose of evading dealer registration. 

Accordingly, the Commission is 

adopting an anti-evasion provision in 

the final rules, consistent with 

suggestions from commenters. This antievasion provision prohibits structuring 

activities or disaggregating accounts for 

the purpose of evading the dealer 

registration requirements.327

Specifically, the anti-evasion provision 

provides that ‘‘no person shall evade the 

registration requirements of this section 

by’’ either ‘‘engaging in activities 

indirectly that would satisfy paragraph 

(a) of this section’’ (‘‘first anti-evasion 

prong’’); or ‘‘disaggregating accounts’’ 

(‘‘second anti-evasion prong’’ and 

together, the ‘‘anti-evasion provision’’). 

The first anti-evasion prong prohibits 

a person from evading the registration 

requirements by engaging indirectly in 

activity that would meet the qualitative 

standard. This prong makes clear that 

persons are prohibited from evading the 

dealer registration requirements under 

the final rules by, among other things, 

using another person or entity to 

indirectly engage in activity that would 

meet the qualitative standard.328

The final rules also include a second 

anti-evasion prong. This prong, which is 

modeled on Rule 13h–1(c)(2),329 would 

make it unlawful for a person to evade 

registration by disaggregating accounts. 

For purposes of this second anti-evasion 

prong, ‘‘disaggregate’’ means separating 

or breaking up accounts for the purpose 

of evading the dealer registration 

requirements. This prong is intended to 

address persons who seek to evade the 

requirements of this rule—not by 

reducing or changing their activity to 

avoid triggering the rules—but by 

spreading the activity across entities or 

accounts such that the level of activity 

is the same, with no real change with 

respect to liquidity provision. The 

second anti-evasion prong thus is 

intended to address market participants 

who disaggregate their existing business 

for the purpose of evading the final 

rules, but not limit the ordinary course 

business activities of persons who have 

no such intent or purpose. For instance, 

the Commission would generally 

consider management by a registered 

investment adviser of separately owned 


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330The separation of purchases and sales in 

distinct legal entities could also indicate evasive 

behavior with respect to the expressing trading 

interest qualitative factor, which requires 

expressing trading interest on both sides of the 

market. 

331See Citadel Comment Letter (‘‘The 

Commission should not aggregate trading activities 

across independent entities, portfolio managers, or 

trading strategies when assessing whether the 

proposed qualitative criteria are met, particularly if 

there are information barriers in place.’’). 

332See Exchange Act Release No. 56206 (Aug. 6, 

2007), 72 FR 45094 (Aug. 10, 2007). 

333See Proposing Release at 23077. 

334See Proposing Release at 23062. 

335 GDCA Comment Letter at 3; MFA Comment 

Letter I at 33–34; FINRA Comment Letter 

(explaining that ‘‘FINRA membership is key to 

facilitate effective oversight of such entities, and to 

provide for enhanced regulatory audit trails and 

market integrity, among other benefits. . .’’). In 

addition, with respect to the compliance period, 

several commenters requested the Commission to 

consider interactions between the proposed rule 

and other recent Commission rules. In determining 

compliance periods, the Commission considers the 

benefits of the rules, as well as the costs of delayed 

compliance dates and potential overlapping 

compliance periods. For the reasons discussed 

throughout this release, to the extent that there are 

costs from overlapping compliance periods, the 

benefits of the rules justify such costs. See infra 

section III.C.2.a.vi for a discussion of the 

interactions of the final rule with certain other 

Commission rules. 

336See GDCA Comment Letter (‘‘If firms were 

required to register, the proposed one year 

compliance period is wholly impractical. In our 

experience, for a firm that is not currently registered 

to prepare to register as a broker-dealer, including 

implementing email, invoicing, and other 

operations related technology, hiring appropriate 

personnel, and completing relevant examinations 

takes at least six months. While FINRA is expected 

to approve registrations within six months, in the 

best circumstances that is often not the case. For 

firms with unusual or complex business plans, such 

as digital asset focused firms, this process could 

take years.’’); MFA Comment Letter I (‘‘We strongly 

urge the Commission to extend the proposed oneyear compliance period. The Proposal’s 

requirements are complex and we understand that 

firms will need to expend significant time, 

resources, and effort to understand and apply them. 

Firms that determine that registration is necessary 

after an analysis of their trading activity will then 

need additional time to prepare a Form BD and 

otherwise prepare to comply with the Commission’s 

dealer regulations. We believe that a 36-month 

transition period following the effectiveness of any 

final rule would be more appropriate.’’). 

337See MFA Comment Letter I (noting that ‘‘[i]t 

will be far easier and fairer to provide a common 

transition period for all market participants’’). 

338FINRA Comment Letter (further stating that 

FINRA ‘‘looks forward to the opportunity to work 

with the Commission and affected market 

participants to facilitate a review process that can 

achieve this balance without disrupting the 

markets.’’). 

client accounts that follow substantially 

the same investment objectives and 

strategies to be ordinary course business 

activities, and so would not impute the 

trading in the clients’ accounts to the 

adviser’s ‘‘own account,’’ absent intent 

to evade the dealer registration 

requirements. 

The anti-evasion provision is 

intended to capture persons dividing or 

structuring their activity to evade the 

application of the final rules. Potentially 

evasive activity would include but is 

not limited to, coordinating and 

integrating trading across commonly 

controlled groups of legal entities such 

that it would not meet the qualitative 

standard, including by switching which 

legal entity is engaged in trading to 

evade the ‘‘regular’’ requirement of the 

qualitative standard. Other specific 

examples of potentially evasive 

behavior include: (i) a person that uses 

two legal entities to separately purchase 

and sell securities; 330 or (ii) a person 

that uses several legal entities to 

purchase and sell securities, but 

‘‘rotates’’ the activity across or among 

entities in a way that none of the legal 

entities trades frequently enough to 

satisfy the ‘‘regular’’ test under either 

factor. 

In determining whether or not a 

person is evading the dealer registration 

requirements in violation of the antievasion provision, the Commission may 

consider, for example, whether there 

are: (i) information barriers to prevent 

sharing of information or sufficiently 

segregated trading,331 (ii) overlapping 

personnel across accounts or entities, or 

(iii) separate account statements for 

each account. Other relevant factors 

could include, for example, the 

identification of personnel with 

oversight or managerial responsibility 

over multiple accounts in a single entity 

or affiliated entities, and account 

owners of multiple accounts, that do not 

have authority to execute trades or preapprove trading decisions for accounts 

or entities; 332 or a business purpose that 

demonstrates that there is no 

coordinated buying and selling between 

accounts or entities. 

While the Commission has identified 

a number of non-exhaustive examples of 

potentially evasive behavior and 

described factors that weigh against a 

conclusion that a person’s intent is 

evasive, it is important to recognize that 

whether a person has violated the antievasion provision will depend on an 

evaluation of the totality of the facts and 

circumstances. 

5. No Presumption 

In the Proposing Release, the 

Commission proposed to include a ‘‘no 

presumption’’ clause to clarify that a 

person may be a dealer if it engages in 

a regular business of buying and selling 

securities for its own account, even if it 

does not meet the conditions set forth in 

the proposed rules. The Commission 

explained that the proposed rules did 

not seek to address all persons that may 

be acting as dealers under otherwise 

applicable interpretations and precedent 

(for example, by acting as an 

underwriter, regardless of whether such 

person has or controls assets of less than 

$50 million).333

No commenters suggested changes to 

the proposed no presumption clause. 

For the reasons discussed in the 

Proposing Release, we are adopting this 

provision as proposed. We also reiterate, 

consistent with our adoption of the no 

presumption clause, that the final rules 

do not modify existing court precedent 

and Commission interpretations, which 

continue to apply to determine whether 

a person is a dealer, even if such person 

would not qualify as a dealer under the 

final rules. 

B. Compliance Date 

In the Proposing Release, the 

Commission proposed and sought 

comment on a compliance date of one 

year from the effective date of the 

adoption of the final rules.334 The 

Commission explained that the 

compliance period was designed to 

provide adequate time for persons 

captured by the proposed rules, if 

adopted, to apply for dealer registration, 

and for the relevant SROs to review new 

member applications, without 

disrupting the markets or the 

participants’ existing market activities. 

The Proposing Release explained that 

the proposed compliance period would 

not cover market participants whose 

activities following the effective date of 

the final rules would require registration 

under those rules. 

The Commission received a few 

comments relating to the compliance 

date.335 Some of the letters expressed 

concerns that the compliance period 

would not be long enough to allow for 

new dealers or government securities 

dealers to prepare to register as well as 

complete the SRO registration 

process.336 One of the commenters 

recommended that the Commission 

provide the same transition period for 

market participants whose activities 

would require registration following the 

effective date.337 Another commenter, 

FINRA, commented that although the 

current FINRA rule set currently 

provides for a 180-day review period for 

a new member application, FINRA has 

‘‘ways to help expedite the processing of 

applications for persons captured by the 

[final rules] and is committed to 

ensuring an application review process 

that is thorough and efficient while 

promoting investor protection.’’ 338

After further consideration, the 

Commission is adopting a one-year 


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339FINRA Comment Letter. 

340See MFA Comment Letter I. 

341 15 U.S.C. 78c(f). 

342 15 U.S.C. 78w(a)(2). 

343 Id. 

344See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111– 

15 (D.C. Cir. 2022). This approach also follows SEC 

staff guidance on economic analysis for rulemaking. 

See Staff’s ‘‘Current Guidance on Economic 

Analysis in SEC Rulemaking’’ (Mar. 16, 2012), 

available at https://www.sec.gov/divisions/riskfin/ 

rsfi_guidance_econ_analy_secrulemaking.pdf (‘‘The 

economic consequences of proposed rules 

(potential costs and benefits including effects on 

efficiency, competition, and capital formation) 

should be measured against a baseline, which is the 

best assessment of how the world would look in the 

absence of the proposed action.’’); id. at 7 (‘‘The 

baseline includes both the economic attributes of 

the relevant market and the existing regulatory 

structure.’’). The best assessment of how the world 

would look in the absence of the proposed or final 

action typically does not include recently proposed 

actions, because doing so would improperly assume 

the adoption of those proposed actions. 

345See, e.g., ICI Comment Letter (‘‘The 

Commission has issued a wide range of 

interconnected rule proposals . . . [that] in the 

aggregate warrant further analysis by the 

Commission. The Commission’s failure to consider 

the Interconnected Rules holistically is a 

widespread concern among other market 

participants.’’). 346Short Position and Short Activity Reporting by 

Institutional Investment Managers, Exchange Act 

Release No. 94313 (Feb. 25, 2022), 87 FR 14950 

(Mar. 16, 2022) (see, e.g., Overdahl Comment Letter 

at 24 n.113; MFA Comment Letter I at 15–16); 

Modernization of Beneficial Ownership Reporting, 

Securities Act Release No. 11030, Exchange Act 

Release No. 94211 (Feb. 10, 2022), 87 FR 13846 

(Mar. 10, 2022) (see, e.g., Element Comment Letter 

at 10; Overdahl Comment Letter at 24 n.113; MFA 

Comment Letter I at 14–16); Private Fund Advisers; 

Documentation of Registered Investment Adviser 

Compliance Reviews, Investment Advisers Act 

Release No. 5955 (Feb. 9, 2022), 87 FR 16886 (Mar. 

24, 2022) (see, e.g., MFA Comment Letter I at 20; 

Element Comment Letter at 10; Overdahl Comment 

Letter at 24 n.113; AIC Comment Letter at 1 n.3, 8); 

Amendments to Form PF to Require Event 

Reporting for Large Hedge Fund Advisers and 

Private Equity Fund Advisers and to Amend 

Reporting Requirements for Large Private Equity 

Fund Advisers, Investment Advisers Act Release 

No. 5950 (Jan. 26, 2022), 87 FR 9106 (Feb. 17, 2022) 

(see Overdahl Comment Letter at 24 n.113; AIC 

Comment Letter at 1 n.3, 8; MFA Comment Letter 

I at 20 n.21); Prohibition Against Conflicts of 

Interest in Certain Securitizations, Securities Act 

Release No. 11151 (Jan. 25, 2023), 88 FR 9678 (Feb. 

14, 2023) (see MFA Comment Letter I at 21–22); 

Reporting of Securities Loans, Exchange Act 

Release No. 93613 (Nov. 18, 2021), 86 FR 69802 

(Dec. 8, 2021) (see, e.g., Overdahl Comment Letter 

at 24 n.113); Standards for Covered Clearing 

Agencies for U.S. Treasury Securities and 

Application of the Broker-Dealer Customer 

Protection Rule With Respect to U.S. Treasury 

Securities, Exchange Act Release No. 95763 (Sept. 

14, 2022), 87 FR 64610 (Oct. 25, 2022) (see AIMA 

Comment Letter III at 4; MFA Comment Letter II at 

6 n.13). 

347Form PF; Event Reporting for Large Hedge 

Fund Advisers and Private Equity Fund Advisers; 

Requirements for Large Private Equity Fund 

Adviser Reporting, Investment Advisers Act Release 

No. 6297 (May 3, 2023), 88 FR 38146 (June 12, 

2023) (‘‘May 2023 SEC Form PF Amending 

Release’’). The Form PF amendments adopted in 

May 2023 require large hedge fund advisers and all 

private equity fund advisers to file reports upon the 

occurrence of certain reporting events. The May 

2023 SEC Form PF Amending Release revised Form 

PF to (i) add new current reporting requirements for 

large hedge fund advisers to qualifying hedge funds 

upon the occurrence of key events (new section 5); 

(ii) add new quarterly reporting requirements for all 

private equity fund advisers upon the occurrence of 

key events (new section 6); and (iii) add and revise 

new regular reporting questions for large private 

equity fund advisers. The compliance dates are Dec. 

11, 2023, for the event reports in Form PF sections 

5 and 6, and June 11, 2024, for the remainder of 

the Form PF amendments in the May 2023 SEC 

Form PF Amending Release. 

348Standards for Covered Clearing Agencies for 

U.S. Treasury Securities and Application of the 

Continued 

compliance date from the effective date 

of the final rules for all persons who 

engage in activities that meet the dealer 

registration requirements under the final 

rules. In light of the significant benefits 

afforded by dealer registration to 

investors and the markets, it is 

important for persons engaging in 

activities that meet the dealer 

registration requirements to register as 

soon as possible. Considering FINRA’s 

expressed commitment to expedite the 

application process,339 a compliance 

date of one year from the effective date 

of the final rules will provide a 

sufficient period of time for affected 

market participants to comply with the 

final rules. However, the one-year 

compliance period will be applicable to 

all affected market participants, as we 

agree that a common transition period 

will be easier to administer and more 

equitable.340

However, we emphasize that the oneyear compliance period only applies to 

market participants who are engaging in 

activities covered by the final rules prior 

to the compliance date, and does not 

apply to persons whose activities 

otherwise satisfy the definition of dealer 

under applicable Commission 

interpretations and court precedent. It is 

incumbent here, as with questions of 

‘‘dealer’’ status generally, for market 

participants to analyze and monitor 

their trading activities to understand 

their registration obligations. 

III. Economic Analysis 

A. Introduction 

The Commission is sensitive to the 

economic effects of its rules, including 

the costs and benefits and effects on 

efficiency, competition, and capital 

formation. Section 3(f) of the Exchange 

Act requires the Commission, whenever 

it engages in rulemaking pursuant to the 

Exchange Act and is required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action would promote efficiency, 

competition, and capital formation.341

In addition, section 23(a)(2) of the 

Exchange Act requires the Commission, 

when making rules under the Exchange 

Act, to consider the effect such rules 

would have on competition.342

Exchange Act section 23(a)(2) prohibits 

the Commission from adopting any rule 

that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.343

The final rules will promote 

competition among entities that 

regularly provide significant liquidity 

by applying consistent regulation to 

these entities, thus leveling the playing 

field between liquidity provision 

conducted by entities that are currently 

registered as dealers and government 

securities dealers and by entities that 

are not. The final rules will also 

promote the financial responsibility and 

operational integrity of significant 

liquidity providers that are acting as 

dealers in securities markets by 

subjecting them to the Net Capital Rule 

and to other Commission and SRO rules 

and oversight. The financial 

responsibility and operational integrity 

of these significant liquidity providers, 

in turn, will support the resilience of 

securities markets. In addition, the final 

rules will improve the Commission’s 

ability to analyze market events and 

detect manipulation and fraud. 

Although the final rules may have small 

negative effects on market liquidity and 

efficiency, due to increases in costs for 

affected parties, the final rules may also 

promote liquidity and efficiency by 

limiting the probability that significant 

liquidity providers fail. 

B. Baseline 

The baseline against which the costs, 

benefits, and the effects on efficiency, 

competition, and capital formation of 

the final rules are measured consists of 

the current state of the securities 

markets, current practice as it relates to 

dealers and other significant liquidity 

providers in securities markets, and the 

current regulatory framework. The 

economic analysis considers existing 

regulatory requirements, including 

recently adopted rules, as part of its 

economic baseline against which the 

costs and benefits of the final rules are 

measured.344 Several commenters 

requested the Commission to consider 

interactions between the economic 

effects of the proposed rules and other 

recent Commission rules.345 The 

Commission recently adopted seven of 

the rules mentioned as potentially 

impacting the economic effects of the 

final rules,346 namely the May 2023 SEC 

Form PF Amending Release,347 the 

Treasury Clearing Adopting Release,348


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Broker-Dealer Customer Protection Rule With 

Respect to U.S. Treasury Securities, Exchange Act 

Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 

16, 2024) (‘‘Treasury Clearing Adopting Release’’). 

Among other things, the Treasury Clearing 

Adopting Release requires covered clearing 

agencies for U.S. Treasury securities to have written 

policies and procedures reasonably designed to 

require that every direct participant of the covered 

clearing agency submit for clearance and settlement 

all eligible secondary market transactions in U.S. 

Treasury securities to which it is a counterparty. 

The compliance dates are 60 days following Jan. 16, 

2024, for each covered clearing agency to file any 

proposed rule changes pursuant to 17 CFR 

240.17ad–22(e)(6)(i) and (e)(18)(iv)(C) (‘‘final Rule 

17ad–22(e)(6)(i) and (e)(18)(iv)(C)’’) and final Rule 

15c3–3, and the rule changes must be effective by 

Mar. 31, 2025. With respect to the changes to Rule 

17ad–22(e)(18)(iv)(A) and (B), each covered clearing 

agency will be required to file any proposed rule 

changes regarding those amendments no later than 

150 days following Jan. 16, 2024, and the proposed 

rule changes must be effective by Dec. 31, 2025, for 

cash market transactions encompassed by 

paragraph (ii) of the definition of an eligible 

secondary market transaction, and by June 30, 2026, 

for repo transactions encompassed by paragraph (i) 

of the definition of an eligible secondary market 

transactions. Compliance by the direct participants 

of a U.S. Treasury securities covered clearing 

agency with the requirement to clear eligible 

secondary market transactions would not be 

required until Dec. 31, 2025, and June 30, 2026, 

respectively, for cash and repo transactions. 349Private Fund Advisers; Documentation of 

Registered Investment Adviser Compliance 

Reviews, Investment Advisers Act Release No. 6383 

(Aug. 23, 2023), 88 FR 63206 (Sept. 14, 2023) 

(‘‘Private Fund Advisers Adopting Release’’). The 

Commission adopted five new rules and two rule 

amendments as part of the reforms. The compliance 

date for the quarterly statement rule and the audit 

rule is Mar. 14, 2025, for all advisers. For the 

adviser-led secondaries rule, the preferential 

treatment rule, and the restricted activities rule, the 

Commission adopted staggered compliance dates 

that provide for the following compliance periods: 

for advisers with $1.5 billion or more in private 

funds assets under management, a 12-month 

compliance period (ending on Sept. 14, 2024) and 

for advisers with less than $1.5 billion in private 

funds assets, an 18-month compliance period 

(ending on Mar 14, 2025). The amended Advisers 

Act compliance provision for registered investment 

advisers has a Nov. 13, 2023, compliance date. See 

Private Fund Advisers Adopting Release, sections 

IV, VI.C.1. 

350Modernization of Beneficial Ownership 

Reporting, Securities Act Release No. 11253, 

Exchange Act Release No. 98704 (Oct. 10, 2023), 88 

FR 76896 (Nov. 7, 2023) (‘‘Beneficial Ownership 

Amending Release’’). Among other things, the 

amendments generally shorten the filing deadlines 

for initial and amended beneficial ownership 

reports filed on Schedules 13D and 13G, and 

require that Schedules 13D and 13G filings be made 

using a structured, machine-readable data language. 

The new disclosure requirements and filing 

deadlines for Schedule 13D are effective on Feb. 5, 

2024. The new filing deadline for Schedule 13G 

takes effect on Sept 30, 2024, and the rule’s 

structured data requirements have a one-year 

implementation period ending Dec. 18, 2024. See 

Beneficial Ownership Amending Release, section 

II.G. 

351Reporting of Securities Loans, Exchange Act 

Release No. 98737 (Oct. 13, 2023), 88 FR 75644 

(Nov. 3, 2023) (‘‘Rule 10c–1a Adopting Release’’). 

The securities loan reporting rule requires any 

person who loans a security on behalf of itself or 

another person to report information about 

securities loans to a registered national securities 

association (namely, FINRA) and requires FINRA to 

make certain information it receives available to the 

public. The covered persons will include market 

intermediaries, securities lenders, broker-dealers, 

and reporting agents. The final rule’s compliance 

dates require that FINRA propose its rules within 

four months of the effective date of final Rule 10c– 

1a, or approximately May 2024, and finalize them 

no later than 12 months after the effective date of 

final Rule 10c–1a, or approximately Jan. 2025; that 

FINRA implement data retention and availability 

requirements for reporting 24 months after the 

effective date of final Rule 10c–1a, or approximately 

Jan. 2026; that covered persons report Rule 10c–1a 

information to FINRA starting on the first business 

day thereafter; and that FINRA publicly report Rule 

10c–1a information within 90 calendar days 

thereafter, or approximately May 2026. See Rule 

10c–1a Adopting Release, section VIII. 

352Short Position and Short Activity Reporting by 

Institutional Investment Managers, Exchange Act 

Release No. 98738 (Oct. 13, 2023), 88 FR 75100 

(Nov. 1, 2023) (‘‘Short Position Reporting Adopting 

Release’’). The new rule and related form are 

designed to provide greater transparency through 

the publication of short sale-related data to 

investors and other market participants. Under the 

new rule, institutional investment managers that 

meet or exceed certain specified reporting 

thresholds are required to report, on a monthly 

basis using the related form, specified short 

position data and short activity data for equity 

securities. The compliance date for the rule is Jan. 

2, 2025. In addition, the Short Position Reporting 

Adopting Release amends the national market 

system plan governing CAT to require the reporting 

of reliance on the bona-fide market-making 

exception in the Commission’s short sale rules. The 

compliance date for the CAT amendments is July 

2, 2025. 

353Prohibition Against Conflicts of Interest in 

Certain Securitizations, Securities Act Release No. 

11254 (Nov. 27, 2023), 88 FR 85396 (Dec. 7, 2023) 

(‘‘Securitizations Conflicts Adopting Release’’). The 

new rule prohibits an underwriter, placement agent, 

initial purchaser, or sponsor of an asset-backed 

security (including a synthetic asset-backed 

security), or certain affiliates or subsidiaries of any 

such entity, from engaging in any transaction that 

would involve or result in certain material conflicts 

of interest. The compliance date for securitization 

participants to comply with the prohibition is June 

9, 2025. 

354Since proposing these rules, the Commission 

adopted rules to prohibit fraud and prevent undue 

influence over chief compliance officers in securitybased swaps entities that were proposed in another 

proposal identified by a commenter, the SecurityBased Swaps Proposal. See Overdahl Comment 

Letter; Prohibition Against Fraud, Manipulation, or 

Deception in Connection with Security-Based 

Swaps; Prohibition Against Undue Influence over 

Chief Compliance Officers, Exchange Act Release 

No. 97656 (June 7, 2023), 88 FR 42546 (June 20, 

2023). However, the Commission believes that there 

are no potential significant effects from overlapping 

requirements to comply with the final rules. 

Specifically, the new security-based swaps rules 

were effective Aug. 29, 2023—before the effective 

date of the final rules and over a year before 

compliance with the final rules is required for 

persons engaging in activities that meet the dealer 

registration requirements—and were expected to 

have minimal compliance costs because they solely 

identified prohibited actions. 

355 In addition, commenters indicated there could 

also be overlapping compliance costs between the 

final amendments and proposals that have not been 

adopted. See, e.g., ICI Comment Letter; Overdahl 

Comment Letter; MFA Comment Letter I; MFA 

Comment Letter II; Element Comment Letter; AIC 

Comment Letter; Consensys Comment Letter; AIMA 

Comment Letter II. To the extent those proposals 

are adopted, the baseline in those subsequent 

rulemakings will reflect the existing regulatory 

requirements at that time. 

356Order imbalances exist when a market 

receives more buy orders than sell orders, or vice 

versa, at a point in time. Dealers may absorb these 

imbalances by buying when there are more sell 

orders (and temporarily holding inventory) and by 

selling when there are more buy orders (by 

liquidating inventory). A dealer that absorbs 

imbalances in this way can effectively facilitate a 

transaction between a person who wishes to sell at 

time X and a person who wishes to buy at time Y. 

357See supra notes 5 and 11. 

the Private Fund Advisers Adopting 

Release,349 the Beneficial Ownership 

Amending Release,350 the 17 CFR 

240.10c–1a (‘‘Rule 10c–1a’’) Adopting 

Release,351 the Short Position Reporting 

Adopting Release,352 and the 

Securitizations Conflicts Adopting 

Release.353 These adopted rules were 

not included as part of the baseline in 

the Proposing Release because they 

were not adopted at that time.354 In 

response to commenters, this economic 

analysis considers potential economic 

effects arising from any overlap between 

the compliance period for the final 

amendments and each of these recently 

adopted rules.355

Dealers perform important market 

functions, such as absorbing order 

imbalances and providing liquidity to 

buyers and sellers who may not arrive 

at the same time, and a regulatory 

regime exists to govern their 

activities.356 However, market 

participants that do not register as 

dealers—and so do not comply with the 

dealer regulatory regime—increasingly 

perform critical market functions that 

historically have been performed by 

dealers. This difference in regulatory 

treatment creates the potential for 

negative externalities, as described 

below. Furthermore, the unevenness of 

regulation potentially gives lessregulated entities an unfair advantage 

over registered dealers that engage in 

similar activities. 

1. Rules and Regulations That Apply to 

Registered Dealers 

Persons engaged in the business of 

buying and selling securities for such 

person’s own account are generally 

dealers pursuant to section 3(a)(5) of the 

Exchange Act and are required to 

register as dealers with the Commission 

in accordance with section 15(b) of the 

Exchange Act, become members of an 

SRO, and adhere to a comprehensive 

regulatory regime, unless their activities 

fall within an exception,357 or unless 

they limit their dealing activity to 

excluded or exempted securities. 

Dealers that are also government 

securities dealers are further subject to 

rules issued by the Treasury that 

concern financial responsibility, capital 

requirements, recordkeeping, and 


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358The Net Capital Rule requires dealers to hold 

liquid assets in excess of their unsubordinated 

liabilities. See section III.C.2.b for a more complete 

discussion of the Net Capital Rule. 

359See supra note 26. 

360See supra note 27. 

361See 17 CFR 240.17a–5(d)(1)(i)(A) (‘‘Rule 17a– 

5(d)(1)(i)(A)’’). 

362See Form BD. 

363See supra note 28 and surrounding text. See 

also, e.g., FINRA Rule 2010 (Standards of 

Commercial Honor and Principles of Trade); FINRA 

Rule 2020 (Use of Manipulative, Deceptive, or 

Other Fraudulent Devices); FINRA Rule 4510 Series 

(Books and Records Requirements). Other SROs 

have comparable and sometimes equivalent rules. 

See, e.g., NYSE, NYSE Rules, available at https:// 

nyseguide.srorules.com/rules; Nasdaq, Rulebook— 

The Nasdaq Stock Market, available at https://

listingcenter.nasdaq.com/rulebook/nasdaq/rules. 

364See section III.C.2.b for a discussion of the Net 

Capital Rule. 

365These regulatory requirements include, for 

example, pre-trade requirements such as exchangetrading rules relating to special order types, trading 

halts, odd-lot orders, and SEC rules under 

Regulation SHO and Regulation NMS, as well as 

post-trade obligations to monitor for manipulation 

and other illegal activity. See also supra note 26 on 

the Market Access Rule. 

366See supra note 30. 

367Exchange Act section 17(b) subjects brokerdealers to inspections and examinations by 

Commission staff and by the relevant SRO. In 

addition, 17 CFR 240.15b2–2 (‘‘Exchange Act Rule 

15b2–2’’ or ‘‘Rule 15b2–2’’) generally requires the 

SRO that has responsibility for examining a dealer 

member to inspect a newly registered dealer for 

compliance with applicable financial responsibility 

rules within six months of registration, and for 

compliance with all other regulatory requirements 

within 12 months of registration. See also 17 CFR 

240.17d–1 (‘‘Rule 17d–1’’) (examination for 

compliance with applicable financial responsibility 

rules). Thereafter, FINRA or another SRO, as 

applicable, continues to inspect each firm 

periodically, based on the firm’s risk profile. 

368 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78o–3(b)(6). 

369For instance, see FINRA Rules 2010, 3110, 

5210, and 6140, which establish conduct rules that 

may apply to algorithmic trading and which give 

FINRA supervisory authority. FINRA Notice 15–09 

describes how ‘‘FINRA staff has conducted a 

number of examinations and investigations . . . 

that were prompted by the detection of systemsrelated issues at firms engaged in algorithmic 

strategies, and several of these investigations have 

resulted in settlements of formal actions.’’ The 

FINRA notice provides guidance on best practices 

for keeping algorithmic trading compliant with 

FINRA and Commission rules. 

370See supra note 23. 

371Exceptions to the SIPC membership 

requirement exist for (a) persons whose principal 

business is conducted outside the United States and 

its territories and possessions; (b) persons whose 

business as a broker or dealer consists exclusively 

of (i) the distribution of shares of registered open 

end investment companies or unit investment 

trusts, (ii) the sale of variable annuities, (iii) the 

business of insurance, or (iv) the business of 

rendering investment advisory services to one or 

more registered investment companies or insurance 

company separate accounts; and (c) persons who 

are registered as a broker or dealer with respect to 

transactions in security futures products, pursuant 

to 15 U.S.C. 78o(b)(11)(A). 

372See supra note 29. 

373See 15 U.S.C. 78ccc(a)(2). 

374See 17 CFR 402.2. See also supra note 14 and 

accompanying text. 

375See Treasury Clearing Adopting Release. 

376Proposing Release at 23060–61; see also SEC 

v. Benger, 697 F. Supp. 2d 932, 944 (N.D. Ill. 2010) 

(quoting Celsion Corp. v. Stearns Mgmt. Corp., 157 

F. Supp. 2d 942, 947 (N.D. Ill. 2001) (section 15(a)’s 

registration requirement is ‘‘of the utmost 

importance in effecting the purposes of the Act’’ 

because it enables the SEC ‘‘to exercise discipline 

over those who may engage in the securities 

business and it establishes necessary standards with 

respect to training, experience, and records.’’); Roth 

v. SEC, 22 F.3d 1108, 1109 (D.C. Cir. 1994) (‘‘The 

broker-dealer registration requirement serves as the 

keystone of the entire system of broker-dealer 

regulation.’’); Regional Properties, Inc. v. Financial 

and Real Estate Consulting Co., 678 F.2d 552, 561 

(5th Cir. June 3, 1982); Eastside Church of Christ 

v. National Plan, Inc., 391 F.2d 357, 361 (5th Cir. 

Mar. 12, 1968). 

reports and audits. However, while not 

required to register as dealers, market 

participants (other than registered 

dealers and financial institutions) that 

limit their dealing activities to 

government securities generally have to 

register with the Commission as 

government securities dealers under 

section 15C of the Exchange Act, and 

similarly must comply with Treasury 

rules. 

The regulatory regime for registered 

dealers includes provisions that limit 

risk (e.g., the Net Capital Rule 358 and 

rules promoting operational 

integrity 359), provisions that require 

certain books and records,360 provisions 

that require various reporting and 

disclosure (including audited financial 

statements 361 and the identities of 

owners, directors, and managers 362), 

and antifraud and anti-manipulation 

provisions.363 The Net Capital Rule 

requires registered dealers to maintain 

minimum amounts of net liquid assets 

at all times, even intraday, thus 

constraining dealer leverage.364 In 

addition to the financial and regulatory 

risk management controls required by 

the Market Access Rule, dealers with 

market access must comply with a 

number of underlying regulatory 

requirements when conducting their 

business.365 Registered dealers are also 

subject to the Commission’s authority to 

conduct examinations and impose 

sanctions 366 and to the rules, 

examination authority, and enforcement 

authority of the relevant SRO.367

Section 6(b)(5) and section 15A(b)(6) of 

the Exchange Act, respectively, require 

that the rules of a national securities 

exchange and the rules of a national 

securities association be designed to 

prevent fraudulent and manipulative 

acts and practices; promote just and 

equitable principles of trade; foster 

cooperation and coordination with 

persons engaged in regulating, clearing, 

settling, processing information with 

respect to, and facilitating transactions 

in securities; remove impediments to 

and perfect the mechanisms of a free 

and open market and a national market 

system, and in general protect investors 

and the public interest.368 SROs can 

review their members’ supervisory 

procedures, including requiring internal 

controls on algorithmic trading.369 For 

most securities dealers that trade on 

more than one exchange, the relevant 

SRO is currently FINRA.370

Commission-registered brokers or 

dealers must also become members of 

the Securities Investor Protection 

Corporation (‘‘SIPC’’).371

The regulatory regime differs 

somewhat for entities that transact only 

in government securities, especially 

with respect to requirements on SIPC 

membership and capitalization.372 Such 

persons engaged in the business of 

buying and selling government 

securities for such person’s own account 

are generally dealers pursuant to section 

3(a)(44) of the Exchange Act and have 

to register with the Commission as 

government securities dealers under 

section 15C of the Exchange Act. These 

government securities dealers are not 

required to be members of SIPC,373 and 

they are required to comply with the 

capital requirements set forth in 17 CFR 

402.2 rather than with the Net Capital 

Rule that applies to dealers. They are 

further subject to rules issued by the 

Treasury on financial responsibility, 

capital requirements, recordkeeping, 

and reports and audits.374

The SEC’s recently-adopted Treasury 

Clearing rule requires that any direct 

participant of a covered clearing agency 

submit all eligible secondary market 

transactions in U.S. Treasury securities 

for clearance and settlement, including 

transactions where the counterparty is 

another member of a covered clearing 

agency.375

As explained in section I.A, courts 

have repeatedly recognized the 

requirement that dealers and 

government securities dealers register as 

being ‘‘of the utmost importance in 

effecting the purposes of the Exchange 

Act.’’ 376 Among other things, these 

regulations promote dealers’ financial 

responsibility, including adequate 

capitalization (liquidity held against 

risky assets) and internal controls. The 

dealer regulations also give the 

Commission and the SROs tools to help 

them detect manipulation or fraud by 

analyzing transaction reports and 

examining other records kept by dealers. 

2. Affected Parties 

The Commission believes that some 

entities who are not registered as dealers 

or government securities dealers 

perform a significant role in providing 

liquidity in markets, including entities 


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14968 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

377As noted in section II.A.3, outside of the 

context of these rules, whether a person who has 

or controls less than $50 million in assets must 

register as a dealer will remain a facts and 

circumstances determination. 378Most U.S. investors are households, and most 

household investors have far less than $50 million 

in assets. The 2019 Survey of Consumer Finance, 

sponsored by the Federal Reserve Board of 

Governors and the U.S. Treasury, shows that 68 

million U.S. families owned stocks and bonds, 

either directly or indirectly, and that 93% own less 

than $1 million. The survey also showed that the 

mean (median) U.S. household had total assets of 

$858,000 ($227,000). This number of household 

investors is much larger than the number of 

institutional investors. For example, there are 

currently 3,963 registered investment companies 

and 15,562 registered investment advisers. 

379See FINRA Comment Letter. 380The analysis is limited to a subsection of 

TRACE data where the identity of trading 

counterparties is known. Non-FINRA member 

participants generally appear anonymously when 

they trade with FINRA members, who report their 

activity to TRACE but maintain the anonymity of 

the non-FINRA member counterparties. When nonFINRA member participants trade on an ATS that 

is covered by FINRA Rule 6730.07, the ATS reports 

the transaction to TRACE along with a unique, nonanonymous MPID for each counterparty. For FINRA 

Rule 6730.07, a ‘‘covered ATS’’ is an ATS, as that 

term is defined in Rule 300 of SEC Regulation ATS 

(17 CFR 242.300), that executed transactions in U.S. 

Treasury securities against non-FINRA member 

subscribers of $10 billion or more in monthly par 

value, computed by aggregating buy and sell 

transactions, for any two months in the preceding 

calendar quarter. In 2022, approximately 58% of the 

non-FINRA member volume in TRACE belonged to 

anonymous market participants. 

381Our classification of TRACE entities includes 

an assessment of non-FINRA firms in the data as 

‘‘PTFs,’’ ‘‘hedge funds,’’ etc. A small number of 

non-FINRA firms are registered with the 

Commission as broker-dealers, and these are 

included with the FINRA firms as ‘‘SEC-registered 

broker-dealers’’ in Table 1. 

382 James Collin Harkrader and Michael Puglia, 

‘‘Principal Trading Firm Activity in Treasury Cash 

Markets,’’ FEDS Notes (Aug. 4, 2020) (‘‘[Principal 

trading firms] dominate activity on the electronic 

[interdealer broker] platforms (61%).’’). See also 

Doug Brain et al., ‘‘Unlocking the Treasury Market 

Through TRACE,’’ FEDS Notes (Sept. 28, 2018). 

commonly known as PTFs and 

potentially other market participants 

such as private funds. The final rules 

exclude market participants who have 

or control assets of less than $50 

million.377 This threshold excludes 

small market participants, some of 

whom are natural persons, who are 

unlikely to pose financial and 

operational risks to the markets.378

Similarly, for the reasons discussed 

above in section II.A.3, the final rules 

exclude investment companies that are 

registered under the Investment 

Company Act and central banks, 

sovereign entities, and international 

financial institutions, as defined in the 

final rules. The following two subsections describe PTFs, as well as 

private funds and advisers, which are 

the entities most likely to be affected. 

The third sub-section below analyzes 

data from TRACE and Form PF to 

identify up to 43 entities that the final 

rules may affect. 

a. PTFs 

PTFs, who trade only for their own 

account without customers, have 

emerged as de facto market makers, 

especially in the U.S. Treasury 

market.379 While some such firms have 

registered with the Commission as 

dealers, many others have not. This 

section discusses the baseline for PTFs 

in the current market, and a later section 

will estimate the number of PTFs that 

may be affected by the final rules due 

to their activities in the market for U.S. 

Treasury securities. 

Table 1 summarizes the number and 

type of identifiable market participants 

in TRACE, by average monthly trading 

volume in 2022.380 Many of the most 

active participants are classified in the 

data as ‘‘PTFs’’ who are not registered 

with the Commission as brokerdealers.381 The 231 firms in Table 1 that 

were not SEC-registered broker-dealers 

accounted for approximately 13% of the 

aggregate Treasury trading volume of all 

identifiable firms in 2022. The PTFs had 

by far the highest volumes among the 

non-broker-dealer firms, and the most 

active PTFs had trading volumes 

roughly comparable to those of the most 

active registered dealers. A Federal 

Reserve staff analysis concluded that 

PTFs were particularly active in the 

interdealer segment of the U.S. Treasury 

market in 2019, accounting for 61% of 

the volume on automated interdealer 

broker platforms and 48% of the 

interdealer broker volume overall.382

Figure 1 also shows that in the U.S. 

Treasury market, some participants who 

are not SEC-registered dealers trade very 

high volumes comparable to the most 

active registered dealers. The very high 

trading volumes and large share of 

trading in the interdealer Treasury 

market suggest that at least some PTFs 

may be regularly acting as significant 

liquidity providers. 

TABLE 1—COUNT OF ACTIVE FIRMS IN THE TREASURY MARKET BY TYPE: CALENDAR YEAR 2022 

Firm type 

# Firms, by average monthly (buy + sell) volume 

all firms >$10 bn >$50 bn >$100 bn 

SEC-registered broker-dealers ................................................ 854 83 46 34 

Other firms ............................................................................... 231 54 15 10 

Dealers ............................................................................. 110 23 * 0 

Hedge Funds .................................................................... 62 7 * 0 

PTFs ................................................................................. 40 23 13 10 

Others ............................................................................... 19 1 * 0 

*Suppressed to protect confidentiality. 


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383See supra notes 358–363. 

384See Federal Reserve Regulation T (12 CFR part 

220); Regulation U (12 CFR part 221); Regulation X 

(12 CFR part 224). 

385See FINRA Rule 4210. 

386See supra note 26. 

387See supra note 24 and accompanying text. 

388See Fried Frank Comment Letter; IAA 

Comment Letter I; McIntyre Comment Letter II; 

MMI Comment Letter; SIFMA Comment Letter I. 

389Many broker-dealers contract with third-party 

service providers to fulfill their reporting 

requirements to CAT. 

390Pursuant to the CAT NMS Plan, each customer 

is required to be assigned a unique Customer-ID 

that can be used to link all orders and reportable 

events from a specific customer. 391Pursuant to the CAT NMS Plan, the customer 

information data must be stored separately from the 

order data (see Appendix D–14 and D–33 of the 

CAT NMS Plan) with different access protocols (see 

Appendix D–14 and D–29 of the CAT NMS Plan). 

The purpose of these requirements is to secure 

Personally Identifiable Information (‘‘PII’’). 

According to the CAT NMS Plan, ‘‘[a] subset of 

authorized regulators . . . will have permission to 

access and view PII data.’’ See Appendix D–29 of 

the CAT NMS Plan. 

392See ‘‘Consolidated Audit Trail, Customer and 

Account Information System (CAIS): Specification 

for Firm Designated ID (FDID) and Large Trader ID 

(LTID)’’ (Dec. 18, 2019), available at https://www.

catnmsplan.com/sites/default/files/2020-01/FDIDLTID-Specification-Publication-12-18-v1.pdf, for 

background information on the CAIS system. See 

also CAT NMS Plan 6.5(c)(i) (stating that access is 

for regulatory use only) and CAT NMS Plan 

Appendix D 9.1 at p. D–33 (stating that customer 

information will be stored separately from other 

data). 

PTFs that are engaged in dealing 

activities without registering with the 

Commission as dealers do not have the 

same regulatory responsibilities as 

registered dealers or government 

securities dealers. These responsibilities 

include compliance with regulations 

regarding capitalization, operational 

controls, book-keeping, and recordkeeping.383 These PTFs also do not 

submit annual reports or financial 

statements to the Commission and are 

not subject to examination, thus limiting 

regulators’ insight into their internal 

risk-management or record-keeping 

practices. 

PTFs that are not registered as dealers 

do face constraints on risk-taking, but 

they face fewer constraints than 

registered dealers or government 

securities dealers. When they trade 

through a bank or broker-dealer, 12 CFR 

parts 220, 221, and 224 (‘‘Federal 

Reserve Regulations T, U, and X’’) 

require the bank or broker-dealer to 

limit the PTFs’ risk by imposing margin 

requirements on loans that use 

securities as collateral.384 If they trade 

through a broker-dealer that is a FINRA 

member, FINRA Rule 4210 may apply, 

since the rule specifies margins for 

securities that FINRA members hold in 

their customers’ accounts, including 

initial margin requirements on 

securities transactions and 

commitments and maintenance 

margin.385 If they trade directly in the 

market using a broker-dealer’s market 

access, the Market Access Rule requires 

the broker-dealer offering its market 

access to establish, document, and 

maintain a system of controls and 

supervision designed to limit the risk— 

e.g., financial, regulatory, operational, or 

legal—of the PTFs’ activities related to 

that market access.386 However, entities 

that are not registered as dealers do not 

have to comply with the Net Capital 

Rule.387

PTFs that are not registered as dealers 

do not have reporting obligations to 

CAT or to TRACE, though these data 

sources contain certain information on 

PTFs’ trading.388 CAT generally 

includes all PTFs’ orders in NMS 

securities, OTC equities, and listed 

options because they are reported by 

other registered parties. Broker-dealers, 

including those through whom PTFs 

currently trade, are required to report 

orders and order events to CAT for NMS 

Securities or OTC equities.389

Consequently, the receipt of such 

principal orders from PTFs and the 

execution of such orders (as well as all 

other order events) are included in CAT 

data. However, customers of the brokerdealers, including such PTFs, are only 

identified in the CAT system with 

Customer-IDs.390 Regulators must then 

go to a separate database to obtain 

customer identifying information 

associated with a Customer-ID.391

Pursuant to the CAT NMS Plan, the 

CAT must capture and store Customer 

and Customer Account Information in a 

secure database physically separated 

from the transactional database. ‘‘CAIS’’ 

refers to the Customer and Account 

Information System within the CAT 

System that collects and links 

Customer-ID(s) to Customer and 

Account Attributes and other identifiers 

for queries by regulatory staff.392 When 

the CAIS system becomes fully 

operational, authorized regulators will 


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Figure 1. Treasury Trading Volume Distributions of SEC-registered Broker-Dealers 

versus Other Firms: Calendar Year 2022 

The figure on the left shows the number of identifiable firms in TRACE data during year 

2022, by average monthly trading volume (buy + sell). The figure on the right shows the 

percentage of firms in each volume bucket. 

1000 

800 

600 

400 

200 

0 

N.Rrms 100% 

80% 

60% 

40% 

20% 

$0bn 20 40 60 80 100+ °" 

I• SEC-registered B-Ds 

Pct. Arms 

$0bn 20 40 60 80 100+ 

• other firms j 
14970 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

393See supra note 380. 394Every manager which exercises investment 

discretion with respect to accounts holding section 

13(f) securities, as defined in Rule 13f–1(c), having 

an aggregate fair market value on the last trading 

day of any month of any calendar year of at least 

$100,000,000, shall file a report on Form 13F with 

the Commission within 45 days after the last day 

of such calendar year and within 45 days after the 

last day of each of the first three calendar quarters 

of the subsequent calendar year. 

395Each large trader—defined as a person whose 

transactions in NMS securities equal or exceed 2 

million shares or $20 million during any calendar 

day, or 20 million shares or $200 million during 

any calendar month—is required to identify itself 

to the Commission by filing a Form 13H and 

submitting annual updates, as well as updates on 

as frequently as a quarterly basis when necessary 

to correct information previously disclosed that has 

become inaccurate. See 17 CFR 240.13h–1. 

396 15 U.S.C. 78o(c)(2)(D). For example, the Net 

Capital Rule and the Market Access Rule are both 

tied to section 15(c) of the Exchange Act. 397A private fund, including a hedge fund, is an 

issuer that would be an investment company as 

defined in section 3 of the Investment Company Act 

if not for section 3(c)(1) or 3(c)(7) of the Investment 

Company Act. See 15 U.S.C. 80a–3. 398See SEC Division of Investment Management 

Analytics Office, Private Fund Statistics: Fourth 

Calendar Quarter 2022 (July 18, 2023) (‘‘Private 

fund Statistics’’), available at https://www.sec.gov/ 

files/investment/private-funds-statistics-2022- 

q4.pdf. 399Large hedge fund advisers have at least $1.5 

billion in hedge fund assets under management. A 

large hedge fund adviser is required to file Form PF 

quarterly and provide data about each hedge fund 

it managed during the reporting period (irrespective 

of the size of the fund). Large hedge fund advisers 

must report more information on Form PF about 

Qualifying Hedge Funds than other hedge funds 

they manage during the reporting period. A 

Qualifying Hedge Fund is any hedge fund advised 

by a large hedge fund adviser that had a NAV 

(individually or in combination with any feeder 

funds, parallel funds, and/or dependent parallel 

managed accounts) of at least $500 million as of the 

last day of any month in the fiscal quarter 

immediately preceding the adviser’s most recently 

completed fiscal quarter. 

400See Investor.gov, Private Equity Funds, 

available at https://www.investor.gov/introductioninvesting/investing-basics/investment-products/ 

private-investment-funds/private-equity. 

401See Daniel Hiltgen, ‘‘Private liquidity Funds: 

Characteristics and Risk Indicators,’’ DERA White 

Paper (Jan. 27, 2017), available at https://

www.sec.gov/files/2017-03/Liquidity%20

Fund%20Study.pdf. 

be able to identify in the CAIS database 

all the customers associated with orders 

and related events captured and stored 

in the transactional database, including 

any PTFs that are engaging in dealer 

activities but that are not registered as 

dealers. Unlike the identification of 

customers, regulators can identify 

registered broker-dealers (who have 

reporting obligations) by their unique 

identifiers in CAT transactional data 

without having to access CAIS. 

Therefore, analysis requiring the 

identification of customers (such as 

PTFs) takes more time because 

accessing CAIS involves enhanced 

security measures and requires 

necessary additional steps that are not 

required for identifying broker-dealers 

associated with CAT reported trading 

activities in the CAT transactional 

database. 

Additionally, broker-dealers and 

ATSs report transactions in U.S. 

Government securities to TRACE. 

However, TRACE data include the 

identities of unregistered entities only 

when the trades occur on an ATS 

covered by FINRA Rule 6730.07 

(generally, the ATSs with higher 

volume).393 When PTFs that are not 

registered as dealers trade U.S. 

Government securities and other fixedincome securities through a brokerdealer or on an ATS that is not covered 

by FINRA Rule 6730.07, the brokerdealer or ATS reports the transaction to 

TRACE, but the identity of the PTF 

remains anonymous. PTFs that are not 

registered as dealers are always 

anonymous in the TRACE database for 

corporate bond transactions. 

PTFs with high volumes or large 

portfolios in equities markets may also 

have to report to the Commission on 

Form 13F 394 or Form 13H.395 On Form 

13F, institutional investment managers 

report the details of their holdings of 

section 13(f) securities—e.g., CUSIP, fair 

market value. On Form 13H, among 

other things, large traders provide 

details of their organization, 

governance, and relationships. 

PTFs are subject to the antimanipulation and antifraud provisions 

under Securities Act section 17(a) and 

Exchange Act section 10(b), but they are 

not subject to Exchange Act section 

15(c). Exchange Act section 15(c) 

authorizes the Commission to issue, for 

registered entities, specific rules and 

regulations that ‘‘define, and prescribe 

means reasonably designed to prevent, 

such acts and practices as are 

fraudulent, deceptive, or manipulative 

and such quotations as are 

fictitious.’’ 396 They are also not subject 

to examinations, net capital 

requirements, or any record-keeping or 

reporting requirements. 

b. Private Funds and Advisers 

Private funds 397 are also prominent 

participants in U.S. securities markets. 

This section discusses the baseline for 

private funds and advisers in the 

current market, and in section III.B.2.c 

we will estimate the number of hedge 

funds that may be affected by the final 

rules. 

TABLE 2—PRIVATE FUND STATISTICS AS OF 2022Q4 

Fund type Count 

Gross asset value Net asset value 

Total 

($B) 

Avg 

($mm) 

Total 

($B) 

Avg 

($mm) 

Hedge Fund ......................................................................... 9,783 9,347 955 4,811 492 

Private Equity Fund ............................................................. 20,860 6,710 322 6,030 289 

Venture Capital Fund ........................................................... 2,978 375 126 342 115 

Liquidity Fund ....................................................................... 71 321 4,521 318 4,479 

Other Private Fund .............................................................. 6,688 1,622 243 1,397 209 

Real Estate Fund ................................................................. 4,226 1,137 269 857 203 

Securitized Asset Fund ........................................................ 2,482 935 377 272 110 

Note: These statistics rely on Form PF. Only SEC-registered advisers with at least $150 million in private fund assets under management 

must report to the Commission on Form PF; SEC-registered investment advisers with less than $150 million in private fund assets under management, SEC exempt reporting advisers, and state-registered investment advisers are not required to file Form PF. 

Table 2 shows the number of private 

funds as of the fourth quarter of 2022.398

Of the 9,783 hedge funds reported on 

Form PF during this period, there were 

2,069 qualifying hedge funds that 

reported information on their positions, 

and these held $2.4 trillion in listed 

equities and $1.8 trillion in U.S. 

Government securities.399 Certain hedge 

fund strategies, such as those that 

involve automated or high-frequency 

trading (‘‘HFT’’), could meet the final 

rules’ definition of dealing. 

The business models of private equity 

funds 400 and liquidity funds 401 are 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14971 

402Section 203(l) of the Advisers Act provides 

that an investment adviser that solely advises 

venture capital funds is exempt from registration, 

and section 203(m) exempts from registration any 

investment adviser that solely advises private funds 

if the adviser has assets under management in the 

U.S. of less than $150 million. Advisers that rely 

on the venture capital and private fund adviser 

exemptions are generally referred to as ‘‘exempt 

reporting advisers,’’ because sections 203(l) and 

203(m) provide that the Commission shall require 

the advisers to maintain such records and to submit 

such reports as the Commission determines 

necessary or appropriate in the public interest or for 

the protection of investors. 

403See 17 CFR 275.206(3) (‘‘Rule 206(3)’’). 

404See Commission Interpretation Regarding 

Standard of Conduct for Investment Advisers, 

Investment Advisers Act Release No. 5248 (June 5, 

2019) 84 FR 33669 (July 12, 2019), at 24–25. 

405See 17 CFR 275.206(4)–1 (‘‘Rule 206(4)–1’’); 17 

CFR 275.206(4)–2 (‘‘Rule 206(4)–2’’); 17 CFR 

275.206(4)–7 (‘‘Rule 206(4)–7’’). 

406See Private Fund Advisers; Documentation of 

Registered Investment Adviser Compliance, 

Investment Advisers Act Release No. 6383 (Aug. 28, 

2023) 88 FR 63206 (Sept. 14, 2023) (adopting 17 

CFR 275.206(4)–10; 275.211(h)(1)–1, 275.211(h)(1)– 

2; 275.211(h)(2)–1; 275.211(h)(2)–2; 275.211(h)(2)– 

3). 

407These periodic and current reporting 

obligations of large hedge fund advisers on Form PF 

reflect recently adopted amendments. See supra 

note 347. 

408See supra notes 394 and 395. See also Fried 

Frank Comment Letter; IAA Comment Letter I; 

McIntyre Comment Letter II; SIFMA AMG 

Comment Letter. 

409See supra note 396. 

410Commenters said the proposed rules would 

have had a much larger impact on private funds 

than suggested by the economic analysis and asked 

that the Commission analyze Form PF data to 

estimate the number of affected funds. See AIMA 

Comment Letter II; IAA Comment Letter I; Fried 

Frank Comment Letter; T. Rowe Price Comment 

Letter. In consideration of these comments, we have 

supplemented this economic analysis with 

estimations based on Form PF. 

411See supra note 20. See also SIFMA Comment 

Letter I. The letter describes how the Commission’s 

Market Access Rule, beginning in 2010, may have 

encouraged previously unregistered equity or 

options dealers to register with the Commission. 

412See FINRA Rule 6730—Transaction Reporting, 

Supplementary Material .07—ATS Identification of 

Non-FINRA Member Counterparties for 

Transactions in U.S. Treasury Securities (among 

other things, defining the term ‘‘covered ATS’’ as 

an ATS that executed transactions in U.S. Treasury 

securities against non-FINRA member subscribers 

of $10 billion or more in monthly par value, 

computed by aggregating buy and sell transactions, 

for any two months in the preceding calendar 

quarter). 

unlikely to engage in activities that meet 

the final rules’ definition of dealing, 

because they are generally long-only 

investors that are not likely to regularly 

communicate trading interests on both 

sides of the market or earn revenue 

primarily from capturing bid-ask 

spreads. 

Investment advisers are subject to the 

Advisers Act and the Commission 

oversees private fund advisers, many of 

which are registered with the SEC or 

report to the SEC as exempt reporting 

advisers.402 Advisers may also trade for 

their own account subject to certain 

restrictions.403 When trading through a 

bank or broker-dealer, private funds and 

investment advisers are indirectly 

constrained by the same limitations on 

risk-taking as are PTFs, as described in 

the previous section—i.e., the Market 

Access Rule, FINRA Rule 4210, and 

Federal Reserve Regulations T, U, and 

X. Investment advisers are subject to a 

Federal fiduciary duty, which comprises 

a duty of care and a duty of loyalty,404

and are subject to the antifraud 

provisions in section 206 of the 

Advisers Act. Private funds and 

investment advisers are also subject to 

section 10(b) of the Exchange Act and 

section 17(a) of the Securities Act. 

Registered investment advisers are 

further subject to specific substantive 

requirements related to various areas, 

including principal trading, agency 

cross transactions, custody of client 

assets, and marketing.405 The 

Commission also recently adopted new 

rules and rule amendments to enhance 

the regulation of private fund 

advisers.406

The Advisers Act establishes 

reporting and recordkeeping 

requirements for registered advisers to 

private funds. For example, section 204 

requires registered investment advisers 

to keep certain books and records 

(records of the advised private funds are 

considered records of the adviser for 

these purposes). Registered investment 

advisers and exempt reporting advisers 

must also disclose information on Form 

ADV. Registered private fund advisers 

report certain information on the private 

funds they manage to the Commission 

annually (and, for certain large advisers 

of certain large hedge funds, quarterly) 

on Form PF. Specifically, large hedge 

fund advisers currently file quarterly 

periodic reports and—within 72 hours 

of the occurrence of certain events 

including extraordinary investment 

losses and large margin increases— 

current reports to the Commission on 

Form PF and are subject to books and 

records rules and examinations.407

Advisers are also subject to Commission 

examinations. Advisers and funds with 

high trading volumes or large portfolios 

may also have to report to the 

Commission on Form 13F or Form 13H, 

on which they would disclose details of 

their securities holdings, organization, 

governance, and relationships.408

However, private funds and 

investment advisers do not have to 

comply with the Net Capital Rule or 

with any other direct regulatory 

constraint on leverage. They also are not 

required to report their transactions 

(though their broker-dealer may be 

required to report the transactions), and 

they are not subject to section 15(c) of 

the Exchange Act.409 Regulators may be 

able to obtain complete data on private 

funds’ and advisers’ securities 

transactions through examinations, but 

such information is currently more 

readily available for registered dealers 

or government securities dealers. 

c. Number of Affected Parties 

In this section, we provide estimates 

of the number of entities that may 

satisfy the qualitative standard, as 

adopted. These estimates are subject to 

significant caveats that we also describe 

below. We use TRACE data on U.S. 

Treasury transactions to provide an 

estimate of the number of identifiable 

Treasury-market participants that could 

be affected. We use data from Form 

PF 410 to approximate the number of 

possibly affected private funds, under 

the assumption that, to the extent 

private funds employ trading strategies 

that would qualify under the final rules’ 

qualitative standard, they would most 

likely report those as HFT strategies. 

The analysis focuses on U.S. Treasury 

markets where market participants not 

registered as dealers are significant 

liquidity providers.411 Natural persons 

are unlikely to be dealing in U.S. 

Government securities, and we do not 

observe any natural persons trading U.S. 

Government securities in the interdealer 

market. 

Using TRACE data for U.S. Treasury 

securities, we estimate the number of 

affected parties by identifying firms that 

appear to meet the primary revenue 

factor by earning revenue from 

capturing bid-ask spreads in the market 

for U.S. Treasury securities. We do not 

estimate the number of entities that 

appear to meet the expressing trading 

interest factor because the Commission 

does not have sufficient data on quoting 

activities. TRACE data identify specific 

parties in the Treasury market that are 

not registered broker-dealers who trade 

on certain ATSs.412 In other markets, 

post-trade data do not identify entities 

that are not registered as broker-dealers. 

In all markets, when entities transact on 

ATSs for or on behalf of other market 

participants that are not registered 

broker-dealers, data limitations prevent 

us from identifying the ultimate buyer 

or seller. It is the Commission’s 

understanding that significant liquidity 

providers are more likely to be 

registered broker-dealers in other 

markets such as those for equities and 

options than they are in the market for 


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14972 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

413See supra note 20. 

414For each firm and for each CUSIP, we 

calculate the daily spread as the volume-weighted 

average sell price minus the volume-weighted 

average buy price. We then take the simple average 

of this number across days within each firm-CUSIPmonth. 

415The final rules’ primary revenue factor says, 

‘‘earning revenue primarily from capturing bid-ask 

spreads.’’ 

416See Lewis Study for a description of some 

trades that may profit from intraday price 

movements without intending to capture bid-ask 

spreads. 

417These 31 non-broker-dealers represent 13% of 

the 231 non-broker-dealers shown in Table 1. 

418 In Figure 2, the 31 non-broker dealers that 

appear to meet the primary revenue factor in 2022 

for at least 1 month include 22 PTFs, 4 hedge funds, 

4 entities classified as ‘‘dealers’’ (though they are 

not FINRA members and do not appear to be 

registered with the Commission), and 1 entity 

classified as ‘‘other.’’ A higher alternative threshold 

of 20 days would show up to 12 firms, including 

9 PTFs and 1 hedge fund. A lower alternative 

threshold of 10 days would show up to 40 firms, 

including 27 PTFs and 7 hedge funds. 

419See, e.g., AIMA Comment Letter II; IAA 

Comment Letter I; Fried Frank Comment Letter; T. 

Rowe Price Comment Letter. 420The question does not provide a definition for 

the term high frequency trading strategies. The 

Commission has proposed to remove Question 21 

from Form PF because the form’s question on 

portfolio turnover, with proposed revisions, would 

better inform our and FSOC’s understanding of the 

extent of trading by large hedge fund advisers and 

would better show how larger hedge funds interact 

with the markets and provide trading liquidity. See 

Form PF; Reporting Requirements for All Filers and 

Large Hedge Fund Advisers, Investment Advisers 

Act Release No. 6083 (Aug. 10, 2022), 87 FR 53832 

at 53850 (Sept. 1, 2022), as corrected 87 FR 54641 

(Sept. 7, 2022). The proposed amendments to the 

form’s question on portfolio turnover would not 

provide information on the number of funds that 

would meet the definition of dealer under the final 

rules because the proposed portfolio turnover 

question asks about aggregate value of turnover in 

a month, for specific asset classes. While responses 

to the question could indicate potentially high 

trading activity by private funds, they would not 

indicate the number of trades or the securities 

traded. In contrast, responses to current Question 

21, which asks about HFT strategies at the fund 

U.S. Treasury securities.413 We 

acknowledge that this lack of 

transparency may affect our estimates. 

The Commission does not necessarily 

observe all revenue sources for the most 

active participants in the U.S. Treasury 

market. Thus, for the purpose of 

estimating the number of affected 

entities, we consider that firms 

potentially meet the primary revenue 

factor if they trade at least 4 of the 10 

highest-volume U.S. Government 

securities on at least 15 different trading 

days in a given month and if they 

realize, on average across the month, a 

positive intraday trading spread on each 

of those securities.414 We consider such 

trading characteristics for this analysis 

because (1) TRACE data cannot 

determine whether any spread 

apparently earned is a ‘‘primary’’ source 

of revenue,415 and (2) the calculation of 

intraday spreads does not distinguish 

between trades that capture the bid-ask 

spread and trades that profit from 

intraday price movements.416 A firm 

that earns its revenue primarily from 

dealing in U.S. Government securities 

will likely trade at least one of the 

highest-volume securities on most 

trading days and will also tend to profit 

from those trades. This analysis reflects 

the requirement that dealing be regular 

by requiring the firm to trade the 

security on at least 15 trading days in a 

month (the ‘‘day’’ threshold) and by 

counting the number of months in 

which a firm appears to deal. We only 

consider a 15-day threshold here, rather 

than a lower threshold of 10 trading 

days or a higher threshold of 20 trading 

days (effectively every trading day in a 

month), because a firm that is not 

dealing—even a hypothetical firm that 

trades randomly—might earn a positive 

spread in a given security on a few 

trading days each month; likewise, a 

firm acting as a dealer might suffer a 

negative spread on a few trading days 

each month. Although we rely on a 

proxy definition of dealing for the 

purpose of this analysis, we stress that 

the determination of whether an entity 

is engaged in regular dealing activity 

depends on the facts and circumstances. 

The empirical proxy of dealing used for 

the purpose of this analysis—trading a 

security for at least 15 days in a month 

with a positive average trading spread— 

may not be necessary or sufficient for 

determining whether an activity 

constitutes dealing according to the 

final rules. 

Figure 2 counts the number of 

identifiable non-broker-dealers that 

appear to meet the primary revenue 

factor for 1+, 2+, etc. months during 

2022 in the market for U.S. Government 

securities. Figure 2, using the empirical 

measures described above, identifies as 

potential significant liquidity providers 

a total of 31 non-broker-dealers in 

TRACE that would have met the 

primary revenue factor for at least one 

month in 2022,417 and 15 that would 

have done so for at least 6 months. 

Depending upon the number of months 

considered in Figure 2, these numbers 

include from 13 to 22 entities classified 

as PTFs and up to 4 entities classified 

as hedge funds.418

Several commenters 419 cited the 

relevance of Form PF data for 

identifying market participants that 

could be captured by the final rules. We 

use Form PF to provide an estimate of 

the number of possibly affected hedge 

funds. Form PF filers provide 

information on hedge funds’ trading 

strategies in two ways: (1) Question 20 

asks about the breakdown of funds’ 

reliance on several categories of 

strategy—e.g., ‘‘Equity, Market Neutral’’ 

or ‘‘Equity, Long/Short’’—and (2) 

Question 21 asks how much of the 

funds’ assets are dedicated to HFT 

strategies.420 Based on our 


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Figure 2. Number of non-broker-dealers appearing to meet the primary revenue factor for 

U.S. Government securities in 2022 

Ill 

cu 

i 

C 

cu 

~ 

22 PTFs 

4HFs 

5others 

Avg Spread>0, Oays2:lS in 4 oftop-10 CUSIPs 

3 4 

For at least # Different Months 
Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14973 

level, are more directly informative for this release. 

Based on our understanding of private fund 

activity, self-reported HFT is more relevant for 

estimating which entities may be affected by these 

final rules than the proposed portfolio turnover 

question. 

421As described in section III.B.2.a, the CAIS 

system in CAT will allow the Commission to 

identify individual non-broker-dealers in equity 

and options markets, including any PTFs not 

currently registered as broker-dealers, but CAIS is 

not yet fully operational. Notably, because CAIS is 

not fully operational, the transactional data does 

not contain unique customer identifiers needed to 

track the same customer across broker-dealers. This 

prevents us from analyzing CAT to identify entities 

engaging in dealing activity that are not registered 

as dealers. 

422See supra note 380. 

423See, e.g., AIMA Comment Letter II; Consensys 

Comment Letter; Fried Frank Comment Letter; ICI 

Comment Letter; McIntyre Comment Letter II; MFA 

Comment Letter I; NAPFM Comment Letter; SIFMA 

Comment Letter I; SIFMA AMG Comment Letter; 

Two Sigma Comment Letter I. 

424See SIFMA Comment Letter I. 

425See the Commission’s proposed amendments 

to Regulation ATS for ATSs that trade government 

securities (‘‘ATS–G Proposing Release’’), 85 FR 

Continued 

understanding of the trading objectives 

that hedge funds report pursuant to 

Questions 20 and 21, we believe that 

any hedge funds employing trading 

strategies that would fit the final rules’ 

qualitative standard, as adopted, would 

likely report them as HFT. 

Table 3 describes the number of hedge 

funds that used at least some HFT 

strategies, as reported by their advisers 

in the advisers’ most recent Form PF 

filing between 2021–Q4 and 2022–Q3. 

Using Form PF, advisers report their use 

of HFT strategies as a range of 

percentages of net asset value (‘‘NAV’’), 

such as ‘‘less than 10%’’ of NAV, 

‘‘10%–25%,’’ etc. We calculate a range 

of dollar values for each fund by 

multiplying the high and low values of 

the reported range by the fund’s NAV. 

For example, if an adviser reports that 

a fund engages in HFT using ‘‘Less than 

10%’’ of the fund’s NAV, and if the 

fund’s NAV is $100, then we conclude 

that the fund uses HFT to manage 

between $0 and $10 (10% of $100). For 

reported HFT use of ‘‘100% or more’’ of 

NAV, we use 500% of NAV as the high 

end of the range. The third row of Table 

3 shows the total range of HFT use that 

we obtain by summing the low and the 

high estimates across funds. The left 

column provides statistics for funds 

with reported HFT use that is less than 

10% of NAV, and the right column 

provides statistics for funds with 

reported HFT use that is 10% or more 

of NAV. 

TABLE 3—PRIVATE FUNDS’ USE OF HFT, LATEST FORM PF FILING BETWEEN 2021–Q4 AND 2022–Q3 

Funds with 

HFT <10% of NAV 

Funds with 

HFT ≥10% of NAV 

# Funds .............................................................. 40 ..................................................................... 12. 

Average NAV ...................................................... $3.2 bn ............................................................. $0.9 bn. 

Total $s dedicated to HFT * ............................... $0–$12.7 bn ..................................................... $8.9 bn–$40.4 bn. 

# Advisers ........................................................... 21 ..................................................................... 10. 

* Form PF includes a range of reported HFT—e.g., ‘‘less than 10%’’ of NAV, ‘‘10%–25%,’’ etc. For funds reporting ‘‘100% or more,’’ we use 

500% of NAV as the high end of the range. 

The use of HFT strategies is, however, 

an imperfect proxy for whether these 

funds would qualify under the 

qualitative standard, as adopted. We are 

unable to determine whether the HFT 

activities that these funds report would 

satisfy the expressing trading interest 

factor or the primary revenue factor 

because we do not observe individual 

transactions in Form PF. The use of HFT 

strategies, to the extent it may be 

dealing, is more likely to be a primary 

source of revenue when it accounts for 

a larger percentage of a fund’s NAV. 

Accordingly, the 12 hedge funds with 

HFT of at least 10% of NAV in Table 3 

are the more likely to meet the final 

rules’ primary revenue factor. However, 

since reported HFT may apply to a 

broader set of activities than the final 

rules’ qualitative factors, the actual 

number of affected funds may be less 

than 12. 

Our empirical analyses of likely 

affected parties face other limitations. In 

the current stage of implementation of 

CAT, we do not have comprehensive 

statistics on option or equity market 

activity stemming from entities engaging 

in dealing activity that are not registered 

as dealers, such as those known as PTFs 

in other markets.421 Similarly, because 

our TRACE analysis is limited to U.S. 

Government securities, it does not cover 

markets for equities, options, or other 

fixed-income markets. Our TRACE data 

also cannot establish whether firms 

primarily earn revenue from capturing 

bid-ask spreads. Further, and 

specifically for Treasury market 

participants, our counts of identifiable 

firms in TRACE may be low because 

TRACE data on U.S. Government 

securities transactions does not identify 

all market participants.422 The TRACE 

analysis also relies on empirical proxies 

to estimate the number of firms—i.e., 

the range of values for ‘‘regular’’ and the 

‘‘at least 15 days’’ distinction—and uses 

observed intraday trading spreads rather 

than the (unobserved) revenue earned 

from bid-ask spreads. As explained 

above, the analysis also does not 

estimate the number of entities 

described by the final rules’ expressing 

trading interest factor because of data 

limitations. Whether or not a person is 

a securities dealer or government 

securities dealer under the final rules 

would be, in part, a question of facts 

and circumstances not observed in the 

data, such as whether and to whom 

trading interests are expressed, whether 

they are on both sides of the market, and 

whether they are at or near the best 

available prices. 

Commenters said that the number of 

hedge funds affected by the Proposed 

Rules would be much higher than the 

Proposing Release suggested, potentially 

numbering into the hundreds.423

However, the changes to the final rules 

described in section I.B largely respond 

to commenters’ concerns by reducing 

the number of entities that the final 

rules would potentially require to newly 

register as dealers. 

One commenter stated that the 

Commission did not estimate the 

number of affected parties based on 

trading in other asset classes, such as 

corporate bonds, municipal securities, 

and asset- or mortgage-backed 

securities.424 Transaction data in these 

markets do not permit such estimations 

because non-broker-dealers are 

generally labeled as ‘‘customer’’ without 

name attribution in trade reports. 

However, with regard to PTFs, it is the 

Commission’s understanding that these 

market participants are most active in 

on-the-run Treasury markets, where 

they provide a substantial amount of 

liquidity, but are less active in off-therun Treasury securities and play only a 

small role in the market for agency 

securities.425 Similarly, the Commission 


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14974 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

87106 (Dec. 31, 2020), available at https://www.

federalregister.gov/documents/2020/12/31/2020- 

21781/regulation-ats-for-atss-that-trade-usgovernment-securities-nms-stock-and-othersecurities. In particular, Table X.2 highlights that 

PTFs accounted for 31.4% of on-the-run volume 

share from July 1, 2019, to Dec. 31, 2019, while 

Table X.3 shows that PTFs accounted for only 1.5% 

of off-the-run volume. Table X.4 shows that PTFs 

were essentially not active in agency securities 

during the same period. 

426See Bond Dealers of America comment letter 

to ATS–G Proposing Release, available at https://

www.sec.gov/comments/s7-12-20/s71220-8426431- 

229605.pdf. 

427See Terrence Hendershott, Livdan Dmitry, and 

Norman Schu ̈rhoff, ‘‘All-to-All Liquidity in 

Corporate Bonds,’’ Swiss Finance Institute Research 

Paper No. 21–43 (Oct. 27, 2021), available at 

https://papers.ssrn.com/sol3/papers.cfm?abstract_

id=3895270. 

428See Kevin McPartland, What’s Next for High 

Frequency Traders? Not Calling Them High 

Frequency Traders, Coalition Greenwich (Sept. 27, 

2019), available at https://www.greenwich.com/ 

blog/what%E2%80%99s-next-high-frequencytraders (noting that one PTF has begun to trade 

using corporate bond RFQs). 

429We would have to match entities’ trades in 

crypto asset securities across platforms in order to 

determine whether or not their trading activity 

meets the final rules’ definition of regular liquidity 

provision. 

430We consider all dealer-to-dealer trades and all 

trades on covered ATSs (see supra note 380) to be 

the interdealer market. For the purposes of this 

table, we consider all registered broker-dealers to be 

potential liquidity providers, though it may be the 

case that some broker-dealers do not regularly seek 

to provide liquidity in the market for U.S. 

Government securities. 

431As of Oct. 2023, there were 3,490 active 

broker-dealers registered with the Commission. See 

SEC, Data: Company Information About Active 

Broker-Dealers (updated Oct. 2, 2023), available at 

https://www.sec.gov/help/foiadocsbdfoiahtm.html. 

432HHI is equal to the sum of squared market 

shares. An index of 1 would indicate a completely 

concentrated market with a single significant 

liquidity provider. 

433A Federal Reserve analysis from 2020 finds 

that activity on electronic interdealer platforms is 

slightly more concentrated, with an HHI of 0.082. 

See James Collin Harkrader and Michael Puglia, 

‘‘Principal Trading Firm Activity in Treasury Cash 

Markets,’’ FEDS Notes (Aug. 4, 2020). 

does not believe that PTFs are active in 

municipal securities markets, which are 

characterized by a high level of retail 

investors. One commenter to the ATS– 

G Proposing Release noted that 

approximately 15% of daily dollar 

volume in municipal bonds is executed 

electronically, further indicating that 

PTFs—which rely on electronic 

platforms—may not play a significant 

role in this market.426 Finally, recent 

research finds that non-dealer liquidity 

providers are present in corporate bond 

markets, though they account for a small 

share of overall volume. Looking at a 

particular electronic platform, the 

authors of one study find that all-to-all 

trading makes up 12% of all trades on 

the platform; of this, new liquidity 

providers acting as dealers account for 

7%.427 However, this platform accounts 

for approximately 10% of trading 

reported to TRACE, so that the overall 

share of non-dealer liquidity providers 

or PTFs in the corporate bond market is 

relatively small. Other anecdotal 

evidence suggests that PTFs have begun 

to enter the corporate bond market using 

RFQ platforms, possibly driven by the 

growth of corporate bond ETFs.428

Because crypto asset platforms 

transacting in crypto assets for their 

own account may already be dealers 

under current law—i.e., with respect to 

crypto assets that are securities or 

government securities within the 

meaning of the Exchange Act—the final 

rules might affect only a few of the 

entities that provide significant liquidity 

in crypto asset markets. We understand 

that the rules may affect some PTFs in 

crypto asset markets, however. We are 

unable to estimate the number of crypto 

asset market participants who would be 

affected by the rules, because data do 

not allow us to match crypto asset 

security transactions to individual 

traders, especially across platforms.429

3. Competition Among Significant

Liquidity Providers 

The previous sections highlight 

important differences in regulatory 

treatment among competing significant 

liquidity providers. Specifically, 

registered dealers and the unregistered 

market participants that perform similar 

functions operate under different 

regulations—i.e., unregistered market 

participants have fewer constraints on 

risk-taking and are subject to fewer 

reporting requirements—even as they 

perform a similar role as dealers in 

markets. The requirement that dealers 

register is of the utmost importance in 

effecting the purposes of the Exchange 

Act (see section I.A). In this section, we 

provide some data on current 

concentration in the market for U.S. 

Government securities and also discuss 

the competitive implications of 

differences in regulatory treatment. 

Our analysis of TRACE data suggests 

that liquidity provision in the 

interdealer market for U.S. Government 

securities is not concentrated.430 Table 

4 displays measures of market 

concentration among entities that are 

potentially dealing in U.S. Government 

securities across months in 2022.431

This table categorizes firms as potential 

significant liquidity providers in three 

ways, and we display two measures of 

concentration for each. In column 1, the 

list of potential significant liquidity 

providers includes only firms currently 

classified as dealers in our TRACE data. 

In column 2, the list also includes 

identifiable PTFs. In column 3, the list 

expands again to include identifiable 

hedge funds. The two measures of 

concentration are the volume share of 

the 5 highest-volume firms and the 

Herfindahl-Hirschman index 

(‘‘HHI’’).432 The inverse of the HHI 

provides some intuition by giving the 

number of equally sized competitors a 

market would need to produce such an 

HHI. The first column of Table 4 shows 

that between 445 and 714 dealers were 

active in the U.S. Treasury market in 

2022, and that the 5 highest-volume of 

these firms accounted for approximately 

40% of the group’s total volume each 

month. Across months, the HHI in 

column 1 ranged between 0.047 and 

0.056, comparable to a market with 18 

to 21 equally sized competitors.433 If we 

also consider identifiable PTFs to be 

significant liquidity providers (column 

2), then 479 to 748 significant liquidity 

providers were active each month 

during 2022, and the five highestvolume firms accounted for 

approximately one-third of the group’s 

total. The HHI in this case averages 

approximately 0.0385, comparable to a 

market with 26 equally sized 

competitors. If we further consider 

identifiable hedge funds in TRACE to be 

significant liquidity providers (column 

3), then 517 to 799 significant liquidity 

providers were active in the U.S. 

Treasury market in each month during 

2022, the concentration metrics are 

nearly the same as in column 2. The 

narrow differences between columns 2 

and 3 suggest that the hedge funds that 

we can identify in TRACE are not major 

competitors in the market for liquidity 

provision against either registered 

broker-dealers or PTFs. 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14975 

434Maureen O’Hara and Alex Zhou, Anatomy of 

a Liquidity Crisis: Corporate Bonds in the Covid–19 

Liquidity Crisis, 142 J. Fin. Econ. 46 (2021), 46–68. 

435Transaction Fee Pilot for NMS Stocks, 

Exchange Act Release No. 82873 (Mar. 14, 2018), 83 

FR 13008 (Mar. 26, 2018). 

436See supra note 382. 

437See discussion of risk limitations in section 

III.B.2.a. 

TABLE 4—COMPETITION AMONG SIGNIFICANT LIQUIDITY PROVIDERS IN THE TREASURY MARKET, 2022 

[The largest 5 firms in this table overall are registered broker-dealers] 

Significant liquidity 

providers: registered 

BDs 

Significant liquidity 

providers: registered 

BDs + PTFs 

Significant liquidity 

providers: registered 

BDs + PTFs + hedge 

funds 

No. of firms ...................................................................... 445–714 ............................. 479–748 ............................. 517–799. 

Share of interdealer market * ........................................... 72.7%–83.7% .................... 93.7%–97.4% .................... 95.0%–98.5%. 

Concentration measures: 

Share of top 5 firms ................................................. 37.3%–43.1% .................... 32.0%–35.4% .................... 31.7%–35.0%. 

HHI ........................................................................... 0.047–0.056 ....................... 0.036–0.041 ....................... 0.036–0.047. 

HHI comparable to market with ll equal-size 

competitors.

18–21 ................................. 24–28 ................................. 24–28. 

* Source: TRACE data. Our sample contains all transactions in the interdealer market, including direct dealer-to-dealer trades and trades that 

occur on ATSs covered by FINRA Rule 6730.07. 

The Commission also understands 

that many firms compete to provide 

liquidity in the markets for corporate 

bonds and for equities (not necessarily 

the same firms). Research has 

documented that, as of the first quarter 

of 2020, about 600 dealers 

intermediated in the market for 

corporate bonds, but that the top 10 

broker-dealers controlled approximately 

70% of the volume.434 Another analysis 

by the Commission 435 found that of the 

3,972 broker-dealers that filed Form X– 

17a–5 (FOCUS report) in 2016, 430 were 

also members of U.S. equities 

exchanges, and the largest 20 brokerdealers controlled approximately 75% 

of the total assets of all broker-dealers. 

The current competitive landscape 

among significant liquidity providers is 

shaped by the difference in regulatory 

treatment between registered dealers 

and the unregistered market participants 

that perform a similar role in the 

markets. Competition among significant 

liquidity providers in U.S. capital 

markets, described above, puts pressure 

on firms’ ability to profit from these 

activities, meaning that even small 

regulatory differences across significant 

liquidity providers can be important. 

The compliance costs of the additional 

requirements to which registered 

dealers are subject may currently allow 

less-regulated firms such as PTFs to 

increase (or continue to increase) their 

share of dealing activity at registered 

dealers’ expense. These dynamics may 

especially apply to the electronic 

interdealer segment of the Treasury 

market, where PTFs now account for a 

majority of trading activity (as of 

2019).436

4. Externalities 

Externalities arise in a market when a 

market participant engages in activity 

that impacts participants not otherwise 

directly related to the activity and the 

market participant does not take this 

impact into account. In this analysis, 

externalities can arise with regard to 

activities, such as risk taking and 

abusive trading, that are taken by market 

participants who act as regular 

significant liquidity providers (i.e., 

dealers). The dealer regulatory regime 

promotes dealers’ financial 

responsibility, including adequate 

capitalization (liquidity held against 

risky assets) and internal controls, 

which can help address externalities— 

above and beyond any other existing 

regulatory or industry practices. 

Subjecting unregistered market 

participants that perform as dealers to 

this regime, similarly to all currently 

registered dealers, will therefore 

enhance oversight by regulators and 

help limit externalities by helping 

prevent spillovers that may broadly 

harm investors. 

Market participants that act as regular 

significant liquidity providers, whether 

registered with the Commission as 

dealers or not, can not only harm their 

counterparties but also cause wider 

harm throughout securities markets if 

they fail financially. 

Failed liquidity providers can become 

unable to meet short-term obligations to 

trading counterparties, repo lenders and 

other lenders, and clearing firms. 

Negative effects can be transmitted 

further through creditors or 

counterparties to other market entities 

who are not directly related. For 

instance, a lender that suffers a loss due 

to the bankruptcy of one of its borrowers 

may reduce its willingness to lend (i.e., 

it may increase the price of credit) more 

generally, especially when the lender is 

uncertain about whether the bankruptcy 

is due to idiosyncratic events or to 

events that have also negatively 

impacted other potential borrowers. 

Prior to or during a failure, a significant 

liquidity provider may have to liquidate 

an unexpectedly large position— 

perhaps acquired because offsetting 

trades were unavailable for a time or 

because of errors in trading algorithms 

or other systems (including human 

errors). Rapid liquidation of the position 

may cause detrimental price volatility or 

a temporary drop in market liquidity. 

If the failed liquidity provider is a 

substantial market participant, then its 

disorderly exit from the market or from 

a securities position may push market 

prices away from fundamental value 

and harm traders across the markets. 

Because a significant liquidity provider 

can harm others to whom it is not 

directly related—and who may not be 

able to contract to bear those costs—its 

failure can impose negative 

externalities. These externalities may 

ensue whether the failed liquidity 

provider is registered as a dealer or not. 

However, the next paragraph explains 

how the dealer regime’s limitations on 

financial risk, including the Net Capital 

Rule, reduce the risk for registered 

dealers. 

Dealer regulations are designed to 

mitigate the magnitude of these 

externalities and to limit the probability 

that they occur at all. For example, the 

Net Capital Rule requires dealers to 

maintain sufficient liquid assets to meet 

all unsubordinated liabilities— 

including obligations to counterparties 

and other creditors—and to have 

adequate additional resources to wind 

down their business in an orderly 

manner if they fail financially. PTFs that 

are not registered as dealers currently 

face fewer regulations restricting their 

operational or financial risk,437 and they 

are also not subject to additional SRO 

rules that promote financial 


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14976 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

438See Private Fund Statistics, Tables 4, 49, and 

51. As of the fourth quarter of 2022, qualifying 

hedge funds had $1.2 trillion (32%*$3.8 trillion) in 

assets that could be liquidated within a day, $2.9 

trillion (78%*3.8 trillion) in assets that could be 

liquidated within a year, and $3.5 trillion in 

secured debts. In the Proposing Release, we 

estimated that ‘‘qualifying hedge funds are more 

leveraged than registered dealers.’’ A commenter 

disagreed with our use of the word ‘‘leverage’’ in 

that statement, citing statistics showing that the 

average hedge fund has a lower ratio of assets to 

equity—a more traditional measure of leverage— 

than registered dealers (see MFA Comment Letter 

I). However, we believe the comparison in the 

proposal and here is apt because the Net Capital 

Rule constrains a form of leverage—not book 

leverage, but a more ‘‘liquid’’ notion of leverage 

equal to liquid assets minus unsubordinated 

liabilities. To avoid misunderstanding, we refer to 

‘‘having more secured debts than assets that could 

be liquidated within a day or even within a year’’ 

instead of ‘‘leverage.’’ See also supra note 399 for 

a definition of ‘‘qualifying hedge fund.’’ 

439See AIMA Comment Letter II; Blockchain 

Association Comment Letter; FIA PTG Comment 

Letter I; MFA Comment Letter I; SIFMA Comment 

Letter I. 

440See AlphaWorks Comment Letter; FIA PTG 

Comment Letter I; McIntyre Comment Letter I; 

Overdahl Comment Letter. 

sharply than PTFs’ volumes.’’). See also infra note 

460 and surrounding text. 

444See Overdahl Comment Letter. 

445See Alphaworks Comment Letter. 

446See Darrell Duffie, et al., Oct. 2023, ‘‘Dealer 

Capacity and U.S. Treasury Market Function,’’ 

Federal Reserve Bank of New York Staff Reports, 

no. 1070, available at https://doi.org/10.59576/ 

sr.1070. 

447See Nellie Liang, ‘‘Remarks by Under 

Secretary for Domestic Finance Nellie Liang at the 

2023 Treasury Market Conference’’ (Nov. 16, 2023), 

available at https://home.treasury.gov/news/pressreleases/jy1917. 

448See section III.B.2.a for a discussion on 

transactions reporting by registered dealers versus 

other entities. 

449 In 2020 and 2021, FINRA identified nonmember firms in 17% of the alerts generated by its 

surveillance of manipulative trading patterns in 

U.S. Treasury market, despite limitations on its 

surveillance of non-members—FINRA can only 

identify trades as involving non-FINRA members 

when the trades take place on certain ATSs (see 

supra note 380). See Sept. 27, 2022, letter from 

FINRA responding to SEC Release No. 95388 (15b9– 

1), pp. 9–10, available at https://www.sec.gov/ 

responsibility and operational 

capability. Private funds can place 

limits on investor withdrawals, and the 

fund adviser’s fiduciary obligations may 

also deter private funds’ excessive risktaking. However, qualifying hedge funds 

have no regulatory leverage constraints 

and tend to have more secured debts 

than assets that could be liquidated 

within a day or even within a year.438

Some commenters disagreed that 

traders without customers pose risks to 

investors, since they do not interact 

directly with the investing public.439 A 

dealer’s insolvency can also harm other 

counterparties and creditors even in the 

absence of customers. Any entity that 

effectively and regularly provides 

significant liquidity to markets, 

regardless of whether that entity has 

customers or not, has the potential to 

harm markets if it fails, as discussed 

above. 

Some commenters questioned the 

proposal’s premise that market 

participants who are not registered 

dealers can have important externalities, 

or stated that any such externalities 

manifest themselves so infrequently that 

the proposed rules are unnecessary.440

Market participants engaged in dealing 

activities but without being registered as 

dealers create the potential for serious 

externalities if they fail, regardless of 

the historical frequency of such failure. 

Two examples illustrate such 

externalities: the failure of Drysdale 

Government Securities and the Treasury 

market illiquidity in March 2020. In 

1982, Drysdale Government Securities— 

a firm that was not registered as a dealer 

but was actively dealing in the U.S. 

Treasury market for its own account— 

failed when it became unable to pay 

interest due on securities it had 

acquired in reverse repo agreements 

with 30 brokers.441 Drysdale had 

acquired a $4 billion securities portfolio 

supported by only $20–30 million in 

capital—far in excess of the leverage 

that the Net Capital Rule would have 

allowed for a registered dealer. Even 

though Chase Bank (Drysdale’s agent) 

supported market confidence by making 

Drysdale’s payments and markets 

eventually return to normal, Drysdale’s 

failure harmed market functioning for 

several days. For as long as a week, 

‘‘according to dealers, the secondary 

markets in government securities 

continue[d] to be very thin, with few 

deals being done. And . . . the repo 

market was virtually dead.’’ 442

In addition, the 2021 IAWG Joint Staff 

Report showed that PTFs in particular 

(many of whom were not registered as 

dealers) appeared to pull back from 

providing liquidity in the Treasury 

markets relative to dealers during the 

market volatility in March 2020, 

possibly because ‘‘their lower 

capitalization relative to dealers may 

[have left] them with less capacity to 

absorb adverse shocks.’’ 443 Higher 

441 Drysdale Government Securities was very 

active in the U.S. Treasury market, and the firm had 

acquired a large portfolio of U.S. Government 

securities through reverse repurchase agreements. 

Those agreements required Drysdale to pass along 

any interest received to the banks from whom it had 

borrowed the securities. The firm collapsed when 

it was unable to pass along those interest payments. 

See Ron Scherer, ‘‘How Drysdale Affair Almost 

Stymied US Securities Market,’’ Christian Science 

Monitor (May 27, 1982), available at https://www.

csmonitor.com/1982/0527/052737.html; James L. 

Rowe Jr. and Merrill Brown, ‘‘Through Abrupt 

Personality Change, Tiny Wall Street Firm 

Demonstrates the Allure, and Danger, in 

Speculative Trading,’’ Wash. Post (May 23, 1982), 

available at https://www.washingtonpost.com/ 

archive/politics/1982/05/23/through-abruptpersonality-change-tiny-wall-street-firmdemonstrates-the-allure-and-danger-in-speculativetrading/532bf4ea-bdf2-4248-924b-d6a682907aba/ 

https://www.washingtonpost.com/archive/politics/ 

1982/05/23/through-abrupt-personality-changetiny-wall-street-firm-demonstrates-the-allure-anddanger-in-speculative-trading/532bf4ea-bdf2-4248- 

924b-d6a682907aba/ (retrieved from Factiva 

database). 

442See Ron Scherer, ‘‘How Drysdale Affair 

Almost Stymied US Securities Market,’’ Christian 

Science Monitor (May 27, 1982), available at 

https://www.csmonitor.com/1982/0527/ 

052737.html.

443See 2021 IAWG Joint Staff Report, supra note 

21. Initially, PTFs increased trading activity, but 

they pulled back from market making several days 

later when volatility reached very high levels. See 

id. at 13 (‘‘In the first week of Mar., a large share 

of the increased trading volume came from PTFs, 

and on Mar. 9, PTFs’ share of trading on electronic 

IDB platforms was just over 60%, a typical level. 

But as heavy net investor sales continued, the 

balance of activity in the interdealer market shifted 

. . . PTFs’ total share of activity fell to a low of 

45% on Mar. 16. Dealers’ total volumes on 

electronic IDB platforms also declined, but less 

capitalization may have given PTFs 

more capacity to absorb the shock, 

which may have increased their ability 

to provide liquidity as well as 

increasing the resiliency of the market 

itself. While PTFs may not have been 

the primary cause of the volatility,444

this episode illustrates that PTFs’ 

market withdrawal can contribute to 

stress in the overall U.S. Treasury 

market. One commenter disagreed with 

the IAWG’s characterization of March 

2020, and said that ‘‘price moves 

reflected rapidly shifting outlooks for 

the world economy, and the spreads 

were narrower than might be expected 

given the price moves.’’ 445 Research has 

shown that Treasury market liquidity in 

March 2020 was considerably lower 

than might be expected given the price 

volatility.446 Consistent with this 

research, we disagree with the 

commenter that spreads were narrower 

than might be expected. However, we 

do not necessarily conclude that PTFs 

always exacerbate market instability, 

since PTFs’ share of market trading 

appeared to increase during the 

uncertainty in March 2023.447

Negative externalities can also derive 

from market misconduct by unregistered 

dealers. Several elements of the dealer 

regulatory regime address misconduct 

risks and regulators can examine 

regulated dealers. Under that regime, 

financial statement reporting, 

transaction reporting,448 and 

examinations help regulators detect 

manipulation or fraud and determine 

whether firms comply with applicable 

regulations. If unregistered dealers 

engage in market misconduct, it could 

result in negative externalities by 

distorting market prices and adversely 

impacting market participants.449


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comments/s7-05-15/s70515-20144330-309240.pdf. 

FINRA staff later clarified that some of that 17% 

may be due to SEC-registered broker-dealers who 

are not FINRA members (see memorandum of 

telephone conversation between Commission staff 

and FINRA available at https://www.sec.gov/ 

comments/s7-05-15/s70515-226580-474322.pdf). 

450See AIMA Comment Letter III; Lewis Study; 

MFA Comment Letter II; Overdahl Comment Letter. 

451See Treasury Clearing Adopting Release, 89 

FR 2717–22. 

452See id. at 2716. 

453See id. at 2798. 

454See id. 

455See id. at 2798–99. 

456One commenter stated that ‘‘[t]he Regulation 

ATS proposal may well result in coverage of some 

of the same market participants as would be 

covered by the [proposed rules] and may therefore 

address some of the needs that the Commission 

claims warrant the [proposed rules].’’ See 

Consensys Comment Letter (discussing 

Amendments Regarding the Definition of 

‘‘Exchange’’ and Alternative Trading Systems 

(ATSs) That Trade U.S. Treasury and Agency 

Securities, National Market System (NMS) Stocks, 

and Other Securities, Exchange Act Release No. 

94062 (87 FR 15496, Mar. 18, 2022) (‘‘Regulation 

ATS Proposal’’)). The Regulation ATS Proposal has 

not been adopted and is therefore not part of the 

baseline for this economic analysis. See supra note 

355. In any event, the final rules and the Regulation 

ATS Proposal differ in scope and impact, as the 

rules would apply to market participants engaging 

in different types of market activities if Regulation 

ATS is adopted as proposed. 

457 In a comment letter, FINRA agreed that 

‘‘requiring such entities to register with the SEC 

. . . would close regulatory gaps,’’ and stated that 

‘‘current regulatory disparities are especially 

pronounced in the market for U.S. Treasury 

securities.’’ See FINRA Comment Letter. 

Some commenters said that requiring 

more Treasury security transactions to 

be centrally cleared would address the 

same externalities that are described 

above.450 The SEC recently adopted the 

Treasury Clearing Adopting Release, 

which, among other things, amends 17 

CFR 240.17Ad–22(e)(18) to require 

covered clearing agencies that provide 

central counterparty (‘‘CCP’’) services 

for U.S. Treasury securities to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed, as applicable, to 

establish objective, risk-based and 

publicly disclosed criteria for 

participation, which require that any 

direct participant of such a covered 

clearing agency submit for clearance 

and settlement all the eligible secondary 

market transactions in U.S. Treasury 

securities to which such direct 

participant is a counterparty.451 The 

Treasury Clearing Adopting Release 

lowers overall systemic risk in the U.S. 

Treasury market by bringing the benefits 

of central clearing to more transactions 

involving U.S. Treasury securities.452

The amendments that the Commission 

adopted in the Treasury Clearing 

Adopting Release will likely yield 

benefits associated with increased levels 

of central clearing in the secondary 

market for U.S. Treasury securities.453

These benefits could be particularly 

significant in times of market stress, as 

CCPs will mitigate the potential for a 

single market participant’s failure to 

destabilize other market participants, 

destabilize the financial system more 

broadly, and/or reduce the effects of 

misinformation and rumors.454 A CCP 

also will address concerns about 

counterparty risk by substituting the 

creditworthiness and liquidity of the 

CCP for the creditworthiness and 

liquidity of counterparties.455

Accordingly, the Commission 

acknowledges that the Treasury Clearing 

Adopting Release addresses some of the 

externalities discussed above stemming 

from the failure of large firms, which the 

final rules are also intended to address. 

However, given that the Treasury 

Clearing Adopting Release and the final 

rules address these externalities through 

different mechanisms, the final rules 

would serve to further reduce the 

externalities in the market for U.S. 

Government securities. This, in turn, 

further reduces the probability that a 

significant liquidity provider fails and 

thus promotes the stability and 

resiliency of the government securities 

market. By limiting the risk of failure, 

the final rules limit the probability that 

such failure could harm creditors or 

lead to price volatility as a troubled firm 

rapidly deleverages. The final rules may 

also limit the probability of failure for 

all PTFs and hedge funds who are 

engaged in dealing activity. The 

Treasury Clearing Adopting Release, in 

contrast, would not require central 

clearing for hedge funds’ cash trades or 

for any transaction between a PTF who 

is not a member of a clearing agency and 

another non-member counterparty. In 

addition, benefits of the final rules such 

as the consistent application of dealer 

regulations across significant liquidity 

providers, operational and financial 

requirements designed to mitigate risks, 

deterrence of abusive and deceptive 

trading practices, extension of SROs’ 

examination authority to significant 

liquidity providers for U.S. financial 

markets, and increased transparency 

into the identities of significant 

liquidity providers in the Treasury 

market, are largely unaffected by the 

adoption of the Treasury Clearing 

Adopting Release. 

C. Economic Effects, Including Impact 

on Efficiency, Competition, and Capital 

Formation 

As described in section II, the 

Commission believes that the final rules 

will promote the stability and 

transparency of U.S. Treasury and other 

securities markets by closing the 

regulatory gap that currently exists and 

ensuring consistent regulatory oversight 

of persons engaging in regular liquidity 

provision in securities markets. 

Specifically, the final rules will increase 

the share of liquidity provision that is 

undertaken by persons who are subject 

to the dealer regime’s limits on financial 

risk-taking, reporting requirements, 

regulation against abusive practices, and 

examinations. The greatest benefits 

come from applying these dealer 

regulations to entities that are currently 

not registered at all—i.e., unregistered 

PTFs. While the Commission already 

has some insight into private funds and 

investment advisers, to the extent that 

certain private funds or registered 

investment advisers perform the 

functions of dealers, it would be 

beneficial to extend dealer risk 

limitations and transaction reporting 

responsibilities to them. These benefits, 

as well as the costs described in this 

section, may differ for registered 

government securities dealers, since 

they have different capital requirements 

and are not required to join SIPC as 

discussed in section III.B.1. 

Costs of the final rules include 

registration and membership fees, costs 

of recordkeeping and reporting, and 

costs associated with net capital 

requirements. Additionally, the final 

rules may influence patterns of market 

participation, which may in turn affect 

competition among significant liquidity 

providers, market liquidity and 

efficiency, and capital formation. 

1. Benefits 

The final rules would subject all 

market participants that perform similar 

dealer functions to a common regulatory 

regime. This regime includes provisions 

that limit risk (e.g., the Net Capital Rule 

and rules promoting operational 

integrity), provisions that require certain 

books and records, provisions that 

require various reporting and disclosure 

(including audited financial statements 

and the identities of owners, directors, 

and managers), and antifraud and antimanipulation provisions. Subjecting 

currently unregistered (as dealers) 

market participants to dealer 

requirements will thus enable oversight 

by regulators,456 limit externalities by 

helping prevent spillovers that may 

broadly harm investors, and ensure that 

the competitive landscape among 

significant liquidity providers is not 

shaped by a difference in regulatory 

treatment.457

As previously discussed, PTFs and 

hedge funds would be the primary 

affected parties, and registering PTFs 

that are dealing would provide the 


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458See 2010 Equity Market Structure Concept 

Release. 

459See Comment Letter of Berkowitz, Trager & 

Trager, LLC (Apr. 21, 2010) (‘‘Berkowitz Comment 

Letter’’). See also supra note 20. 

460See supra notes 21 and 443 and accompanying 

text for further discussion of changes in trading 

activity of principal trading firms during the U.S. 

Treasury market volatility of Mar. 2020. The market 

share of PTFs declined from approximately 62% at 

the beginning of Mar. 2020 to a low of 45% on Mar. 

16, 2020. 

461See section III.B.3. 

462See Alphaworks Comment Letter; MMI 

Comment Letter; FIA PTG Comment Letter I. 

463See infra Table 6. 

464See infra note 543. 

465This discussion of the potential negative 

economic impact on smaller liquidity providers for 

purposes of the economic analysis does not impact 

the regulatory flexibility analysis discussed later in 

section V because the final rules include a $50 

million exclusion. As a result, any of the ‘‘small 

liquidity providers’’ discussed in the economic 

analysis would not meet the Commission’s 

definition of a ‘‘small business’’ or ‘‘small 

organization’’ in 17 CFR 240.0–10 (‘‘Rule 0–10’’), 

which defines an ‘‘issuer’’ or ‘‘person’’ other than 

an investment company as having total assets less 

than $5 million on the last day of its fiscal year for 

purposes of the Regulatory Flexibility Act. 

466See supra note 369 and accompanying text. 

467See supra note 399. 

468See supra note 438 and accompanying text. 

469See supra notes 21 and 443 (referring to the 

Treasury market events of 2020). 

largest benefits. Some investment 

advisers may also be affected if they 

engage in dealing activities on their own 

account, and these entities’ dealer 

registration would also provide benefits. 

In response to a related initiative in 

2010,458 at least one principal trading 

firm told the Commission that the costs 

of registering PTFs as dealers were not 

justified because equity markets worked 

well during the autumn of 2008 (then 

the most-recent crisis) and because the 

commenter believed that principal 

trading firms in general help market 

integrity by providing liquidity during 

difficult situations.459 However, the 

2021 IAWG Joint Staff Report showed 

that, during the U.S. Treasury market 

volatility of March 2020, PTFs’ share of 

market intermediation fell considerably 

more than did dealers’ share.460 The 

Joint Staff Report’s conclusion suggests 

that PTFs do not always promote 

stability in securities markets. 

a. Regulatory Consistency and 

Competition 

Currently, large market participants 

that are not registered as dealers (or 

government securities dealers) perform 

critical market functions, in particular 

liquidity provision, akin to those 

performed by dealers (or government 

securities dealers). For example, in the 

U.S. Treasury market, PTFs account for 

about half of the daily volume in the 

interdealer market and yet are not 

registered as dealers. The final rules will 

help ensure that all market participants 

that take on significant liquidityproviding roles are appropriately 

registered as dealers and government 

securities dealers. The final rules will 

thereby promote competition among 

entities that regularly provide 

significant liquidity by applying 

consistent regulation to these entities, 

thus leveling the competitive playing 

field between liquidity provision 

conducted by entities that are currently 

registered as dealers and government 

securities dealers and by entities that 

are not. 

The regulatory consistency under the 

final rules is expected to benefit 

currently registered dealers by ensuring 

that all of their competitors, including 

currently unregistered market 

participants that perform the same 

function as dealers, are subject to 

common regulatory requirements.461 As 

stated above in section III.B.3, even 

small differences across significant 

liquidity providers in regulatory costs 

could be enough to give important 

advantages to the firms bearing the 

smallest regulatory burdens. 

Some commenters stated that the final 

rules would negatively impact 

competition by especially harming 

small PTFs and creating barriers to entry 

against small liquidity providers.462 We 

agree that the final rules could impose 

proportionally greater costs on smallvolume liquidity providers for two 

reasons. First, FINRA’s Gross Income 

Assessment 463 generally declines as a 

percentage of revenue for larger firms, 

so that firms with smaller revenues pay 

proportionally larger fees. Second, fees 

associated with reporting to TRACE 464

are proportionally lower for trades with 

larger dollar par value. To the extent 

that larger firms also tend to place larger 

trades, on average, TRACE reporting 

might be proportionally more costly for 

small firms. However, the final rules 

will exclude market participants who 

have or control assets less than $50 

million.465 Also, currently registered 

dealers include smaller market 

participants, and under the final rules 

smaller unregistered market participants 

would be subject to the same rules as 

smaller registered market participants, 

thereby creating a level competitive 

landscape amongst smaller market 

participants. 

b. Regulations on Financial and 

Operational Risk-Taking 

The final rules will mitigate 

externalities to liquidity and stability, 

discussed in section III.B.3, by applying 

the Net Capital Rule and SRO 

requirements to additional significant 

liquidity providers. These final rules 

will reduce the risk that a significant 

liquidity provider fails and harms its 

counterparties and the broader 

functioning of the markets, by 

promoting the financial stability of 

individual significant liquidity 

providers. SRO supervision may also 

reduce the risks that errors in algorithms 

lead to trading activities that violate 

Commission or SRO rules.466

The Net Capital Rule will make risktaking more costly for affected parties 

because the final rules will require them 

to maintain a greater supply of liquid 

assets when they are exposed to more 

risk. In the event that a significant 

liquidity provider fails, the Net Capital 

Rule will ensure that it has sufficient 

liquid assets to meet all its liabilities to 

unsubordinated creditors. In addition, 

qualifying hedge funds,467 on average, 

have fewer liquid assets than the Net 

Capital Rule would allow.468 Markets in 

which significant liquidity providers are 

required to hold some amount of liquid 

assets and face constraints on leverage 

may be less sensitive to sudden market 

disruptions that could otherwise reduce 

their capacity to provide liquidity. Such 

liquidity providers are better able to 

withstand adverse events without 

compromising their ability to remain 

engaged in the market.469

The benefit of the Net Capital Rule’s 

constraints on risk-taking may be 

smaller for certain affected parties. 

Some persons may meet the final rules’ 

definition of dealing but also keep their 

gross exposure small at any moment. 

Such persons would operate with very 

little leverage and would have few 

short-term obligations at any moment. 

The benefit of the Net Capital Rule may 

also be smaller when applied to persons 

whose creditors and counterparties have 

rigorous risk management practices and 

are capable of calculating and managing 

their exposure to that person. Such 

creditors and counterparties may not be 

seriously harmed by a dealer’s failure. 

As noted above, registered government 

securities dealers are subject to 

minimum liquid capital requirements as 

set forth in 17 CFR 402.2. These 

requirements would generally serve the 

same risk-limiting purpose as the Net 

Capital Rule. Also, the Net Capital Rule 

would not necessarily make affected 

persons more willing to provide 

liquidity in times of market stress; 

solvent firms could still decide not to 

provide liquidity if it were not 

profitable to do so. 

The final rules require affected 

persons to become FINRA members and 

comply with FINRA rules designed to 


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470See supra note 369. 

471See Better Markets Comment Letter; FINRA 

Comment Letter; Gretz Comment Letter. 

472See Alphaworks Comment Letter; Consensys 

Comment Letter; FIA PTG Comment Letter I; 

McIntyre Comment Letter II; Morgan Lewis 

Comment Letter. 

473See supra section I.A for a discussion on how 

dealer registration enhances market stability by 

giving regulators increased insight into firm-level 

and aggregate trading activity and so helps 

regulators to evaluate, assess, and address market 

risks and to contribute to fair and orderly markets. 

474See Alphaworks Comment Letter; ADAM 

Comment Letter; MFA Comment Letter I; Lewis 

Study; Element Comment Letter; ICI Comment 

Letter; Letter from the Hedge Fund Association 

(May 27, 2022) (‘‘HFA Comment Letter’’); IAA 

Comment Letter I; IDTA Comment Letter; Morgan 

Lewis Comment Letter; NAPFM Comment Letter; 

SIFMA Comment Letter; T. Rowe Price Comment 

Letter; Virtu Comment Letter. See supra notes 384– 

386 and accompanying text for a discussion of 

existing risk limits. 

475See AIMA Comment Letter II; ABA Comment 

Letter; Citadel Comment Letter; Committee on 

Capital Markets Regulation Comment Letter; 

Element Comment Letter; MFA Comment Letter I; 

MFA Comment Letter II; Fried Frank Comment 

Letter; HFA Comment Letter; IAA Comment Letter 

I; ICI Comment Letter; Lewis Study; McIntyre 

Comment Letter II; T. Rowe Price Comment Letter; 

Two Sigma Comment Letter I. 

476See Lewis Study; McIntyre Comment Letter II. 

477See sections III.B.2.a and III.B.2.b. 

478See AIMA Comment Letter; Blockchain 

Association Comment Letter; Consensys Comment 

Letter; FIA PTG Comment Letter I; IAA Comment 

Letter I; MFA Comment Letter I; T. Rowe Price 

Comment Letter. 

479See FINRA Comment Letter. 

480See FIA PTG Comment Letter I; AIMA 

Comment Letter II. 

481See supra notes 348 and 375 and 

accompanying text. 

facilitate the orderly and robust 

execution of algorithmic and HFT 

operations.470 Applying these rules 

would address the risk that a significant 

liquidity provider’s failure could cause 

market disruptions, and these rules are 

also designed to limit the duration of 

any such market disruptions that may 

occur. We understand that algorithmic 

HFT is a primary feature of the PTFs 

and private funds who are most likely 

to meet the final rules’ qualitative 

factors, since such trading can involve 

regularly expressing trading interests on 

both sides of the market (the expressing 

trading interest factor) or earning 

revenue from bid-ask spreads or 

incentives offered for liquidityproviding trades (the primary revenue 

factor). The application of these rules to 

affected parties engaged in such 

algorithmic trading activity will 

accordingly promote the stability and 

resilience of U.S. securities markets. 

A few commenters agreed that the 

proposed rules would provide benefits 

of market stability, integrity, and 

resiliency.471 Other commenters asked 

how the final rules would prevent or 

mitigate harm from future market 

disruptions and one said that having 

more market participants registered as 

dealers would not have improved the 

market structure in March 2020.472 We 

acknowledge that dealer registration 

does not obligate an entity to provide 

liquidity in the secondary market, and 

that even registered dealers may pull 

back from the market at times for 

business reasons. We also acknowledge 

that even registered dealers can fail. 

However, we emphasize that the dealer 

regime, including the Net Capital Rule, 

seeks to limit financial risk that may 

make entities more likely to fail or to 

need to pull back from the market. We 

believe that compliance with the dealer 

regime would make significant liquidity 

providers less likely to contribute to 

market instability.473

Many commenters stated that market 

participants who are not registered as 

dealers are already subject to regulatory 

risk limits, because the market 

participants typically trade through 

registered entities (e.g., banks and 

broker-dealers), and therefore it is not 

necessary for such participants to 

comply with the Net Capital Rule.474

Other commenters questioned the 

benefits of regulating private fund 

advisers as dealers, since existing rules 

and regulations already limit advisers’ 

risk and protect their investors through 

rules on custody of assets, fiduciary 

duty, and reporting, and recordkeeping.475 Another commenter added 

that professional equity trading firms 

are also subject to the Market Access 

Rule, which is designed to promote 

market integrity, and to the 

Commission’s large trader program, 

which may impose reporting obligations 

on unregistered as well as registered 

entities.476 The Commission 

acknowledges that market participants 

currently have direct and indirect 

constraints on their trading activity and 

risk-taking.477 However, as discussed in 

section III.B.3.a, the Net Capital Rule is 

another important constraint on risktaking and helps promote the stability of 

markets. Unlike the various margin 

requirements, the Net Capital Rule 

directly ensures that dealers are 

sufficiently liquid so that they can 

quickly satisfy creditors and 

counterparties. With respect to direct 

market access, the Market Access Rule 

does not directly impose obligations on 

all trading firms. Rather, the Market 

Access Rule requires a broker or dealer 

with market access to establish, 

document, and maintain a system of risk 

management controls and supervisory 

procedures reasonably designed to 

manage financial, regulatory, and other 

risks of this business activity. 

Some commenters questioned the 

benefits of applying the Net Capital Rule 

to entities without customers—e.g., 

PTFs, investment advisers, or private 

funds.478 However another commenter 

stated that even entities without 

customers may still engage in a 

significant amount of trading activity, 

and so their financial and operational 

condition can present risks to the 

markets.479 Two commenters said that 

the Net Capital Rule was designed to 

protect creditors and counterparties, in 

addition to customers.480 Such creditors 

and counterparties may include repo 

counterparties and clearing firms. If a 

significant liquidity provider were to 

fail, these other parties could become 

unable to complete trades or lose 

control of assets, either permanently or 

temporarily during bankruptcy 

proceedings. Even if the losses were 

eventually recovered, the significant 

liquidity provider could be temporarily 

unable to deliver securities or cash, 

forcing the counterparties to quickly 

enter new trades, put on new hedges, 

replace frozen collateral, or find new 

sources of liquidity. If market prices 

were volatile during this period, even a 

temporary freeze could cause serious 

stress to these counterparties and 

creditors. If a liquidity provider with 

large enough positions were to fail, the 

cumulative harm to counterparties and 

creditors, even if temporary, could 

cause substantial market disorder. Even 

if it does not fail, a highly leveraged 

significant liquidity provider may 

exacerbate market instability during 

times of market stress or volatility. For 

example, the entity may receive margin 

calls at a time of volatility, requiring it 

to reduce its leverage by closing 

positions instead of continuing to 

provide liquidity the market. 

The final rules may also increase the 

benefits associated with increased 

central clearing. Under the recent 

Treasury Clearing amendments,481

registered dealers and government 

securities dealers that are direct 

participants of a covered clearing 

agency will be required to centrally 

clear all of their eligible secondary 

market transactions; such transactions 

of dealers and government securities 

dealers that are not direct participants of 

a covered clearing agency will still be 

subject to central clearing requirements 

if those transactions are with members 

of a covered clearing agency. 

Accordingly, the final rules may 

increase the number of transactions 

subject to central clearing requirements 

to the extent they result in registration 

of new dealers or government securities 

dealers whose eligible secondary market 


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482Such transactions would not have been 

cleared under the baseline unless the transaction 

was with direct participant that brought together 

multiple buyers and sellers using a trading facility 

(such as a limit order book) and is a counterparty 

to both the buyer and seller in two separate 

transactions. See Treasury Clearing Adopting 

Release. 

483See Treasury Clearing Adopting Release; see 

also supra section III.B.4. 

484See Citadel Comment Letter; Overdahl 

Comment Letter. 

485See 15 U.S.C. 78ccc(a)(2). 

486See SIPC, List of Members, available at https:// 

www.sipc.org/list-of-members/ (listing SIPC 

members, including multiple firms that do not have 

customers). 

487See SIPC, Member FAQs, available at https:// 

www.sipc.org/for-members/member-faqs#my-firmhas-no-public-customers-why-do-i-have-to-be-amember (‘‘When Congress passed the Securities 

Investor Protection Act, it made all SIPC members 

subject to its provisions, including the obligation to 

pay assessments into the SIPC Fund. The objective 

was to instill confidence in the investing public and 

to place the financial support of the SIPC program 

on all firms that made their livelihood in the 

securities business, regardless of whether they had 

public customers or not.’’). 

488See section III.B.2.a for a discussion of 

limitations that exist when market participants do 

not have reporting obligations—reduced efficiency 

in identifying market participants in CAT, and 

limited ability to identify market participants in 

TRACE. 

489For example, regulators’ lack of insight into 

the market for U.S. Treasury securities became 

especially apparent during the instability of Mar. 

2020. The 2021 IAWG Joint Staff Report on Nov. 8, 

2021, noted that ‘‘In Mar. 2020 . . . there was a 

[particular] need for timely information on the 

positions and transactions of institutions other than 

dealers.’’ See supra note 21. Wider TRACE 

reporting would have provided more of such 

information. 

490See Fried Frank Comment Letter; McIntyre 

Comment Letter II; MMI Comment Letter; Morgan 

Lewis Comment Letter; SIFMA Comment Letter I; 

Virtu Comment Letter. 

491See Fried Frank Comment Letter; IAA 

Comment Letter I; McIntyre Comment Letter II; 

SIFMA AMG Comment Letter. 

492See FINRA Comment Letter; Gretz Comment 

Letter. 

493See supra notes 394 and 395 and surrounding 

text. 

494See supra note 396. 

495See supra notes 367–369. 

496 Id. 

transactions with a direct participant of 

a covered clearing agency will need to 

be centrally cleared.482 This increase in 

central clearing will confer benefits as 

discussed in the Treasury Clearing 

Adopting Release.483

Entities that register as dealers, other 

than registered government securities 

dealers, will be required to become 

members of SIPC. Some commenters 

questioned whether dealers registered 

under the final rules that do not have 

customers would benefit from SIPC 

membership.484 We acknowledge that 

not every registered dealer has 

customers. However, in the Securities 

Investor Protection Act of 1970 

(‘‘SIPA’’), Congress mandated that a 

broad range of dealers, including those 

without customers, are required to 

become members of SIPC.485 In fact, 

there are many firms that are current 

broker-dealers and have no customers 

that are members of SIPC.486 The 

requirement for dealers to become SIPC 

members is intended to place the 

financial support of the SIPC program 

on all firms that made their livelihood 

in the securities business, regardless of 

whether they had public customers or 

not.487 Accordingly, we believe that 

expanding SIPC membership will 

enhance the ability of SIPC to carry out 

its investor protection mission, 

consistent with SIPA, which will have 

positive effects on the securities markets 

overall. In addition, we note that 

entities that choose to comply with the 

final rules by registering as government 

securities dealers under section 78o– 

5(a) of the Exchange Act are not 

required to become SIPC members. 

c. Regulations on Reporting

The final rules would enhance

regulators’ oversight of significant 

liquidity providers and of individual 

securities trades. Entities that register as 

dealers under the final rules will have 

new reporting obligations to CAT (if 

they transact in CAT-reportable 

securities) and to TRACE (if they 

transact in TRACE-eligible securities). 

The additional reporting would give 

regulators greater insight into securities 

trading patterns, including the ability to 

more efficiently match trades to market 

participants.488 PTFs who register as 

dealers or as government securities 

dealers would also begin submitting 

annual reports, including financial 

statements, for the first time. This 

additional information, especially the 

financial reporting and the transaction 

reporting, would help address the 

Commission’s concerns described in 

sections III.B.3. and III.B.4. The 

information would enable regulators to 

better analyze markets—including 

reconstructing markets and detecting 

abusive trading behaviors—respond to 

market events and inform investors.489

Improved regulatory oversight would, in 

turn, promote the efficiency and 

stability of the markets as well as 

investor confidence, which would 

support capital formation by increasing 

demand for securities issued in U.S. 

markets and lowering yields. 

Comment letters argued that dealer 

registration would not provide an 

information benefit because transactions 

are already reported to TRACE or 

CAT,490 because investment advisers are 

already subject to Commission 

oversight, and because PTFs and 

investment advisers are potentially 

subject to reporting on Forms 13F or 

13H.491 Section III.B.2 describes the 

differences in the information available 

to regulators for registered dealers 

compared to PTFs and private funds. 

Specifically, registered dealers who 

become FINRA members will be 

required to report fixed income 

transactions to TRACE, which will 

expand the ability to identify the new 

registered dealers and potentially result 

in more trades being reported. We 

believe this information would be useful 

for surveillance and for market 

reconstruction.492 Forms 13F and 13H 

also contain valuable information, but 

they do not contain the detailed 

transaction data that registered dealers 

are responsible for submitting.493

d. Regulations on Deceptive Practices

The final rules would help the

Commission and the SROs to detect and 

deter abusive behaviors such as fraud or 

manipulation by subjecting significant 

liquidity providers to section 15(c) of 

the Exchange Act 494 and to SRO rules 

and oversight.495 As described in 

section III.B.2, registering affected 

parties as dealers would subject them to 

Commission examinations and would 

expand the Commission’s ability to 

issue specific rules and regulations 

designed to deter misbehavior under 

Exchange Act section 15(c). The persons 

whom the final rules would require to 

register would be those with the ability 

to significantly impact markets, whether 

in pursuit of legitimate trading strategies 

or possibly through market 

manipulation. Therefore, subjecting 

them—particularly the highly active but 

unregistered PTFs shown in Table 1—to 

the additional anti-fraud regulations 

that apply to registered dealers, as well 

as to additional regulatory oversight, 

would contribute to fair and orderly 

markets. 

e. Regulations Related to Examinations

Registered dealers and government

securities dealers are subject to 

examinations by the Commission and by 

the relevant SRO, and they are also 

required to comply with certain books 

and records requirements.496 PTFs that 

are not registered as dealers are not 

subject to examinations or to books and 

records rules, but registered private 

fund advisers are currently subject to 

recordkeeping requirements and 

Commission examinations. 

Examinations help regulators detect 

manipulative or fraudulent activities, as 

well as verify more generally that 

persons comply with all relevant 


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497The Commission currently can examine 

registered investment advisers and private funds, 

but it has no authority to examine PTFs who are 

not registered as dealers. 

498On Aug. 1, 2012, an error in Knight Capital’s 

trading software caused the firm to purchase $7 

billion in equities in the first hour of trading, and 

the firm later tried to reverse some of the 

unintentional purchases. The buying and selling 

caused price volatility in approximately 150 

different equities, and nearly bankrupting the firm. 

See Henrico Dolfing, ‘‘Case Study 4: The $440 

Million Software Error at Knight Capital,’’ available 

at https://www.henricodolfing.com/2019/06/ 

project-failure-case-study-knight-capital.html. For 

FINRA’s response, see Targeted Examination Letter 

on High Frequency Trading, FINRA, available at 

https://www.finra.org/rules-guidance/guidance/ 

targeted-exam-letter/high-frequency-trading. 

499See FINRA Regulatory Notice 15–09, available 

at https://www.finra.org/sites/default/files/notice_

doc_file_ref/Notice_Regulatory_15-09.pdf. 

500 Id. The notice states, in part, ‘‘FINRA staff has 

conducted a number of examinations and 

investigations over the past several years that were 

prompted by the detection of systems-related issues 

at firms engaged in algorithmic strategies . . . As 

a result of these reviews and working with member 

firms engaged in algorithmic strategies, FINRA has 

developed the following list of suggested effective 

practices for such firms.’’ 

501Registered dealers would be subject to 

requirements, such as Exchange Act Rules 15c3–1, 

17 CFR 240.17a–1 (‘‘Rule 17a–1’’), 17a–3, 17a–4, 

and 17 CFR 240.17a–5 (‘‘Rule 17a–5’’). 

502The TRACE analysis identifies up to 22 PTFs, 

4 hedge fund, 4 entities classified as ‘‘dealers’’ 

(though they are not FINRA members and do not 

appear to be registered with the Commission), and 

1 entity classified as ‘‘other.’’ The Form PF analysis 

identifies 12 hedge funds as the most likely to be 

affected. See supra note 418. 

503See, e.g., section III.B.2.c for a discussion of 

the affected entity estimates and uncertainty 

regarding the affected entity estimates. 

regulations. Books and records 

requirements facilitate examinations by 

ensuring that data entries are defined, 

recorded, and preserved in a consistent 

manner across all dealers. The final 

rules would allow regulators to examine 

firms that currently are not registered, 

including PTFs, who are not currently 

subject to examinations but whose 

activity contributes significantly to 

market liquidity or to price discovery. 

Since examinations help ensure 

compliance with other rules, and since 

the Commission already has authority to 

examine registered investment advisers, 

subjecting PTFs to examination would 

support the other benefits that would 

come from registering PTFs as dealers. 

Examinations also help regulators 

analyze market disruptions and inform 

subsequent regulatory changes. Since 

the final rules will give regulators the 

ability to conduct targeted examinations 

of entities that provide substantial 

market liquidity and price formation, 

regulators will be able to better 

determine the causes of market 

disruptions and implement regulatory 

reforms designed to mitigate and 

prevent future similar disruptions.497

For instance, following the market 

disruptions caused by Knight Capital in 

2012,498 FINRA conducted targeted 

examinations on member firms’ HFT 

operations and then updated its 

guidance on supervision and control 

practices for algorithmic trading 

strategies.499 While FINRA oversight did 

not prevent Knight Capital’s 

disruptions—Knight was a registered 

broker-dealer—FINRA oversight did 

give the regulator authority to examine 

other firms engaged in activities similar 

to Knight and to inform its guidance.500

2. Costs 

a. Compliance Costs 

The final rules will impose 

compliance costs on certain market 

participants, including costs of 

registering with the Commission and 

with an SRO, recordkeeping and 

reporting costs, direct costs that may 

stem from meeting net capital 

requirements (i.e., continuously 

monitoring capitalization), and selfevaluation as to whether one is a dealer 

or not.501 These potential compliance 

costs can be broadly organized into five 

categories: 

1. Costs related to registration as a 

dealer or government securities dealer. 

2. Costs related to FINRA membership 

or membership with another SRO. 

3. Costs related to TRACE reporting 

for firms that trade fixed income 

securities. 

4. Costs related to CAT reporting for 

firms that trade NMS securities or OTC 

equities. 

5. Costs related to SIPC membership 

for firms that register as dealers under 

section 15(b) of the Exchange Act. 

The costs of registration as a dealer or 

government securities dealer will apply 

to all firms. Likewise, the cost of FINRA 

membership or membership with 

another SRO will apply to all firms. 

However, the costs of TRACE reporting 

will only apply to firms that trade fixed 

income securities. The costs of CAT 

reporting will only apply to firms that 

trade NMS securities, OTC equity 

securities, or options. The costs of SIPC 

membership will apply only to firms 

that register as dealers under section 

15(b) of the Exchange Act and not firms 

that register as government securities 

dealers under section 15C of the 

Exchange Act. 

The Commission has itemized and 

updated its cost estimates for affected 

parties in response to commenters.502

The following subsections present 

itemized compliance cost estimates for 

affected parties that register as dealers 

under section 15(b) of the Exchange Act 

after the rules’ adoption or register as 

government securities dealers under 

section 15C of the Exchange Act. The 

compliance cost estimates reported in 

the following subsections are reported 

on a per firm basis. Some compliance 

costs in the following subsections are 

approximately proportional to trading 

activity or revenue. For these 

compliance costs, we report both how 

these costs scale with trading activity or 

firm revenue, and quantitative estimates 

of these costs for the large firm sample 

from the Amended Rule 15b9–1 

Adopting Release. 

The cost estimates in the following 

subsections are subject to several 

assumptions, uncertainties, and other 

factors. In particular, the cost estimates 

are for firms the Commission expects to 

register as dealers or government 

securities dealers because the firms 

meet either the expressing trading 

interest factor or the primary revenue 

factor in the final rule. Since estimates 

of the number of affected parties are 

subject to some uncertainty, the 

following cost estimates are subject to 

similar uncertainty and limitations.503

Other sources of uncertainty are 

discussed within individual 

subsections. Additionally, some firms 

may already own a registered dealer or 

government securities dealer. If an 

affected party already owns a registered 

dealer, then the party may choose to 

migrate operations satisfying the 

expressing trading interest factor or 

primary revenue factor into the 

registered dealer instead of registering 

additional entities as dealers. If an 

affected party chooses to migrate 

operations into an existing registered 

dealer after the rules’ adoption, then its 

compliance costs will likely be less than 

the cost estimates reported in the 

following subsections. PTFs, since they 

do not have clients or customers, would 

bear the costs of registration and 

compliance themselves. Private funds, 

however, may either bear the costs 

themselves (i.e., the funds’ investors 

would bear the cost) or the costs may be 

borne by their investment adviser. 

i. Dealer Registration 

This section discusses the 

Commission’s estimates of the costs 

associated with dealer registration 

under section 15(b) of the Exchange Act 

and government securities dealer 

registration under section 15C of the 

Exchange Act with the Commission for 

the final rules’ affected parties. The 

Commission expects the costs of 

registration to be similar for dealer 

registration under section 15(b) and 

government securities dealer 

registration under section 15C because 


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504Exchange Act Release No. 76324 (Oct. 30, 

2015), 80 FR 71388, 71509 n.1487 (Nov. 16, 2015) 

(‘‘Regulation Crowdfunding Adopting Release’’), 

estimates the upper bound on the costs of 

registering as a broker-dealer and complying with 

associated regulations would be $500,000. Most of 

these costs involve personnel hours and legal 

services. Since the cost of legal services and 

nominal wages paid to administrative and financial 

operations employees have approximately risen 

with the consumer price index since 2015, we 

adjust these estimates for inflation of 27.31% 

between Oct. 2015 and May 2023, based on the 

CPI–U as recorded by the Bureau of Labor Statistics 

(see U.S. Bureau of Labor Statistics, Consumer Price 

Index, available at https://www.bls.gov/cpi/ 

data.htm). $500,000 × 1.2731 = $636,550. We add 

an additional $60,000 self-evaluation cost suggested 

by commenters discussed in infra note 517. 

$636,550 + $60,000 = $696,550. We round this 

figure to $700,000 to reflect uncertainty in our 

estimate. As in previous releases, this is an 

estimated upper bound on the range of registration 

costs incurred by broker-dealers; it is possible that 

certain affected parties—for example, smaller firms 

with relatively simple trading operations—could 

incur lower registration costs. 

505See infra note 517 for the calculation of the 

$60,000 self-evaluation cost. 

506See section III.B.1 for a detailed description of 

the filings and regulations associated with dealer 

registration and maintaining dealer registration. 

507See Regulation Crowdfunding Adopting 

Release. 

508The Regulation Crowdfunding Adopting 

Release estimated the ongoing cost of broker-dealer 

registration with the Commission is approximately 

$230,000. Most of these costs involve personnel 

hours and legal services, so we adjust this cost 

estimate for inflation by a factor of 1.2731. The 

inflation adjusted cost estimate is $230,000 × 1.2731 

= $292,831. We add a $300,000 estimate for the cost 

of an annual audit by an independent PCAOBregistered account firm to this figure to construct 

the final cost estimate. See Private Fund Advisers; 

Documentation of Registered Investment Adviser 

Compliance Reviews, Investment Advisers Act 

Release No. 6383 (Aug. 2023), 88 FR 63206 (Sept. 

14, 2023) (‘‘Registered Investment Adviser 

Compliance Reviews Adopted Rule’’). $292,831 + 

$300,000 = $592,831. We round $592,831 to the 

nearest hundred thousand to reflect uncertainty in 

the cost estimate. We have added an additional 

auditing expense to the Commission’s revised cost 

estimates in response to comment letters that stated 

that the original expense estimates for broker-dealer 

registration were underestimated because they 

omitted compliance, clerical, and accounting 

related costs associated with preparing and 

verifying financial statements required to comply 

with broker-dealer related regulations. See, e.g., 

AlphaWorks Comment Letter; AIMA Comment 

Letter II; Citadel Comment Letter; Fried Frank 

Comment Letter. 

509See the Proposed Rule for estimates of labor 

hour requirements for completing tasks associated 

with ongoing broker-dealer registration-related 

expenses and filing related fees. The hourly wage 

rates are based on: (1) SIFMA’s Management & 

Professional Earnings in Securities Industry 2013, 

modified by SEC staff to account for an 1,800-hour 

work-year and inflation, and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits, 

and overhead; and (2) SIFMA’s Office Salaries in 

the Securities Industry 2013, modified by SEC staff 

to account for an 1,800-hour work-year and 

inflation, and multiplied by 2.93 to account for 

bonuses, firm size, employee benefits, and 

overhead. The final estimates are based on the 

preceding SIFMA data sets, which SEC staff have 

updated since the Proposing Release to account for 

current inflation rates. 

510See Rule 15c3–3(k). 

511See section IV.A.8. 

512See, e.g., AIMA Comment Letter II; AIMA 

Comment Letter III; BlackRock Comment Letter; 

Citadel Comment Letter at 5; Committee on Capital 

Markets Comment Letter; Lewis Study; Element 

Comment Letter; Fried Frank Comment Letter; 

Hagerty-Hill Comment Letter; MFA Comment Letter 

I; NAPFM Comment Letter; Two Sigma Comment 

Letter. 

513See Rule 15c3–3(e) (requiring carrying brokerdealers to maintain a special reserve bank account 

for brokers and dealers, which must be separate 

from any other bank account of the carrying brokerdealer). 

514Regulation ATS Proposal at 15629. 

515 Id. 

of the registrations’ similarity, e.g., both 

registrations require completing and 

amending Form BD, maintaining dealerrelated policies and procedures, recordkeeping, and filing annual reports. 

The Commission estimates the initial 

cost of the final rules for affected parties 

that register as dealers is approximately 

$700,000.504 The Commission estimates 

the cost of the final rules for parties that 

self-evaluate but do not register as 

dealers is approximately $60,000.505

The initial costs to register as a dealer 

with the Commission would include 

costs associated with filing Form BD, 

filing Form ID, any related legal or 

consulting costs that may be needed to 

ensure compliance with rules, including 

drafting policies and procedures as may 

be required, and an initial selfevaluation of the final rules’ 

applicability to the affected party.506 If 

a firm has a large number of employees, 

has several lines of business, or 

relatively complicated trading 

operations, then the firm may incur 

greater expenses relative to other firms 

when registering as a dealer.507

The Commission estimates the 

ongoing cost of registering with the 

Commission as a dealer is 

approximately $600,000.508 The 

Commission’s estimate of the annual 

cost for an affected party to maintain its 

status as a registered dealer includes 

several items: filing form BD 

amendments, risk management system 

maintenance, information collection, 

information storage, financial reporting, 

audits by an independent PCAOBregistered accounting firm, and claiming 

an exemption from treatment as a dealer 

pursuant to 17 CFR 240.15c3–3 (‘‘Rule 

15c3–3’’).509

A dealer registered under section 

15(b) of the Exchange Act is subject to 

the compliance requirements of the 

customer protection rule, Rule 15c3–3, 

unless the dealer’s operations satisfy 

certain criteria that exempt the dealer 

from the rule.510 The Commission 

believes that the affected parties would 

generally claim they are exempt from 

Rule 15c3–3 because they do not carry 

brokerage accounts for customers.511 If 

an affected party does not claim an 

exemption, then the affected party may 

incur additional costs to comply with 

Rule 15c3–3. Several commenters 

suggested that dealers registered under 

the final rules would lose protections 

under Rule 15c3–3.512 However, we do 

not believe the final rules will 

significantly impact registered dealers 

with respect to the customer protection 

rule. In particular, Rule 15c3–3 requires 

a carrying broker-dealer to take steps to 

protect both customer accounts and also 

proprietary accounts of other brokers or 

dealers (‘‘PAB Accounts’’). Therefore, a 

registered dealer that holds accounts at 

another broker-dealer would benefit 

from the protections for PAB Accounts 

under Rule 15c3–3.513

The initial and ongoing compliance 

costs include financial reporting, 

recording keeping, and net capital 

requirement compliance operations. The 

costs associated with the reporting, 

record keeping, and net capital 

requirements of dealer registration will 

depend on the scope of the firm’s dealer 

activities, capital structure, existing 

compliance-related activity, and 

jurisdiction. If a firm trades securities 

belonging to several different asset 

classes, then the firm may incur greater 

dealer related compliance costs because 

different types of securities are subject 

to different reporting, record keeping, 

and net capital requirements.514 If a firm 

is already a registered investment 

adviser or affiliated with an investment 

adviser, then the firm may incur fewer 

dealer related compliance costs because 

the firm has prior experience 

implementing and maintaining 

compliance-related operations.515 Firms 

already conducting reporting and 

recordkeeping related activities for 

compliance purposes may incur 

somewhat lower costs because these 

firms have already established 

recordkeeping practices, internal 

controls, and related business processes. 

For example, if some of a private fund 

adviser’s existing compliance-related 

records, internal controls, and other 

processes overlap with dealer 

compliance requirements, then the 

private fund might use its adviser’s 

existing compliance infrastructure to 

satisfy dealer related compliance 

requirements. However, these potential 

cost reductions are limited only to 

situations where a private fund’s 

existing compliance operations can be 

re-used to comply with dealer 

requirements. 


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516See Blockchain Association Comment Letter 

II; AIMA Comment Letter II; HFA Comment Letter; 

Morgan Lewis Comment Letter; NAPFM Comment 

Letter; SIFMA Comment Letter I; SIFMA Comment 

Letter II; Schulte Roth Comment Letter. 

517The Regulation Crowdfunding Adopting 

Release estimated a lower bound on the cost of 

registration as a broker-dealer with the SEC is 

$50,000. See Regulation Crowdfunding Adopting 

Release at 71509 n.1487. We use this lower bound 

to approximate the cost of the self-evaluation 

process, including, if necessary, the use of outside 

consultants and legal counsel to evaluate a firm’s 

trading operations and the possible preparation of 

an opinion letter stating a firm does not need to 

register as a dealer to comply with the final rule. 

Because the cost of consulting and legal services 

has approximately risen with the consumer price 

index since 2015, we adjust this estimate for 

inflation of 27.31% between Oct. 2015 and May 

2023, based on the CPI–U as recorded by the Bureau 

of Labor Statistics. See Consumer Price Index, U.S. 

Bureau of Labor Statistics, available at https://

www.bls.gov/cpi/data.htm. The inflation adjusted 

cost of the opinion letter is $63,655.46 = $50,000 

× 1.2731. We round this figure to $60,000 to the 

nearest ten thousand to reflect uncertainty in our 

estimate of the cost of the opinion letter. 

518See supra note 517 for the calculation of the 

$60,000 cost. 

519See section III.B.2.c. 

520 Id. 

521See supra notes 380 and 422 and surrounding 

discussion. 

522The Commission has revised its estimate of 

affected firms’ FINRA-related costs in response to 

comment letters. See, e.g., Citadel Comment Letter; 

Fried Frank Comment Letter; Overdahl Comment 

Letter; MFA Comment Letter II; Morgan Lewis 

Comment Letter; NAPFM Comment Letter; Virtu 

Comment Letter. 

523See supra note 23. 

524 Initial and ongoing cost estimates associated 

with FINRA membership are from section V.C.2 of 

Amended Rule 15b9–1 Adopting Release. 

525The application fee ranges from $7,500 for a 

small new member applicant (i.e., 1–10 employees, 

Tier 1) to $55,000 for a large new member applicant 

(i.e., 5,000+ employees, Tier 3). See FINRA, 

Schedule of Registration and Exam Fees, available 

at https://www.finra.org/registration-exams-ce/ 

classic-crd/fee-schedule. 

526See FINRA, Schedule of Registration and 

Exam Fees, available at https://www.finra.org/ 

registration-exams-ce/classic-crd/fee-schedule, for 

application fees when an applicant has more than 

150 registered persons. 

An additional compliance cost of the 

rules is the cost of self-evaluation.516

The self-evaluation cost applies to firms 

whose trading operations may satisfy 

the final rules’ expressing trading 

interest factor or primary revenue factor. 

The Commission estimates the initial 

costs of self-evaluation for one firm will 

add up to approximately $60,000.517

This expense includes costs incurred by 

a firm to determine whether the firm 

should register as a dealer following the 

final rules’ adoption from an initial 

review of the firm’s trading operations 

through the potential preparation of an 

opinion letter by outside counsel stating 

the firm does not need to register as a 

dealer. The self-evaluation process may 

begin with a review of a firm’s trading 

operations by internal personnel or 

consultants to assess a firm’s likelihood 

of satisfying the expressing trading 

interest factor or primary revenue factor. 

If a firm finds its trading operations are 

very unlikely to meet either criteria, 

then the firm may conclude its selfevaluation after this initial review at a 

cost much less than the $60,000 

estimate.518

If a firm finds its trading operations 

might satisfy the criteria for the trading 

interest factor or primary revenue factor, 

then the firm will likely hire legal 

counsel to conduct an independent 

review of a firm’s trading operations. 

The review will produce one of two 

outcomes. The first possible outcome is 

the preparation of an opinion letter 

stating that the legal counsel believes a 

firm’s trading operations do not satisfy 

the trading interest or primary revenue 

factors and therefore the firm does not 

need to register as a dealer. The second 

possible outcome is that the external 

legal counsel finds that the firm should 

register as a dealer following the final 

rules’ adoption, in which case the firm 

will not incur the costs associated with 

the preparation of an opinion letter. 

The Commission is unable to provide 

quantitative estimates of the number of 

firms that would incur the cost of selfevaluation but determine they are not 

required to register. The Commission is 

unable to provide a quantitative 

estimate because of the same data 

limitations that constrain the 

Commission’s ability to estimate the 

number of firms that will ultimately 

register as dealers.519 Our analyses 

observe several entities whose activities 

may constitute dealing according to the 

final rules.520 However, the lack of 

transparency in TRACE conceals the 

identities of other non-FINRA entities 

that may also be dealing or near enough 

to dealing to require careful selfevaluation.521 In addition, some firms 

engaged in HFT activity as reported on 

Form PF may determine that they do not 

meet the final rules’ qualitative factors. 

It is also possible, though unlikely, that 

some hedge fund activity that is not 

reported as HFT may nevertheless be 

dealing or near enough to dealing to 

require self-evaluation. Because of the 

limitations of TRACE data, we are 

unable to estimate the number of 

entities that would need to self-evaluate. 

As discussed above, section I.B explains 

modifications made to the rules that 

tailor the scope of the final rules. These 

changes largely respond to commenters’ 

concerns regarding the number of 

affected parties by narrowing the scope 

of the final rules in a way that reduces 

that number. These changes would 

likewise reduce the number of firms that 

would incur the cost of self-evaluation. 

ii. FINRA or Other SRO Membership 

Affected parties that register as 

dealers after the final rules’ adoption 

must become members of FINRA or 

another appropriate SRO.522 The 

Commission expects affected parties 

who choose to register as government 

securities dealers to become members of 

FINRA.523

The initial costs for an affected party 

to become a member of FINRA are 

composed of FINRA membership 

application fees and any legal or 

consulting costs necessary for an 

affected party to complete the FINRA 

membership application and comply 

with FINRA rules.524 Table 5 

summarizes the initial costs associated 

with FINRA membership for an affected 

firm. The small firm column in Table 5 

reports initial costs for FINRA 

membership for a firm with one to ten 

registered employees. The large firm 

column in Table 5 reports initial costs 

for FINRA membership for a firm with 

101–150 employees. 

TABLE 5—INITIAL COST OF FINRA 

MEMBERSHIP IN DOLLARS PER FIRM * 

Cost Small firm Large 

firm 

Application ........................... $7,500 $20,000 

Consulting ........................... 40,000 125,000 

Total ** .......................... 50,000 150,000 

* Cost estimates are from the Amended Rule 

15b9–1 Adopting Release. A small firm has 1–10 

registered employees. A large firm has 101–150 registered employees. 

** Totals are rounded to the nearest ten thousand 

to reflect uncertainty in the cost estimates. 

The fees associated with a FINRA 

membership application can vary.525

The application fee itself depends on 

the number of registered persons 

associated with the affected party. If an 

affected party employs ten or fewer 

registered persons, then the application 

fee is $7,500. For an affected party with 

11 to 100 registered persons the 

application fee is $12,5000. The 

application fee is $20,000 for an affected 

party affiliated with 101 to 150 

registered persons.526

The other initial cost associated with 

FINRA membership is a consulting 

expense, which accounts for the legal 

and other advisory work necessary for 

an affected party to successfully 

complete a FINRA membership 

application. Some affected parties may 

decide to perform this work internally, 

while others may use outside counsel. 

When making this choice, an affected 

party will likely consider factors, such 

as the size and resources of the affected 

party, the complexity of the affected 


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I I 
14984 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

527See Amended Rule 15b9–1 Adopting Release 

section V.C.2 for the consulting cost estimates and 

methodology. 528The small firm TAF estimate corresponds to 

the $6,746.92 median annual TAF for the 64 nonFINRA member firms in the Amended Rule 15b9– 

1 Adopting Release. The large firm TAF estimate 

corresponds to the $119,255.85 median annual TAF 

for the 12 largest non-FINRA member firms. We 

round both figures to the nearest thousand to reflect 

uncertainty in the estimates. We use data from the 

Amended Rule 15b9–1 Adopting Release to 

estimate FINRA costs for affected firms because the 

Commission does not observe the financial or 

trading data necessary to directly calculate the TAF 

or GIA costs associated with FINRA membership for 

firms affected by these rules. 

529We have revised our TAF cost estimates in 

response to comment letters. See Blockchain 

Association Comment Letter; Overdahl Comment 

Letter. See also FINRA, Trading Activity Fee, 

available at https://www.finra.org/rules-guidance/ 

guidance/trading-activity-fee. 

530See FINRA, Schedule A to the By-Laws of the 

Corporation, Section 1—Member Regulatory Fees 

(footnote on Trading Activity Fee rates), available 

at https://www.finra.org/rules-guidance/rulebooks/ 

corporate-organization/section-1-memberregulatory-fees. 

531See id., section 1(b)(2) (transactions exempt 

from the Trading Activity Fee). 

532See Self-Regulatory Organizations; Financial 

Industry Regulatory Authority, Inc.; Notice of Filing 

and Immediate Effectiveness of a Proposed Rule 

Change To Amend FINRA’s Trading Activity Fee, 

Exchange Act Release No. 97798 (June 26, 2023), 88 

FR 42404 (June 30, 2023), available at https://

www.govinfo.gov/content/pkg/FR-2023-06-30/pdf/ 

2023-13894.pdf. 

533We are adding GIA to our estimate of the rules’ 

cost for an effected firm in response comment 

letters. See Blockchain Association Comment 

Letter; Overdahl Comment Letter. For the definition 

of gross revenue, see FINRA, Schedule A to the ByLaws of the Corporation, Section 2—Gross Revenue 

for Assessment Purposes, available at https://

www.finra.org/rules-guidance/rulebooks/corporateorganization/section-2-gross-revenue-assessmentpurposes. 

party’s trading operations, and the 

affected party’s previous use of outside 

counsel. The Commission’s estimate of 

these consulting costs ranges from 

$40,000 to $125,000 with a midpoint of 

$82,500.527 Additionally, if an affected 

party is affiliated with a firm that is 

already a registered member of FINRA 

and the affiliated firm retains legal 

personnel with FINRA-related 

experience, then the affected party may 

incur fewer expenses during the FINRA 

membership application process 

because the affiliated firm’s legal staff 

may provide services at a lower cost 

than a third party. 

Affected parties will incur ongoing 

annual costs to maintain FINRA 

membership after completing their 

initial application. The ongoing annual 

costs include the Gross Income 

Assessment (‘‘GIA’’), the Trading 

Activity Fee (‘‘TAF’’), the FINRA 

section 3 fee, FINRA-related compliance 

activities, and the personnel assessment. 

Table 6 summarizes these ongoing 

annual expenses for the final rules’ 

affected parties. The Commission 

estimates that the ongoing annual cost 

of FINRA membership for an affected 

entity will range from approximately 

$61,000 for a relatively small firm to 

$1,130,000 for a relatively large firm. 

We will discuss each of these costs and 

our estimates below. 

TABLE 6—ONGOING COST OF FINRA 

MEMBERSHIP IN DOLLARS PER FIRM * 

Cost Small firm Large 

firm 

Trading Activity Fee ** ......... $7,000 $120,000 

Gross Income Assessment 30,000 330,000 

Section 3 Fee ...................... 3,000 560,000 

Compliance Activities .......... 20,000 100,000 

Personnel Assessment ....... 1,000 20,000 

Total *** ............................ 61,000 1,130,000 

* Cost estimates are from the Amended Rule

15b9–1 Adopting Release. A small firm has 1–10 

registered employees. A large firm has 101–150 registered employees. 

** FINRA recently implemented an amendment to 

TAF that exempts PTFs belonging to FINRA from 

TAF for trades on exchanges of which the firm is a 

member. This may cause affected parties to incur 

lower TAF fees than those reported in the table. 

*** Totals are rounded to the nearest thousand to 

reflect uncertainty in the cost estimates. 

The Commission estimates the TAF 

cost for an affected party registering as 

a dealer following the final rules’ 

adoption will range from approximately 

$7,000 for a small firm conducting few 

trades in securities subject to TAF to 

$120,000 for a large firm conducting 

many trades subject to TAF.528

The TAF is a transaction-based fee 

that is usually assessed on member firm 

transactions in covered equity 

securities, options, security futures, 

TRACE-eligible bonds, and asset-backed 

securities.529 Table 7 summarizes the 

fees associated with specific classes of 

securities under TAF.530 Most security 

fees assessed via TAF are subject to one 

or more conditions and one or more 

possible exemptions. The covered 

equity security fee, TRACE-eligible 

bond fee, and asset-backed security fee 

are subject to maximum fees per trade. 

The security future fee is subject to a 

minimum fee per trade. Some 

transactions are exempt from TAF, 

which may reduce firms’ TAF related 

expenses.531 Potentially relevant 

exemptions from TAF for firms 

registering under the rules include 

transactions in U.S. Treasury securities, 

transactions in options and futures 

involving narrow and broad indices, 

transactions made by a firm in their 

capacity as a market specialist or market 

maker, and transactions executed 

outside the United States not requiring 

reporting to a transaction reporting 

association. Additionally, a recently 

implemented TAF Amendment exempts 

PTFs from TAF for trades occurring on 

exchanges of which the firm is a 

member.532 If the firms joining FINRA 

because of the final rules execute trades 

that qualify for exemption from TAF 

under the recent TAF amendment, then 

the firms’ TAF-related expenses may be 

less than our TAF cost estimates. 

TABLE 7—TRADING ACTIVITY FEE RATES FOR SPECIFIC SECURITIES IN DOLLARS * 

Security Fee Rate

Covered Equity Security .................................... 0.000166 ........................................................... per share sale.** 

Option ................................................................ 0.00279 ............................................................. per option sale. 

Security Future .................................................. 0.00011 ............................................................. per round turn transaction.*** 

TRACE-eligible bond ......................................... 0.00105 ............................................................. per bond sale.  

Asset-Backed Security ...................................... sale price × 0.00000105 ................................... per security sale.** ** 

* FINRA recently implemented an amendment to TAF that exempts PTFs belonging to FINRA from TAF for trades on exchanges of which the

firm is a member. Additionally, FINRA is currently implementing annual increases in its TAF rates until 2024. This table reports the fees that will 

be in effect for 2024 and future years. 

** Up to $7.27 per trade. 

*** Minimum charge is $0.012 per round turn transaction. 

**** Up to $0.92 per trade. 

The GIA is an annual expense 

determined by a firm’s annual gross 

revenue, which is defined as a firm’s 

total income as reported on FOCUS 

form Part II or Part IIA excluding 

commodities income.533 We estimate 


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534The small firm GIA estimate corresponds to 

the $33,655.65 median GIA estimate for the 64 nonmember firms from the Amended Rule 15b9–1 

Adopting Release. The large firm GIA estimate 

corresponds to the $327,870 median GIA estimate 

for the 12 largest non-member firms from the 

Amended Rule 15b9–1 Adopting Release. We round 

both figures to the nearest ten thousand to reflect 

uncertainty in the estimates. 

535See supra note 533. 536For the personnel assessment, see FINRA Fee 

Increase Schedule, available at https://

www.finra.org/rules-guidance/rule-filings/sr-finra2020-032/fee-increase-schedule. 

537See FINRA, Individual Registration, available 

at https://www.finra.org/registration-exams-ce/ 

individuals. 

538See section III.B.2 for a discussion of the data 

limitations associated with the Commission’s 

estimates of the final rules’ affected parties. 

539For a small firm with 1–10 registered 

employees the midpoint is 5 employees. 5 × $210 

= $1,050. We round $1,050 to the nearest thousand 

to reflect uncertainty in our cost estimate. For a 

large firm with 101–150 employees the midpoint is 

125 employees. 5 × $210 + 25 × $200 + 95 × $190 

= $24,100. We round $24,100 to the nearest ten 

thousand ($20,000) to reflect uncertainty in our 

estimate. 

540See FINRA, Schedule A to the By-Laws of the 

Corporation, Section 4—Fees, available at https:// 

www.finra.org/rules-guidance/rulebooks/corporateorganization/section-4-fees. 

541See FINRA, SRO/Jurisdiction Fee and Setting 

Schedule, available at https://www.finra.org/sites/ 

default/files/srojurisdiction-fee-and-settingschedule.pdf. 

542See FINRA, Trading Activity Fee Frequently 

Asked Questions, available at https://

www.finra.org/rules-guidance/guidance/faqs/ 

trading-activity-fee. 

543TRACE fees include system fees of between 

$20 and $260 per month plus transaction reporting 

fees, which are one of: (i) $0.475 per trade for trades 

with par value up to $200,000, (ii) $2.375 per 

million dollars par value for trades with par value 

more than $200,000 but less than $1 million, or (iii) 

$2.375 per trade for trades with par value of at least 

$1 million or $1.50 per trade for agency passthrough MBS that are traded TBA or SBA-backed 

ABS that are traded TBA. See FINRA Rule 7730 

(Trade Reporting and Compliance Engine), 

available at https://www.finra.org/rules-guidance/ 

rulebooks/finra-rules/7730. 

544See Amended Rule 15b9–1 Adopting Release, 

Tables 5 and 6. We have rounded the 

implementation cost estimate and ongoing annual 

cost estimate to reflect uncertainty in the estimates. 

the annual GIA for an affected party 

joining FINRA after the final rules’ 

adoption will range from approximately 

$30,000 for a small firm with relatively 

little annual gross revenue to $330,000 

for a large firm with a relatively large 

annual gross revenue.534 Since FOCUS 

forms are not available for the final 

rules’ affected parties, we use GIA 

estimates from Amended Rule 15b9–1 to 

estimate the affected parties’ GIA.535

A firm’s GIA is the greater of the 

expense calculated per the schedule in 

Table 8 below or the firm’s average GIA 

over the previous three years. Table 8 

reports the schedule used to calculate a 

firm’s GIA given its gross revenue. The 

table reports the assessment for the 

portion of a firm’s gross revenue within 

a given range. For instance, suppose a 

firm’s gross revenue is $100M. The 

firm’s Gross Income Assessment is 

$172,293. This assessment is the sum of 

the following items: The firm owes 

$1,200 on its first million dollars of 

gross revenue. The firm owes an 

additional $41,568 = ($24M × 0.1732%) 

on its gross revenue between $1M and 

$25M. The firm also owes $92,625 = 

($25M × 0.3705%) on its gross revenue 

between $25M and $50M. And the firm 

owes $36,900 = ($50M × 0.0738%) on its 

gross revenue between $50M and 

$100M. 

TABLE 8—GROSS INCOME

ASSESSMENT * 

Gross income range Cost 

$0 to $1M ................................... $1,200 

$1M to $25M .............................. 0.1732% 

$25M to $50M ............................ 0.3705% 

$50M to $100M .......................... 0.0738% 

$100M to $5B ............................. 0.0520% 

$5B to $25B ................................ 0.0566% 

$25B or more .............................. 0.1219% 

* FINRA is currently implementing annual increases in the rates for its Gross Income Assessment until 2024. This table reports the 

rates that will be in effect for 2024 and future 

years. 

FINRA charges an annual personnel 

assessment of $210 for each of the first 

five registered representatives at a firm, 

$200 for each of the sixth through 25th 

registered representatives at a firm, and 

$190 for each of the 26th and 

subsequent representatives at a firm.536

Registered individuals include 

salespersons, branch managers, 

department supervisors, partners, 

officers, and directors involved in a 

firm’s securities business.537 The 

Commission does not have the 

information necessary to estimate the 

personnel fees the affected parties will 

likely incur to maintain FINRA 

membership.538 Table 6 reports 

personnel fees for the midpoints of a 

small firm with 1–10 registered 

employees and a large firm with 101– 

150 registered employees.539 The 

personnel fee estimate for a small firm 

is $1,000. The personnel fee estimate for 

a large firm is $20,000. 

FINRA also charges an annual branch 

office fee of $75 for each office, 

excluding one office, operated by a firm 

and registered by FINRA.540

Finally, registered dealers are subject 

to an annual renewal fee that applies for 

each SRO or jurisdiction where the 

dealer is registered. Renewal fees vary 

by SRO and jurisdiction, as well as by 

the number of registered representatives 

and branch offices at a dealer. Given our 

estimate that entities that register as a 

result of the final rules will not have 

registered representatives or branch 

offices, we focus on the fee that applies 

at the level of the dealer. At the 

jurisdiction level, renewal fees range 

between $40 and $600, depending on 

the state, with most between $250 and 

$300. If the newly registered dealer 

chooses to also register with another 

SRO, renewal fees range between $0 and 

$10,000, depending on the SRO.541 We 

assume that the final rules would 

require membership at only one SRO. 

The discussion above may overstate 

the final rules’ costs to affected firms to 

the extent that already registered brokerdealers pass regulatory costs through to 

the affected firms. For example, the 

Commission understands that FINRA 

member brokers and dealers can pass at 

least some of the burden of regulatory 

costs including the TAF to their 

customers, so that the parties who will 

be affected by the final rules may 

already bear these costs indirectly to the 

extent that they trade with FINRA 

members. If the affected party were to 

register as a dealer and become a FINRA 

member, some of the regulatory costs 

incurred by its trading partners may fall. 

For instance, when a PTF who is not a 

broker-dealer places a sell order on an 

ATS and matches with a FINRA 

member broker-dealer, the TAF is 

assessed on the FINRA member 

executing the cross.542 However, if the 

PTF were a FINRA member, then it 

would bear the TAF costs directly and 

the other member executing the cross 

would not, because the TAF is assessed 

on the selling FINRA member brokerdealer. 

iii. TRACE Reporting 

Firms joining FINRA will also incur 

the costs of reporting their fixed-income 

transactions (other than municipal 

securities) to TRACE.543 We estimate 

that the initial implementation cost 

associated with TRACE reporting is 

$2,000 and that the ongoing annual cost 

associated with TRACE reporting 

$100,000.544 Firms that do not trade 

fixed-income securities will not incur 

TRACE reporting costs. In addition, 

FINRA Rule 7730(b) excludes 

transactions in U.S. Treasury securities 

from the TRACE transaction reporting 

fees. 

iv. Consolidated Audit Trail Reporting 

In this section, we estimate costs from 

CAT-related reporting, should an 

affected party trade CAT-eligible 

securities. However, the Commission 

believes few, if any, of the 43 potentially 

affected parties identified in section 

III.B.2.c will incur CAT-related 

reporting costs. If an affected party does 


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545See Exchange Act Release No. 79318 (Nov. 15, 

2016), 81 FR 84696 (Nov. 23, 2016) (‘‘CAT NMS 

Plan Approval Order’’), for additional information 

about CAT. We note that the Commission recently 

approved the CAT Funding Plan. See Securities 

Exchange Act Release No. 98290 (Sept. 6, 2023), 88 

FR 62628 (Sept. 12, 2023) (‘‘CAT Funding Plan’’) for 

additional information about the CAT Funding 

Plan. 

546See section V.F of the CAT NMS Plan 

Approval Order for information about the 

construction of the estimates of CAT reporting for 

different types of firms. See supra note 504 for 

information about the sources for the inflation 

adjustments. The inflation factor for CAT-related 

costs is 1.25 = 303 (May 2023 CPI–U)/238 (Nov. 

2016 CPI–U) after rounding to the nearest 

hundredths place. The lower value estimate is the 

inflation adjusted initial implementation cost for an 

options floor broker from Table 4 of the CAT NMS 

Plan Approval Order. $848,700 (Implementation 

cost for one options floor broker) × 1.25 = 

$1,062,487.53. We round this value to the nearest 

$100,000 to reflect uncertainty in our cost estimate. 

The upper value estimate is the inflation adjusted 

initial implementation cost for an electronic 

liquidity provider in Table 4 of the CAT NMS Plan 

Approval Order. $3,875,517 (Implementation cost 

for one electronic liquidity provider) × 1.25 = 

$4,851,760. We round this figure to the nearest 

$100,000 to reflect uncertainty in our cost estimate. 

We use an options floor broker and an electronic 

liquidity provider to estimate the range of CAT 

costs for the affected parties because both types of 

firms’ primary business is liquidity provision and 

both types of firms do not carry customer accounts. 

547See supra note 546 for a discussion of the 

inflation adjustments used for the initial and 

ongoing CAT reporting costs. The lower value 

estimate is the inflation adjusted ongoing cost for 

an options floor broker from Table 4 of the CAT 

NMS Plan Approval Order. $442,625 (Ongoing cost 

for one options floor broker) × 1.25 = $554,122. We 

round this value to the nearest $100,000 to reflect 

uncertainty in our ongoing cost estimate. The upper 

value estimate is the inflation adjusted ongoing cost 

for an electronic liquidity provider in Table 4 of the 

CAT NMS Plan Approval Order. $3,22,5714 

(Ongoing cost for one electronic liquidity provider) 

× 1.25 = $4,038,271. We round this figure to the 

nearest $100,000 to reflect uncertainty in our 

ongoing cost estimate. 

548See CAT NMS Plan Approval Order section 

V.F for a discussion of how CAT reporting costs 

may vary across firms. 

549The CAT NMS Plan requires both the 

Participants and broker-dealers to fund CAT. The 

CAT NMS Plan includes a funding model that sets 

for the methodology for allocating fees to recover 

those costs, including certain costs previously paid 

by the Participants, among the Participants and 

broker-dealers. See CAT Funding Plan. Specifically, 

the CAT NMS Plan sets forth a one-third allocation 

of CAT fees to the applicable Participant in a 

transaction, to the CAT Executing Broker for the 

buyer in a transaction, and to the CAT Executing 

Broker for the seller in a transaction. See CAT NMS 

Plan Approval Order Section 11.3. 

550See CAT Funding Plan Section III.3 for the 

CAT fees associated with NMS stocks, OTC 

equities, and listed options. 

551Such filings have been filed and noticed but 

are not effective because the Commission 

temporarily suspended them and instituted 

proceedings to determine whether to approve or 

disapprove the proposed rule changes. For example, 

on Jan. 3, 2024, New York Stock Exchange LLC filed 

a proposed rule change to establish fees on behalf 

of CAT LLC for broker-dealers relating to certain 

historical costs. On Jan. 17, 2024, pursuant to 

section 19(b)(3)(C) of the Exchange Act, the 

Commission temporarily suspended the rule change 

and instituted proceedings to determine whether to 

approve or disapprove the proposed rule change. 

See Self-Regulatory Organizations; New York Stock 

Exchange LLC; Notice of Filing of a Proposed Rule 

Change to Amend the NYSE Price List to Establish 

Fees for Industry Members Related to Certain 

Historical Costs of the National Market System Plan 

Governing the Consolidated Audit Trail; 

Suspension of and Order Instituting Proceedings to 

Determine Whether to Approve or Disapprove the 

Proposed Rule Change, Exchange Act Release No. 

99380 (Jan. 17, 2024), available at https://

www.sec.gov/files/rules/sro/nyse/2024/34- 

99380.pdf. 

552See Overdahl Comment Letter; Citadel 

Comment Letter; AIMA Comment Letter II. 

553See 15 U.S.C. 78ccc(2)(A)(i) through (iii). 

not trade NMS stocks, OTC equities, or 

listed options, then the affected party 

will not incur CAT-related reporting 

costs because the affected party does not 

trade securities that must be reported to 

CAT. For instance, if an affected party 

that only trades government securities 

only registers as a government securities 

dealer under section 15C, then that 

affected party will not incur CATreporting related expenses because it 

will not trade securities associated with 

CAT-reporting obligations. Affected 

parties that newly register as dealers 

under section 15(b) and trade NMS 

stocks, OTC equities, or listed options 

will incur the cost of reporting their 

transactions in these securities to 

CAT.545

The Commission estimates the initial 

cost of CAT reporting for an affected 

party that trades CAT-reportable 

securities will range from a lower value 

of approximately $1,100,000 for a small 

firm with relatively few reportable 

trades to an upper value of 

approximately $4,900,000 for a large 

firm with many reportable trades. Our 

estimates for the initial costs of CAT 

compliance for an affected party 

registered as a dealer and trading CATreportable securities are based on 

inflation-adjusted cost estimates from 

the CAT NMS Plan Approval Order.546

The Commission estimates the 

ongoing cost of CAT reporting for an 

affected party that trades CATreportable securities will range from a 

lower value of approximately $600,000 

annually for a small firm with relatively 

few CAT-related trades to an upper 

value of approximately $4,000,000 

annually for a relatively large firm 

reporting many trades to CAT. The 

Commission’s estimates for the annual 

costs of CAT compliance of an affected 

party registered as a dealer and trading 

CAT-reportable securities are based on 

inflation-adjusted cost estimates from 

the CAT NMS Plan Approval Order.547

CAT reporting costs also vary 

depending on security type, order size, 

and trading venue, among other 

factors.548 An affected party that trades 

more types of securities, that trades a 

greater variety of order sizes, or that 

trades at more venues will see higher 

CAT-related expenses. Affected parties 

that have a smaller number of registered 

persons, that conduct less brokerage 

activity, or that trade smaller volumes of 

securities will see lower CAT-related 

reporting costs. Affected parties that 

only trade U.S. Government securities 

will not incur CAT-related reporting 

costs because government securities are 

not CAT-reportable securities. 

In addition to the costs for reporting 

data to CAT, affected parties that 

register as dealers and trade NMS 

stocks, OTC equities, or listed options 

may be assessed CAT fees under the 

CAT Funding Plan.549 These CAT fees 

would depend on the extent to which an 

affected party is the executing brokerdealer for its transactions reported to 

CAT and the type of securities involved 

in its transactions reported to CAT.550

The Commission cannot estimate the 

magnitude of these costs because the 

amounts of the CAT fees to be charged 

to broker-dealers pursuant to the 

funding model must be established 

through rule filings pursuant to section 

19(b) of the Exchange Act.551 However, 

the CAT fees allocated in accordance 

with the funding model borne by the 

affected parties are not a new cost to 

industry, but at least partially represent 

a transfer of costs from current brokerdealers with CAT reporting 

responsibilities, who would have higher 

CAT fees in the absence of the final 

rules, to affected parties. Furthermore, 

the Commission believes that other 

broker-dealers with CAT reporting 

responsibilities or CAT NMS Plan 

participants that have previously 

reported data related to the orders of 

affected parties to CAT would have 

likely passed on such costs to the 

affected parties in the absence of the 

amendments because the affected 

parties are customers of existing brokerdealers with CAT reporting obligations. 

v. SIPC Membership 

Commenters said that the costs of 

joining SIPC should also be considered 

in addition to the costs discussed in the 

Proposing Release.552 Under SIPA, all 

dealers registered under section 15(b) of 

the Exchange Act in the U.S. are 

automatically members of SIPC except 

for certain subsets of dealers. The 

Commission acknowledges that if an 

affected party registers as a dealer under 

section 15(b) of the Exchange Act, then 

the affected party will become a member 

of SIPC and incur the costs discussed in 

this section.553 However, government 

securities dealers registered under 

section 15C of the Exchange Act do not 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14987 

554 $3,234 = $431 Compliance Attorney × 0.5 

hours (Annual Report to SIPC Filing) + $431 

Compliance Attorney × 5 hours + $1 Postage 

(Annual SIPC Membership Filing) + $431 

Compliance Attorney × 2 + $1 Postage (Filing 

Annual Statement from Independent Accounting 

Firm). We round $3,234 to $3,000 to reflect 

uncertainty in our estimate. 

555For the current assessment rate, see Securities 

Investor Protection Corporation, Assessment Rate, 

available at https://www.sipc.org/for-members/ 

assessment-rate. For the assessment rate 

calculation, see Article 6 of the SIPC Bylaws, 

available at https://www.sipc.org/about-sipc/ 

statute-and-rules/bylaws. 

556We use firms from the Amended Rule 15b9– 

1 Adopting Release to approximate the gross 

revenue of affected parties that register as dealers. 

We use the 12 largest firms, which have a median 

gross revenue of approximately $491 million, from 

the Amended Rule 15b9–1 Adopting Release to 

estimate the SIPC assessment for large firms. We 

use the remaining firms from the Amended Rule 

15b9–1 Adopting Release, which have a median 

gross revenue of approximately $20 million, to 

estimate the SIPC assessment for small firms. See 

Amended Rule 15b9–1 Adopting Release, section 

V.C.2.b. Based on those median revenues: $491 

million × 0.0015 = $736,500; and $20 million × 

0.0015 = $30,000. We round $736,000 to the nearest 

hundred thousand, $700,000, to reflect the 

estimate’s uncertainty. We cannot calculate with 

precision the total SIPC-related costs for all affected 

firms because of data limitations regarding 

estimating the number of firms that will ultimately 

register. See sections III.B.2.c and III.C.2.a.i and 

gross operating revenues of those firms. 

557See supra note 555. 

558MFA Comment Letter II; see also ICI Comment 

Letter (stating that the Commission should consider 

‘‘practical realities such as the implementation 

timelines as well as operational and compliance 

requirements’’); Overdahl Comment Letter (‘‘direct 

costs associated with registering as a government 

securities dealers will aggregate with the direct 

costs of compliance with other proposed rules 

which impact that fund’’). 

559See supra note 346. As stated above, 

commenters also specifically suggested the 

Commission consider potential overlapping 

compliance costs between the final rules and 

certain proposing releases. See supra note 345 

(identifying proposals other than those that have 

been adopted). These proposals have not been 

adopted and thus have not been considered as part 

of the baseline here. To the extent those proposals 

are adopted in the future, the baseline in those 

subsequent rulemakings will reflect the regulatory 

landscape that is current at that time. 

560See supra notes 347–353 (summarizing 

compliance dates). 

561The Beneficial Ownership Amending Release 

amends disclosure requirements that apply to only 

those persons who beneficially own more than five 

percent of a covered class of equity securities. The 

Rule 10c-1a Adopting Release will require only 

persons who agree to a covered securities loan to 

report that activity. The Short Position Reporting 

Adopting Release will require only institutional 

investment managers that meet or exceed certain 

reporting thresholds to report short position and 

short activity data for equity securities. And the 

Securitizations Conflicts Adopting Release will 

affect only certain entities—and their affiliates and 

subsidiaries—that participate in securitization 

transactions. In addition, principal trading firms 

will not have to comply with the final rules in the 

May 2023 SEC Form PF Amending Release or the 

Private Fund Advisers Adopting Release. See id. 

562The final rules mitigate costs relative to the 

proposal. As discussed above, the Commission is 

deleting the proposed quantitative and aggregation 

standards, which would have required persons to 

establish robust controls to monitor and analyze 

trading across their corporate structure to determine 

whether registration was required, and if so, which 

entities would register. Additionally, we expect 

FINRA’s expressed commitment to expedite the 

application process will generally ease the 

compliance burdens raised by commenters. See 

supra section II.B. 

563For example, the effective date of the amended 

deadline for filing Schedule 13D will be early 2024. 

By contrast, compliance deadlines for reporting 

securities loans under the Rule 10c–1a Adopting 

Release will be approximately two years later. See 

supra notes 347–353. 

564See section II.B. 

565See discussion on benefits in section III.C.1. 

need to join SIPC, and thus if an 

affected party registers as a government 

securities dealer under section 15C, the 

party will not incur the costs discussed 

in this section. If an affected party 

trades only government securities, then 

the Commission expects the party to 

register as a government securities 

dealer under section 15C of the 

Exchange Act. 

The Commission estimates the annual 

cost of SIPC membership for an affected 

party registered as a dealer is 

approximately $3,000 plus 0.15% of 

gross operating revenues generated by 

the affected party’s securities business 

minus interest expense and dividends. 

This annual expense is the sum of two 

separate annual costs associated with 

SIPC membership. The first annual 

expense is approximately $3,000 and 

represents costs associated with 

preparing and filing annual reports with 

SIPC.554 The second annual expense is 

an assessment equal to 0.15% of gross 

operating revenues generated by a 

dealer’s securities business minus 

interest expense and dividends, which 

SIPC collects for the SIPC Fund from all 

SIPC members.555 We estimate that an 

affected firm’s annual SIPC assessment 

will be approximately $700,000 for 

larger firms and $30,000 for smaller 

firms, although costs will vary 

depending on each firm’s actual gross 

operating revenues.556 The annual SIPC 

assessment of an affected party 

registered as a dealer may differ from 

the above two estimates for a larger firm 

and a smaller firm if the SIPC 

assessment rate changes from 0.15% to 

a different value in the future.557

vi. Other Compliance Costs 

One commenter stated that the 

Commission should consider that ‘‘the 

sheer number and complexity of the 

Proposals, when considered in their 

totality, if adopted, would impose 

staggering aggregate costs, as well as 

unprecedented operational and other 

practical challenges.’’ 558 But, consistent 

with its long-standing practice, the 

Commission’s economic analysis in 

each adopting release considers the 

incremental benefits and costs for the 

specific rule—i.e., the benefits and costs 

stemming from that rule compared to 

the baseline. In doing so, the 

Commission acknowledges that in some 

cases resource limitations can lead to 

higher compliance costs when the 

compliance period of the rule being 

considered overlaps with the 

compliance period of other rules. In 

determining compliance periods, the 

Commission considers the benefits of 

the rules as well as the costs of delayed 

compliance periods and potential 

overlapping compliance periods. 

In this regard, some commenters 

mentioned the proposals which 

culminated in the recent adoptions of 

the May 2023 SEC Form PF Amending 

Release, the Private Fund Advisers 

Adopting Release, the Treasury Clearing 

Release, the Beneficial Ownership 

Amending Release, the Rule 10c-1a 

Adopting Release, the Short Position 

Reporting Adopting Release, and the 

Securitizations Conflicts Adopting 

Release.559 The Commission 

acknowledges that there are compliance 

dates for certain requirements of these 

rules that overlap in time with the final 

rules, which may impose costs on 

resource constrained entities affected by 

multiple rules.560

However, we think these increased 

costs from overlapping compliance 

periods will be limited for several 

reasons. First, the number of newly 

registered dealers that will be subject to 

each of the recently adopted rules 

identified by commenters will be 

limited based on whether those newly 

registered dealers’ activities fall within 

the scope of the other rules.561 Second, 

commenters’ concerns about the costs of 

overlapping compliance periods were 

raised in response to the proposal and, 

as discussed above, we have taken steps 

to reduce costs of the final rules.562

Third, although the compliance periods 

for these rules overlap in part, the 

compliance dates adopted by the 

Commission are generally spread out 

over more than a two-year period from 

2023 to 2026.563 As discussed above, the 

Commission is adopting a compliance 

date of one year from the effective date 

of the final rules for persons engaging in 

activities that meet the dealer 

registration requirements to register.564

As discussed above, the final rules 

may result in certain transactions of 

newly registered dealers or government 

securities dealers being subject to 

central clearing requirements under the 

recent Treasury Clearing 

amendments.565 Such newly registered 


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14988 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

566See Treasury Clearing Adopting Release, 89 

FR 2811–18. 567See 17 CFR 240.15c3–1(c)(2)(i)(G) (‘‘Rule 

15c3–1(c)(2)(i)(G)’’). The Net Capital Rule states that 

‘‘[any] withdrawal of capital made within one year 

of its contribution is deemed to have been intended 

to be withdrawn within a period of one year, unless 

the withdrawal has been approved in writing by the 

Examining Authority for the broker or dealer.’’ Id. 

See AIMA Comment Letter II; Citadel Comment 

Letter; FIA–PTG Comment Letter; Fried Frank 

Comment Letter; Hagerty-Hill Comment Letter; IAA 

Comment Letter I; MFA Comment Letter I; NAPFM 

Comment Letter; Two Sigma Comment Letter. 

568See AIMA Comment Letter II; Citadel 

Comment Letter; Element Comment Letter; Fried 

Frank Comment Letter; NAPFM Comment Letter; 

Two Sigma Comment Letter I; MFA Comment Letter 

I; FIA PTG Comment Letter I; IAA Comment Letter 

I; Overdahl Comment Letter; McIntyre Comment 

Letter II. See also Hagerty-Hill Comment Letter. 

569Table 2 shows 47,088 private funds reported 

on Form PF as of 2022Q4, but section III.B.2.c 

explains why the final rules may only affect a small 

percentage of those funds. 

570At least some investor capital would need to 

remain off-limits to withdrawal for at least one year. 

For example, funds who wish to continue dealing 

activities may need to renegotiate contracts with 

investors to provide for a one-year lockup period. 

571For example, a fund that engages in both 

dealing and non-dealing activities could divide its 

activities into two new funds: one that engages in 

dealing and offers different (lower) liquidity rights 

for investors, and another than continues to operate 

the non-dealing strategies and offers the same 

liquidity rights as the original fund. 

572See MFA Comment Letter I. 573See DeFi Fund Comment Letter at 9; GDCA 

Comment Letter. The Net Capital Rule’s AI standard 

requires net capital to exceed 1/15 of aggregate 

indebtedness. Any crypto assets that are not 

securities would not contribute to net capital, but 

borrowing to fund those holdings may contribute to 

AI. Thus, if an entity were to acquire non-security 

crypto assets using proportionally the same amount 

of leverage as for the entity’s securities holdings, 

the non-security crypto assets would reduce the 

entity’s ratio of net capital to AI. Crypto assets that 

are securities and that have a ‘‘ready market,’’ as 

defined in section (c)(11) of the Net Capital Rule, 

would likely contribute to net capital, subject to 

haircuts. See 17 CFR 240.15c3–1(c)(2)(vi)(K). 

Because the Net Capital Rule’s AI standard requires 

net capital to exceed a fraction (1/15) of AI, entities 

would not necessarily need to fund holdings of 

non-security crypto assets with 100% equity. 

574See FIA PTG Comment Letter I. The letter 

listed 18 ‘‘typical types of trading activity that 

PTFs, and many others in the market, often 

employ,’’ along with quantitative estimates of how 

much the required equity would have increased 

under the proposed rules. 

575CFTC Reg. § 1.17(c)((5)(x)(B). See also Morgan 

Lewis Comment Letter. 576See 17 CFR 240.15c3–1b (‘‘Rule 15c3–1b’’). 577See 17 CFR 240.15c3–1b(a)(3)(ix)(A) (‘‘Rule 

15c3–1b(a)(3)(ix)(A)’’) (providing that there is no 

charge for inventory which is currently registered 

as deliverable on a contract market and covered by 

an open futures contract or by a commodity option 

on a physical). We assume that futures positions 

involved in the strategies listed in the letter are 

covered, but see infra notes 587 and 588 for how 

our calculations may change if they are not. 

578See FIA PTG Comment Letter I. 

579The FIA PTG Comment Letter I did not 

provide sufficient information to enable us to 

assume details for strategy 10 ‘‘Two offsetting 

butterfly positions in bonds.’’ 

dealers or government securities dealers 

may incur costs associated with these 

central clearing requirements, as 

discussed in the Treasury Clearing 

Adopting Release.566

b. Costs Associated With the Net Capital 

Rule 

Affected persons who are not 

currently in compliance with the Net 

Capital Rule would need to decrease the 

charges to their net capital or raise 

additional capital. This may particularly 

impact private funds, as their investors 

generally have withdrawal rights and 

the Net Capital Rule requires a brokerdealer to subtract from net worth when 

calculating net capital any contribution 

of capital to the broker-dealer: (1) under 

an agreement that provides the investor 

with the option to withdraw the capital; 

or (2) that is intended to be withdrawn 

within a period of one year of the 

contribution.567 Therefore, commenters 

said that funds registering as dealers 

may have to amend their contractual 

agreements with investors and that 

those investors may lose substantial 

liquidity rights.568 However, we 

estimate that the final rules will only 

affect a small percentage of private 

funds.569 We acknowledge that affected 

private funds may have to limit investor 

withdrawals if they want to continue 

dealing securities.570 Alternatively, an 

affected private fund may choose to 

separate its dealing activities into a 

separate entity.571

For market participants engaging in 

dealing activity, other than private 

funds, the Net Capital Rule may require 

additional capital. We anticipate the 

costs associated with the Net Capital 

Rule to vary according to the type of 

investment. For example, less liquid 

investments and derivatives positions 

are subject to greater haircuts (see 

below), and will thus require more 

capital.572 Crypto assets that are not 

securities would be subject to a 100% 

deduction when computing net capital 

and so affected persons that hold more 

of such assets would likely need more 

net capital.573 The cost of complying 

with increased capital requirements 

arises because an entity is required to 

either shift the composition of its 

portfolio to hold more liquid assets— 

which typically earn lower rates of 

return—than it would otherwise, or to 

fund its positions with a greater amount 

of equity or subordinated debt, which is 

typically costlier than unsubordinated 

debt. However, entities that take less 

financial risk tend to have better credit 

with investors or lenders, other things 

equal, so more favorable borrowing 

terms for affected parties may partially 

offset the costs of increasing their net 

capital. 

One comment letter stated that the 

proposed rule would greatly increase 

the cost of certain trading strategies and 

provided numerical estimates.574 These 

estimates appeared to rely on position 

sizes and existing margin requirements 

which the commenter did not provide. 

We can nevertheless ascertain that the 

commenter’s estimates rest on two 

assumptions. First, the commenter said 

that, under the proposed rule, the 

futures margin requirement would 

increase by 50% and cited to a CFTC 

rule describing ‘‘Minimum financial 

requirements for futures commission 

merchants and introducing brokers.’’ 575

Registration with the SEC as a dealer— 

by itself—does not create a requirement 

to also register with the CFTC as a 

futures commission merchant or 

introducing broker, so the final rules 

would not necessarily increase affected 

parties’ futures margin. Registered 

broker-dealers—as is the case with 

futures commission merchants—are 

subject to requirements to take capital 

charges for proprietary futures 

positions.576 However, they need not 

take a charge if the position is a covered 

futures position.577 Second, the 

commenter calculated margin costs 

based on a 5-day, 99% confidence, 

portfolio value at risk (‘‘VaR’’) that 

recognizes offsets between futures and 

bonds positions.578 VaR calculation 

methods vary, and they may depend on 

several assumptions—among other 

things, the relevant historical time 

period, the precise assets in a portfolio, 

covariance between those assets, and 

methods for modelling future returns. 

We are uncertain of some of the details 

of the sample strategies identified by the 

commenter, such as which precise 

assets may be involved in the butterfly 

strategies. Under this uncertainty, rather 

than make the assumptions needed to 

calculate VaR, we assume a flat 2% 

margin cost that does not necessarily 

recognize offsets. For entities with 

margin costs lower (or, respectively, 

higher) than 2%, the actual increases in 

minimum capital would be higher 

(lower) than the estimates we report in 

Table 9. Because the final rules will not 

include the proposed first qualitative 

factor, we do not expect the strategies in 

the letter to necessarily constitute 

dealing under the final rules. 

In this context, in response to the 

commenter’s letter, we undertake our 

own estimations of how much the final 

rules may increase affected parties’ 

required capital for different position 

sizes under 17 of the 18 strategies listed 

in the comment letter.579

Estimates of increases in required 

equity: In Table 9, the left column lists 

the strategies as given in the comment 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14989 

580See SEC Rule 15c3–1(c)(2)(vi). 

581 Dealers approved to calculate net capital in 

this manner must also maintain at all times TNC of 

at least $5 billion and NC of at least $1 billion. 

582For example, the fixed dollar amount equals 

$5,000 for a broker-dealer that does not receive, 

directly or indirectly, or hold funds or securities 

for, or owe funds or securities to, customers; 

$50,000 for an introducing broker dealer that 

receives but does not hold securities; $100,000 for 

a dealer (defined as a broker-dealer that, among 

other things, ‘‘effects more than ten transactions in 

any one calendar year for its own investment 

account’’); $250,000 for a carrying broker-dealer; 

$20 million for an OTC derivatives dealer; or $1 

billion for a broker-dealer that has been approved 

to use models to compute net capital. 

letter, and the right column lists the 

contracts and transactions that we 

assume the strategies involve. Dollar 

amounts such as $P or $0.5P indicate 

position sizes. 

TABLE 9—SAMPLE STRATEGIES FROM THE FIA–PTG COMMENT LETTER

Strategy listed in the comment 

letter Contracts and transactions involved * 

1 ................ Two year futures vs On the Run 

cash.

short $P futures position with 2yr Treasury deliverable, long $P Treasury note that will be deliverable against the futures contract. 

2 ................ Five year futures vs On the Run 

cash.

short $P futures position with 5yr Treasury deliverable, long $P Treasury note that will be deliverable against the futures contract. 

3 ................ Ten year futures vs On the Run 

cash.

short $P futures position with 10yr Treasury deliverable, long $P Treasury bond that will be deliverable against the futures contract. 

4 ................ Ultra Bond futures vs Deliverable bonds.short $P futures position with 25+yr Treasury deliverable, long $P Treasury bond that will be deliverable against the futures contract. 

5 ................ Two Year futures vs Off the 

Run 2s.

short $P futures position with 2yr Treasury deliverable, long $P off-the-run Treasury note that 

will be deliverable against the futures contract. 

6 ................ Ultra Bond futures vs On the 

Run 30s.

short $P futures position with 25+yr Treasury deliverable, long $P 30yr on-the-run Treasury 

bond. 

7 ................ Off-the-run Bond Butterfly ......... long $P 5yr Treasury note, short $0.5P 2yr Treasury note and short $0.5P 10yr Treasury note. 

8 ................ US/20yr/WN Butterfly ................ long $P 20yr Treasury bond, short $0.5P futures position with 10yr Treasury deliverable, short 

$0.5P futures position with 30yr Treasury deliverable. 

9 ................ TY futures vs. Off the Run cash short $P futures position with 10yr Treasury deliverable, long $P off-the-run Treasury bond that 

will be deliverable against the futures position. 

10 .............. Two offsetting butterfly positions in bonds.We did not have sufficient information to analyze this strategy. 

11 .............. On the Run vs Off the Run 

20yrs.

short $P on-the-run 20yr Treasury bond, long $P off-the-run 20yr Treasury bond. 

12 .............. 5s30s Flattener ......................... short $P 5yr Treasury note, long $P 30yr Treasury bond. 

13 .............. TY Cash futures basis vs TU 

Cash futures basis.

short $0.5P futures position with 10yr Treasury deliverable and long $0.5P Treasury bond that 

will be deliverable against the futures contract; long $0.5P futures position with 2yr Treasury 

deliverable, short $0.5P Treasury note that will be deliverable against the futures contract. 

14 .............. Ultrabond futures vs. CTD Cash 

bonds.

short $P futures position with 25+yr Treasury deliverable, long $P Treasury bond that will be deliverable against the futures contract. 

15 .............. On the Run 30 Year vs. Aug47s long $P Treasury bond maturing Aug. 2047 (assume maturity >25yrs), $P short on-the-run ** 

30yr Treasury bond. 

16 .............. On the Run 30 Year vs. Feb42s long $P Treasury bond maturing Feb. 2042 (assume maturity <20yrs), short $P on-the-run ** 

30yr Treasury bond. 

17 .............. On the Run 30 Year vs. Feb36s long $P Treasury bond maturing Feb. 2036 (assume maturity <14yrs), short $P on-the-run ** 

30yr Treasury bond. 

18 .............. Low Risk Tight 3 Year Micro 

RV ***.

(a) long $P 5yr Treasury note, short $P 2yr Treasury note. 

(b) long $P 10yr Treasury note, short $P 7yr Treasury note. 

(c) Long $P 25yr Treasury bond, short $P 22yr Treasury bond. 

* Based on the Commission’s understanding of what these strategies mean. 

** Analyses performed in Aug. 2022 (calculations of net capital requirements are not sensitive to changes in interest rates since Aug. 2022). 

*** We consider three possible versions of this strategy. 

In each strategy, the entity in question 

simultaneously (i) takes a long position 

of $P (in total) in one or more securities 

or futures and a short position of $P (in 

total) in one or more securities or 

futures; (ii) posts margin; and (iii) keeps 

no additional cash on its balance sheet, 

so that its equity equals the value of its 

margin account. 

The net capital calculation begins 

with computing Tentative Net Capital 

(‘‘TNC’’), which is equal to book equity 

minus assets not readily convertible to 

cash (e.g., fixed or intangible assets), 

minus certain operational charges, plus 

qualified subordinated liabilities. 

Because the comment letter discussed 

these trading strategies in isolation, our 

calculations correspondingly assume 

that the entity in question has no assets 

that are not readily convertible to cash, 

no relevant operational charges, and no 

qualified subordinated liabilities, so that 

TNC always equals book equity. Net 

Capital (‘‘NC’’) equals TNC minus a 

haircut. Haircuts are standardized by 

security,580 but dealers can seek 

regulatory approval to instead compute 

net capital using the market risk 

standards of appendix E.581 Our 

calculations rely on the standardized 

haircuts. 

NC must equal or exceed the greater 

of a fixed-dollar minimum requirement 

and a ratio-based minimum 

requirement. The aggregate 

indebtedness (AI) standard requires NC 

to exceed the greater of (i) one-fifteenth 

of AI (or one-eighth for 12 months after 

commencing business as a broker or 

dealer) and (ii) a fixed dollar amount 

that varies by broker-dealer type.582 We 

assume that the relevant fixed dollar 

amount is $100,000 for parties affected 

by the final rules, as that is the fixed 

dollar minimum for a dealer. We 

assume that all loans involved in the 

sample strategies in Table 9 would be 

‘‘adequately collateralized by securities 

which are carried long by the broker or 

dealer and which have not been sold’’ 


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14990 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

583Paragraph (c)(1) of the Net Capital Rule 

defines AI as ‘‘the total money liabilities of a broker 

or dealer arising in connection with any transaction 

whatsoever,’’ subject to several exclusions. 

Paragraphs (c)(1)(i) and (ii) describe two exclusions 

that apply to the trading strategies provided by 

FIA–PTG for ‘‘indebtedness adequately 

collateralized by securities which are carried long 

by the broker or dealer and which have not been 

sold,’’ and for ‘‘amounts payable against securities 

loaned, which securities are carried long by the 

broker or dealer and which have not been sold.’’ 584See FIA PTG Comment Letter I. 585See paragraph (a)(6) of the Net Capital Rule. 

The market maker exception is available to a dealer 

‘‘who does not effect transactions with other than 

brokers or dealers, who does not carry customer 

accounts, who does not effect transactions in 

options not listed on a registered national securities 

exchange or facility of a registered national 

securities association, and whose market maker or 

specialist transactions are effected through and 

carried in a market maker or specialist account 

cleared by another broker or dealer.’’ 

586See Rule 15c3–1(c)(6)(iii). For these strategies, 

the thresholds are generally 5% of the value of long 

positions in U.S. Treasury securities plus 25% of 

the value of long positions in U.S. Treasury futures 

plus 30% of the value of short positions. 

and that securities borrowed would also 

be adequately collateralized. AI is thus 

equal to zero in our analysis, and NC 

under the AI standard must therefore 

exceed the fixed dollar amount of 

$100,000.583 An alternative standard 

requires NC to exceed the greater of (i) 

2% of customer debit items or (ii) 

$250,000. Our calculations assume that, 

similarly to the PTFs to which the 

comment letter refers,584 the trader in 

question has no customers. Therefore, in 

the absence of customer debit items, this 

alternative standard requires at least 

$250,000 of NC, which is higher than 

the $100,000 fixed-dollar minimum 

under the AI standard. 

Certain dealers 585 engaged in 

activities as market makers can avoid 

calculating a haircut (so NC=TNC) if 

they maintain liquidating equity above 

a threshold equal to a percentage of 

their securities or derivatives 

positions.586 We consider this provision 

in our analysis, but we find that the 

capital requirement for market makers is 

not the binding constraint for any of the 

sample strategies. 

OTC derivatives dealers must also 

maintain TNC of $100 million, and 

dealers that are approved to calculate 

haircuts using their own internal risk 

models must maintain TNC of $5 

billion. Our calculations are for affected 

parties to which these TNC 

requirements do not apply, however. 

Lastly, as described above, our 

calculations assume that the entity in 

question, whether registered as a dealer 

or not, faces a margin requirement of 

2%, so that its book equity equals 

$0.02P. 

To summarize, we estimate the 

increased capital requirement for 

affected parties under the following 

conditions: (i) TNC equals book equity; 

(ii) affected parties would use the 

standardized haircuts specified in the 

Net Capital Rule; (iii) the fixed amount 

under the AI standard is $100,000 and 

AI equals zero so that the AI standard 

requires $100,000 of NC; (iv) the 

alternative standard requires NC of 

$250,000, therefore it would not be 

adopted by affected parties in lieu of the 

$100,000 fixed dollar minimum 

required under the AI standard; (v) 

certain entities can claim a market 

maker exception that allows them to 

avoid calculating a haircut (so NC=TNC) 

if they maintain capital above a certain 

threshold; (vi) all futures positions are 

covered; and (vii) the entity in question 

must maintain capital of $0.02P even if 

it does not register with the 

Commission. 

Under these conditions, the AI 

standard requires that book equity 

minus any haircut exceeds $100,000— 

i.e., book equity must exceed $100,000 

plus any haircut—so that the percentage 

increase in required equity is equal to: 

[(haircut + $100k)/non-broker-dealer 

margin]¥1, or [(haircut + $100k)/ 

$0.02P]¥1. The AI standard under the 

market maker exception requires instead 

that book equity exceed the greater of 

$100,000 and a percentage of the 

position size P that depends on the 

exposures involved. We now turn to our 

findings. 

Eleven of the 17 strategies for which 

we provide estimates have no haircuts 

under the Net Capital Rule, because the 

securities and/or futures positions offset 

each other—the 11 strategies are strategy 

1, 2, 3, 4, 5, 6, 9, 11, 13, 14, and 15— 

and six strategies do have haircuts— 

these strategies are 7, 8, 12, 16, 17, and 

18. To illustrate the calculations 

involved, Box 1 describes the 

calculation details for a strategy with no 

haircut, and Box 2 describes the 

calculation details for a strategy with a 

haircut. 

BOX 1—CALCULATION DETAILS FOR STRATEGY 1: ‘‘TWO YEAR FUTURES VS ON THE RUN CASH’’ 

Description: short $P futures position with 2yr Treasury deliverable, long $P Treasury note that will be deliverable against the futures contract. 

Transactions assumed: borrow $P, buy $P 2yr notes, enter $P short futures position with 2yr Treasury deliverable, deposit $x in margin. 

Balance Sheet 

Assets .................................. $P 2yr note .............................................. Liabilities ............................ $P loan. 

$x receivable (margin) ............................. Equity ................................. $x. 

Off balance sheet .............. short $P notional 2yr futures. 

Calculations Notes 

Haircut * ............................... 0 ............................................................... futures and note positions offset. 

Capital Requirement (minimum required x) 

Non-dealer ........................... 0.02P ....................................................... margin requirement. 

Dealer .................................. max(0.02P, 100k) .................................... max(margin requirement, dealer capital). 

% Change ............................ (100k/0.02P)¥1 ...................................... if P < 100k/0.02 = $5 million, 

or 

0 ............................................................... if P ≥ $5 million (margin is binding constraint). 

BOX 2—CALCULATION DETAILS FOR STRATEGY 7: ‘‘OFF-THE-RUN BOND BUTTERFLY’’ 

Description: long $P 5yr Treasury note, short $0.5P 2yr Treasury note and short $0.5P 10yr Treasury note. 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14991 

587The increase for strategies with uncovered 

futures would be higher. For example, if the 

additional futures margin meant the entity’s overall 

margin requirement increased from 2% of P to 3% 

of P, then the percentage increase would be 

[max(0.03, $100k)/$0.02P]¥1. The smallest value of 

P we consider is $50 million (see infra Table 10 and 

related discussion). Under the assumption that 

higher futures margin raises overall margin costs 

from 2% to 3%, the increase in required capital for 

strategies with no margin would be 50% at P=$50 

million. 

588The increase for strategies with uncovered 

futures would be higher. For example, if the 

additional futures margin meant the entity’s overall 

margin requirement increased from 2% of P to 3% 

of P, then the percentage increase would be 

[max(0.03, haircut)/$0.02P]¥1. All but one of the 

17 strategies with haircuts have haircuts larger than 

0.03 except for strategy 8, for which we calculate 

a haircut of 2.875%. Under the assumption that 

higher futures margin raises overall margin costs 

from 2% to 3%, then, our calculations are nearly 

the same whether the futures positions are covered 

or not. 

BOX 2—CALCULATION DETAILS FOR STRATEGY 7: ‘‘OFF-THE-RUN BOND BUTTERFLY’’—Continued 

Transactions: borrow $P, buy $P 5yr notes, use 5yr notes as collateral to borrow $0.5P of 10yr notes and $0.5P of 2yr notes, sell them and use 

proceeds to repay loan, deposit $x in margin. 

Balance Sheet 

Assets .................................. $x receivable (margin) ............................. Liabilities ............................ $0. 

Equity ................................. $x. 

Off Balance sheet .............. $0.5P stock borrowed (10yr note). 

$0.5P stock borrowed (2yr note). 

$P 5yr note posted as collateral. 

Calculations Note 

Haircut * ............................... P*7.25% ................................................... (P*4% for 5yr note) + (0.5P*2% for 2yr note) + (0.5P*4.5% for 10yr 

note). 

Capital Requirement (minimum required x) 

Non-dealer ........................... 0.02P ....................................................... margin requirement. 

Dealer .................................. max(0.02P,100k+0.0725P) ...................... under regular AI standard. 

or 

max(100k, 0.35P) ** ................................. if acting as market maker (0.35P = 5% of long + 30% of short positions). 

% Change ............................ (100k/0.02P)¥1 ...................................... if P < 100k/(0.35–0.0725) = 360k. 

or 

(100k+0.0725P)/0.02P¥1 ....................... if P > $360k. 

*See 17 CFR 240.15c3–1, paragraph (c)(2)(vi)(A) (‘‘Rule 240.15c3–1(c)(2)(vi)(A)’’). 

**See 17 CFR 240.15c3–1, paragraph (c)(6)(iii) (‘‘Rule 240.I3–1(c)(6)(iii)’’). 

For strategies with no haircuts, such 

as in Box 1, the percentage change in 

capital is equal to ($100,000/0.02P)¥1, 

which converges to zero as the position 

size P grows, since as P gets large the 

2% margin requirement already requires 

more capital than would the Net Capital 

Rule.587

For strategies with haircuts, such as in 

Box 2, the AI standard with the market 

maker exemption is the easiest to meet 

when the position size P is small 

enough because the market maker 

exemption allows the entity to avoid 

taking a haircut. As P grows, the market 

maker exemption becomes more 

binding, and the regular AI standard is 

the easiest to meet. As P grows 

arbitrarily large, the increase in equity 

converges to (haircut/0.02)¥1.588 If the 

haircut is greater than the margin 

requirement, the Net Capital Rule will 

always require an increase in minimum 

capital. If the haircut is less than the 

margin requirement, then a large enough 

P will make the margin requirement the 

binding constraint. 

Table 10 reports our findings. The 

first column shows the estimated 

increase in required capital that the 

commenter provided for each strategy 

included in the comment letter. 

Columns 2 shows our estimated 

increases in required minimum capital 

for a position size of $50 million (i.e., 

at P = $50mm), because the final rules 

will exclude persons that have or 

control less than $50 million in total 

assets. Column 3 shows our estimated 

increases in required minimum capital 

for very large position sizes (i.e., as P → 

infinity). We estimate that in 10 out of 

the 17 strategies provided by the 

commenter the Net Capital Rule would 

not increase affected parties’ minimum 

capital requirements, and in another 

four strategies the capital requirements 

would increase by less than 100%. Our 

estimates are generally lower than the 

commenter’s estimates. As described 

above, our calculations may differ 

because (i) we do not agree that futures 

margin requirement would necessarily 

increase by 50% and (ii) we use a flat 

2% margin rather than calculating a 

risk-based margin using VaR. 

The values shown in Table 10 may 

also overstate or understate the actual 

costs of the Net Capital Rule for the 

following reasons. For affected parties 

that pursue more than one trading 

strategy, we expect that the actual 

increase in minimum net capital would 

be lower than the values shown in 

column 2, and perhaps even lower than 

the values shown in column 3, because 

net capital applies to the entire portfolio 

and not just to a single strategy. The 

increases shown in Table 10 are 

therefore not additive—e.g., trading 

P=$50 million of, Strategy 7 and $50 

million of Strategy 8 will not cause 

minimum net capital to increase by 

273% + 54%, but by a smaller amount. 

Holding many securities or futures 

positions for many different strategies 

may allow additional offsets when 

calculating standardized haircuts 

according to the Net Capital Rule, so the 

total increase in capital required for a 

$100 million multi-strategy portfolio 

could be even lower than the increase 

associated with $100 million in a single 

strategy. 


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14992 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

589The Net Capital Rule allows for exceptions 

from the one-year lockup for withdrawals that are 

approved in writing by the examining authority. 

Based on staff experience, FINRA—in its capacity 

as an examining authority—has on rare occasions 

provided such approvals to address extraordinary 

circumstances. See supra note 567. 

590See Duffie Comment Letter. 

591See supra note 62. 

592See supra notes 230, 233, 242, and 254. 

593See sections II.A.3.b, III.B.2.c. 

TABLE 10—ESTIMATED INCREASE IN REQUIRED MINIMUM CAPITAL

Strategy 

Estimated capital 

increase reported 

by the commenter 

(%) 

Commission-estimated increases in 

capital 

P = $50mm 

(%) 

Large P 

(P → infinity) 

(%) 

1 ........................................................................................................................... 828 0 0 

2 ........................................................................................................................... 595 0 0 

3 ........................................................................................................................... 718 0 0 

4 ........................................................................................................................... 1,117 0 0 

5 ........................................................................................................................... 34 0 0 

6 ........................................................................................................................... 645 0 0 

7 ........................................................................................................................... 580 273 263 

8 ........................................................................................................................... 718 54 44 

9 ........................................................................................................................... 171 0 0 

10 ......................................................................................................................... 913 * unknown unknown 

11 ......................................................................................................................... 530 0 0 

12 ......................................................................................................................... 207 410 400 

13 ......................................................................................................................... 742 80 0 

14 ......................................................................................................................... 612 0 0 

15 ......................................................................................................................... 615 0 0 

16 ......................................................................................................................... 315 85 75 

17 ......................................................................................................................... 173 98 88 

18 (a) ** ................................................................................................................ 522 210 200 

18 (b) ** ................................................................................................................ 522 335 325 

18 (c) ** ................................................................................................................ 522 73 63 

* For strategy 10, the Commission was unable to find, under its analysis, a position size that corresponded to the commenter’s estimate of 

913%. 

** The Commission estimated three potential versions of strategy 18, ‘‘Low Risk Tight 3 Year Micro RV.’’ 

The values shown in Table 10 may 

understate the actual costs of the Net 

Capital Rule because this analysis does 

not consider the ‘‘lock-up’’ requirement 

that capital be held for at least a period 

of one year.589 As one commenter 

described, this requirement may be 

more restrictive for some corporate 

structures than for others.590 For 

example, consider a dealer trading in 

both Treasury securities and equities for 

whom, on day 1, its Treasury positions 

require net capital of $70 and its equity 

positions require net capital of $30, for 

total required net capital of $100. On 

day 2, the dealer’s activities shift such 

that its Treasury positions now require 

net capital of $30 and its equity 

positions require $70. If a single entity 

engages in these activities, the shift in 

activities on day 2 will not require any 

change in net capital. However, the shift 

may require additional net capital if 

different activities are conducted by 

separate subsidiary entities. Since the 

Net Capital Rule requires capital to be 

held for at least one year, the entity 

trading Treasury securities would still 

have $70 of net capital on day 2, while 

the entity trading equities would need 

to increase its net capital from $30 to 

$70, for a total required net capital of 

$140 across both entities. For a dealer 

organized in this way, shifts in the 

distribution of activities across 

subsidiaries may result in a higher net 

capital requirement than would 

otherwise apply to the aggregate 

activities. In this simple example, a 

dealer that engaged 100% in equities 

one day (through its equity-focused 

subsidiary) and 100% in Treasury 

securities on another day (through its 

Treasury-focused subsidiary) may have 

to hold twice as much net capital as it 

would if it were organized as a single 

consolidated entity. Affected parties 

may respond to this capital lock-up by 

limiting the amount of capital they 

deploy toward dealing activities, with 

the result that affected parties may 

become less likely to commit capital to 

dealing activities, even in times when 

the returns to dealing may be high. 

However, currently-registered dealers 

and their investors must already 

consider these consequences of the Net 

Capital Rule. 

We acknowledge that in instances 

where the Net Capital Rule may increase 

affected parties’ minimum capital 

requirements, these parties may need to 

raise capital or reduce leverage. Several 

commenters suggested that affected 

parties could respond to the final rules 

by changing or curtailing their trading to 

avoid the revised dealer definition.591

Or, as discussed above, affected parties 

could respond by reorganizing their 

activities—e.g., to consolidate 

subsidiaries—in order to avoid the 

capital lock-up problem described in the 

previous paragraph. We cannot quantify 

the costs to these affected parties and 

their investors of scaling back trading 

activities or reorganizing since we do 

not know the scope of their current 

activities, how profitable those activities 

may be, or how market participants may 

allocate trading across different legal 

entities. An affected party’s costs of 

increased net capital requirements 

under the application of the Net Capital 

Rule could be partially offset by 

reductions in its cost of capital as higher 

levels of net capital may reduce the 

affected party’s probability of default. 

c. Potential Implications for Private 

Funds and Advisers 

Commenters mentioned other 

potential conflicts between private 

funds’ business and the dealer rules and 

regulations beyond the challenge of 

reconciling fund investors’ withdrawal 

rights with dealers’ capital 

requirements.592 As explained above, 

the Commission expects that only a 

limited number of private funds will be 

affected by the final rules.593 For the 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 14993 

594A broker-dealer registered with FINRA is 

subject to Rule 5130, which prohibits member firms 

from selling new issues (e.g., IPOs) to restricted 

persons. Generally, a broker-dealer, along with the 

owners that would be listed on Form BD (e.g., 5% 

direct owners, 25% indirect owners) would be 

considered ‘‘restricted persons’’ and subject to the 

new issue restrictions. FINRA member firms are 

also prohibited from purchasing new issue 

securities. See AIMA Comment Letter II; AIMA 

Comment Letter III; Citadel Comment Letter; 

Committee on Capital Markets Comment Letter; 

Element Comment Letter; Lewis Study; MFA 

Comment Letter I. 

595See Hong Qian and Zhaodong (Ken) Zhong, 

2017, ‘‘Do Hedge Funds Possess Private Information 

about IPO Stocks? Evidence from Post-IPO 

Holdings,’’ Review of Asset Pricing Studies 8(1), p. 

117–152. These authors observe that hedge funds 

hold about 80% of the average IPO firm’s shares as 

of the first reporting date after the IPO. 

596See, e.g., Citadel Comment Letter; Lewis 

Study. 

597See Two Sigma Comment Letter I. 

598See Blackrock Comment Letter. 

599 Id. 

600See Commission Interpretation Regarding 

Standard of Conduct for Investment Advisers, 

Investment Advisers Act Release No. 5248 (June 5, 

2019), 84 FR 33669, 33674–75 (July 12, 2019). 

601See supra note 235 and accompanying text. 

602See McIntyre Comment Letter II. 

603See section III.B.2.b for why we believe HFT 

is the most likely private fund activity to fit the 

final rules’ factors. See also 2015 Joint Staff Report, 

stating that low latency trading—i.e., HFT—is 

‘‘typically [a] key element of trading strategies’’ for 

PTFs. For a survey of the literature on HFT, see 

Albert J., 2016, The Economics of High-Frequency 

Trading: Taking Stock, Annual Review of Financial 

Economics (8), 1–24. See also Brogaard, Jonathan, 

Allen Carrion, Thibaut Moyaert, Ryan Riordan, 

Andriy Shkilko, Konstantin Sokolov, 2018, High 

Frequency Trading and Extreme Price Movements, 

Journal of Financial Economics 128(2), 253–265; 

‘‘Fast and Furious,’’ 11/20/2018, J.P. Morgan North 

America Fixed Income Strategy; ‘‘Revisiting the 

Ides of March, Part I: A Thousand Year Flood,’’ 

Council on Foreign Relations (July 20, 2020), 

available at https://www.cfr.org/blog/revisiting-idesmarch-part-i-thousand-year-flood; Better Markets 

Comment Letter. 

604See supra notes 21 and 443. 

605See 2015 Joint Staff report. 

606See supra note 447. 

limited number of affected funds under 

the final rules, we discuss below 

potential costs to those funds and their 

advisers and investors. Depending on 

the specific conflict between private 

funds’ business and the dealer rules and 

regulations, a fund may respond by 

revising its organizational documents 

and agreements with third parties, such 

as prime brokers and executing brokers; 

modifying its investing strategies (which 

can require investor consent and also 

trigger investors’ redemption rights) to 

avoid dealing; or accommodating 

investors that withdraw from the fund. 

Although these costs may be significant 

for individual funds, in aggregate we do 

not expect that their combined impact 

will be significant because of the limited 

number of funds likely to be affected by 

the final rules. 

One potential conflict is that private 

funds that register as dealers may face 

restrictions against participating in the 

IPO market.594 Hedge funds that buy 

IPO shares and also engage in dealing 

strategies may have to withdraw from 

one set of activities when the final rules 

go into effect. We expect that funds will 

choose the activity that adds more value 

to the fund and its investors; some may 

choose to register and stay out of the 

IPO market, while others may forgo 

dealing to be able to invest in IPOs. 

Because hedge funds are important 

players in the IPO market,595 any largescale exit of hedge funds from this 

market could impact the ability of 

issuers to raise new capital, as well as 

reduce efficient pricing in new issues. 

Similarly, any large-scale exit from 

dealing could impact liquidity. The 

magnitude of these costs depends on the 

extent to which there are hedge funds 

that engage in both activities 

simultaneously, as well as on hedge 

funds’ total share of aggregate IPO and 

dealing activity. 

Several commenters stated that 

registering as dealers would cause funds 

to lose the benefit of various customer 

protection regulations that govern their 

relations with their broker-dealers.596

Funds that register as dealers may incur 

costs to the extent that they need to 

revise their organizational documents 

and agreements with third parties 

because certain customer protection 

regulations would no longer apply. And 

insofar as the applicability of these 

customer protections affect investors’ 

decisions to invest, funds may also 

incur costs from investors withdrawing 

or choosing not to invest. 

One commenter suggested that the 

proposed rules’ impact may be costly for 

private funds because funds and brokerdealers are treated differently for tax 

purposes.597 This different treatment 

may result in costs for some of the 

affected funds. But given the limited 

number of affected funds, we do not 

believe that tax consequences for those 

funds will harm market liquidity and 

efficiency. 

One commenter said that ‘‘many 

investment funds (e.g., pension plans) 

may not be permitted to register as a 

dealer under their organizational 

charters’’ and also that ‘‘many potential 

fund investors may not be permitted to 

invest in the equity of a brokerdealer.’’ 598 If any affected funds are 

prohibited from registering as dealers or 

have investors that are prohibited from 

investing in a dealer, then we agree that 

those affected funds may incur 

additional costs, including costs of 

revising organizational documents, 

splitting dealing and non-dealing 

activities into separate legal entities, or 

changing investment strategies and 

withdrawal of investors, whichever 

option is least costly. 

A commenter suggested one scenario 

in the context of all-to-all trading in 

which a fund’s best execution obligation 

as a dealer under FINRA Rule 5310 may 

conflict with the fund adviser’s 

fiduciary duty to achieve best execution 

for its client, the fund.599 The adviser’s 

fiduciary duty to achieve best execution 

is informed by applicable legal 

requirements,600 and, as stated above, 

we do not believe a conflict between 

these legal obligations will arise in the 

scenario raised by the commenter.601

The fund may nevertheless incur costs 

because of best execution obligations as 

a newly registered dealer, including 

costs for amending its organizational 

agreements to facilitate compliance with 

FINRA Rule 5310. To the extent they 

face these costs, some affected persons 

may consider ceasing any behavior that 

constitutes dealing. 

Another commenter said that FINRA 

rules may restrict investment advisers 

who are also dealers from receiving 

carried interest from their private fund 

clients.602 The comment letter cited to 

FINRA Rule 2150, which contains 

prohibitions against FINRA members 

sharing in the profits of customers’ 

accounts. The commenter said that the 

proposed rules’ aggregation provision, 

which would have combined advisers’ 

trading on behalf of their clients 

together with advisers’ proprietary 

trading, would also have meant that 

adviser-client relationships could be 

treated like dealer-customer 

relationships for the purposes of FINRA 

Rule 2150. We have removed the 

aggregation standard from the definition 

of ‘‘own account,’’ as discussed 

previously, and these changes mean the 

final rules are not likely to prevent 

advisers who are also dealers from 

receiving carried interest from their 

private fund clients. 

d. Effects on Market Liquidity 

Studies on HFT are mixed on whether 

affected firms’ activities may improve or 

worsen market liquidity.603 Recent 

experience is also mixed on the role of 

PTFs during market events. PTFs’ share 

of market intermediation fell 

considerably more than did dealers’ 

share did during 2020,604 but their share 

actually increased during the 2014 flash 

rally 605 and again during March 

2023.606 Many commenters said that the 

final rules would reduce market 

liquidity, especially in the market for 


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607See AIMA Comment Letter II; BlackRock 

Comment Letter; Duffie Comment Letter, FIA–PTG 

Comment Letter; Hagerty-Hill Comment Letter; 

IDTA Comment Letter; Lewis Study; MMI Comment 

Letter; Morgan Lewis Comment Letter; Virtu 

Comment Letter. See also section III.C.2.b for a 

discussion of the Duffie Comment Letter, including 

the Net Capital Rule’s potential impact on market 

participants’ trading activity. 

608See supra note 62. 

609See MFA Comment Letter II; Citadel Comment 

Letter. 

610 Dealers that violate the Net Capital Rule by 

having too few liquid assets relative to 

unsubordinated liabilities, at any moment, must 

immediately cease taking on new positions. 

611See Overdahl Comment Letter. 

612See Duffie Comment Letter. 

613See Duffie Comment Letter. 

614See Two Sigma Comment Letter I. 

615This potential reduction in liquidity may 

occur despite the improvement to the liquidity of 

the U.S. Treasury securities market that may result 

from increased central clearing. See section 

III.C.1.b. 

616See section II.A.1.a. 

617See section II.A.4. 

618The Overdahl Comment Letter recommended 

that the Commission examine the liquidity 

contribution made by persons who would be 

affected by the proposed rule (esp. see paragraph 

43). 

619Question 27 of Form PF defines turnover as 

‘‘the sum of the absolute values of transactions in 

the relevant asset class during the period.’’ 

U.S. Government securities.607 These 

commenters said that affected parties 

would curtail or cease the trading 

activities described in the final rule 

rather than submit to dealer 

registration.608 Two commenters also 

said that the costs of dealer registration, 

especially the Net Capital Rule, would 

lead affected parties to curtail their 

trading even if they were to register as 

dealers and continue dealing.609 Also, if 

affected parties experience rapid 

changes in their amounts of liquid 

assets or unsubordinated liabilities, the 

requirement to maintain minimum net 

capital could prevent them from 

providing liquidity even if it would be 

profitable to do so.610 One commenter 

said that the costs of dealer registration 

are a barrier to participation in the U.S. 

Treasury market.611 Another commenter 

said that the costs of the Net Capital 

Rule might make it more costly for firms 

to employ capital in trading U.S. 

Government securities.612 For instance, 

when a ‘‘parent’’ firm has the option to 

contribute capital to any of its trading 

businesses (‘‘subsidiaries’’), one 

commenter added that the effects of 

applying the Net Capital Rule to these 

entities might directly harm liquidity in 

government securities by making it 

more costly for the parent entity to 

‘‘opportunistically’’ deploy capital 

internally.613

We acknowledge that the final rules 

could have the effect of reducing 

liquidity. Affected parties may respond 

by curtailing their liquidity-providing 

activities. If the final rules reduce 

affected parties’ profitability, then 

investors in those entities may reduce 

their market participation as well.614 A 

decrease in the activities of liquidityproviding entities and their investors 

would harm market liquidity. Because 

some PTFs have become especially 

prominent intermediaries in the market 

for U.S. Government securities, any 

harm to market liquidity may be more 

pronounced in that market.615

We conclude that any potential harm 

to market liquidity is likely to be 

smaller than commenters suggested 

because the final rules will likely affect 

fewer entities than the proposed rule, 

due to the elimination of the proposed 

first qualitative factor 616 and the 

elimination of aggregation.617 We also 

believe that any harm to liquidity is 

likely to be limited for the following 

reasons. First, if affected persons reduce 

their trading and bid-ask spreads 

meaningfully widen, then other 

registered dealers may compete with 

one another to trade on the wider 

spreads. The additional buying and 

selling by these other dealers would 

offset some of the liquidity lost as the 

affected persons withdrew from dealing. 

Second, if significant liquidity providers 

that are better capitalized are also less 

volatile during times of crisis, then the 

final rules may promote the stability 

and resiliency of market liquidity by 

consistently applying the Net Capital 

Rule. Third, section III.B.4 describes 

how the failure of a significant liquidity 

provider can harm market functioning. 

These final rules will reduce the risk 

that a significant liquidity provider fails, 

and so they should also limit the harm 

such failure may have on market 

liquidity. 

The following analysis of Form PF 

data sheds light on how the final rules’ 

effect on private funds might, in turn, 

reduce market liquidity.618 Registered 

investment advisers report the monthly 

turnover 619 across all their funds, in 

each of 10 different asset classes. As 

discussed in section III.B.2.b, private 

fund activities reported as HFT are the 

most likely to be affected by the final 

rules. Table 11 describes the turnover 

for the advisers associated with funds 

that use HFT for the most recently 

reported month between 2021–Q4 and 

2022–Q3 (see also Table 3). The left 

column describes the advisers for the 40 

funds listed in Table 3 as using less than 

10% of NAV for HFT, and the right 

column describes the advisers for the 12 

funds listed as using more than 10%. 

The second row lists the total number 

of funds with these advisers (including 

funds that do not have any reported 

HFT), and the third row lists the total 

NAV of all of these funds. As described 

above in the context of Table 3, we use 

Form PF data to translate each fund’s 

HFT use (reported as a percentage of 

NAV) into dollar amounts. The fourth 

row of Table 11 divides the total HFT 

use across these advisers by the total 

NAV of all the advisers’ funds, to 

express an adviser-level percentage use 

of HFT. The remaining rows report the 

total turnover for these advisers during 

the most recent month in their most 

recent filings between 2021–Q4 and 

2022–Q3. No adviser appears in both 

columns. 

TABLE 11—TURNOVER FOR ADVISERS OF FUNDS USING HFT STRATEGIES, FOR MOST RECENT MONTH BETWEEN 2021– 

Q4 AND 2022–Q3 

Funds with HFT 

≤10% of NAV 

Funds with HFT 

>10% of NAV 

Advisers over funds using HFT ............................................................................................................... 21 10 

Total funds with these advisers ............................................................................................................... 178 23 

Total NAV ($ billions) ............................................................................................................................... $210.6 $63.2 

HFT (as % of adviser total NAV) ............................................................................................................. 0%–6.1% 14.1%–64.0% 

Turnover ($ billions): 

Listed equity ..................................................................................................................................... $1,511.3 $193.8 

Corp. bonds (other than convertible) ............................................................................................... 66.3 7.6 

Convertible bonds ............................................................................................................................. 4.3 1.3 

U.S. Treasury securities ................................................................................................................... 423.1 78.6 

Agency securities ............................................................................................................................. 11.0 3.4 


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620See Cboe, Historical Market Volume Data, 

available at https://www.cboe.com/us/equities/ 

market_statistics/historical_market_volume/. 

621See FINRA, Treasury Monthly Aggregate 

Statistics, available at https://www.finra.org/finradata/browse-catalog/about-treasury/monthly-data. 

622See supra note 430. 

623See supra note 380. 

TABLE 11—TURNOVER FOR ADVISERS OF FUNDS USING HFT STRATEGIES, FOR MOST RECENT MONTH BETWEEN 2021– 

Q4 AND 2022–Q3—Continued 

Funds with HFT 

≤10% of NAV 

Funds with HFT 

>10% of NAV 

GSE bonds ....................................................................................................................................... 15.7 9.6 

Sov. bonds (non-U.S. G10) .............................................................................................................. 119.6 41.6 

Other sovereign bonds ..................................................................................................................... 50.6 2.4 

U.S. state & local bonds ................................................................................................................... 0.8 0.6 

Futures .............................................................................................................................................. 2,709.3 1,366.1 

As described in section III.B.2.c, the 

advisers in the left column may be less 

likely than those in the right column to 

have funds that meet the final rules’ 

definition of dealing. To put the 

turnover numbers in context, total 

equity trading volume across all U.S. 

exchanges averaged about $12 trillion 

per month in 2022,620 and total U.S. 

Treasury market volume was 

approximately $17 trillion in October 

2023.621 Therefore, the advisers in the 

left column may account for 

approximately 12.6% of equity market 

volume and 1.6% of Treasury market 

volume, and the advisers in the right 

column may account for another 2.5% 

of equity volume and 0.5% of Treasury 

volume. For the following reasons, we 

expect any curtailing of affected 

activities to reduce trading volumes by 

much less than these numbers. First, for 

the advisers in the left column that may 

be less likely to have any affected funds, 

only 0%–6% of the advisers’ total NAV 

was used for HFT. Second, for the 

advisers in both columns, the final rules 

may not apply to all the activities that 

advisers report as HFT on Form PF. 

Third, affected private funds that do 

cease certain HFT activities may 

redeploy their capital to alternate 

trading strategies and thus keep the 

capital engaged in the markets. Fourth, 

if falling trading volumes were to cause 

bid-ask spreads to meaningfully widen, 

other registered dealers might increase 

their own buying and selling and so 

replace some of the lost activity. 

We also analyze entities’ trading 

volumes in TRACE data to estimate how 

much liquidity affected parties may 

provide in the market for U.S. 

Government securities. For each 

government security CUSIP in TRACE 

in 2022, we calculate trading volume in 

the interdealer market 622 and calculate 

the share of that volume attributable to 

identifiable 623 non-broker-dealers. 

Figure 3 shows, for each CUSIP, what 

the interdealer volume was in 2022 

along with the share of that volume 

attributable to (i) all non-broker-dealers 

and (ii) the subset of non-broker-dealers 

identified in TRACE as PTFs. We do not 

show the shares for firms identified as 

hedge funds because the shares are 

generally quite low. 

The values for ‘‘% interdealer 

volume’’ in Figure 3 may be biased 

downwards by any non-broker-dealers 

that trade on Treasury ATSs by 

submitting orders through brokerdealers, because TRACE would attribute 

such trades to the broker-dealer and the 

ultimate buyer or seller would remain 

anonymous. However, this bias will be 


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Figure 3. CUSIP-level volumes in 2022 and volume shares attributable to non-broker-dealers 

0%+-~ ........ -4'-4--------.... -

$1k $1 mm $1 bn $1 tn 

interdealer CUSIP volume (log scale) 
14996 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

624See id. 

625See Blockchain Association Comment Letter; 

American Blockchain PAC Comment Letter; 

Andreessen Horowitz Comment Letter; ADAM 

Comment Letter; U.S. Reps. Comment Letter. 

626See section III.B.2.c. 

627By ‘‘efficiency,’’ here we mean price 

discovery, or the speed with which new 

information or developments impact the market 

price of a security. 

628PTFs’ risk-taking is currently less constrained 

than that of registered broker-dealers (see section 

III.B.2.a). For evidence that hedge funds may have 

less capital than the Net Capital Rule allows, see 

supra notes 438 and 468 and accompanying text. 629See Overdahl Comment Letter. 

630See Citadel Comment Letter. 

631See Virtu Comment Letter. 

632See Andreessen Horowitz Comment Letter; 

Consensys Comment Letter. 

633We believe that some primary liquidity 

providers in crypto asset markets may already be 

dealers under the Exchange Act. See section 

III.B.2.c and supra note 626 and accompanying text. 

634See supra section III.C.2.a.v. 

635 Id. 

636But see infra section V (stating that the final 

rules will not have a significant economic impact 

on a substantial number of small entities for 

purposes of the Regulatory Flexibility Act). 

smaller for CUSIPs that PTFs are most 

likely to trade on the most active 

Treasury ATSs—generally the highervolume CUSIPs—because PTFs 

involved in such trades are not 

anonymous in our data. Identifiable 

non-broker-dealer PTFs account for 

more than 10% of interdealer volume in 

approximately 11% of CUSIPs and for 

more than 25% of volume in 1.6% of 

CUSIPs, but for no CUSIPs do they 

account for more than 40% of the 

volume in 2022. 

The TRACE analysis is limited by the 

large volume of trading where the 

counterparty to the reporting brokerdealer is anonymous.624 However, we 

understand that entities that regularly 

provide liquidity in U.S. Government 

securities markets are likely to appear in 

our data, because they are likely to trade 

on the ATSs that report to TRACE. 

Commenters said that the proposed 

rules would harm liquidity in markets 

for crypto assets.625 We acknowledge 

that the final rules may affect PTFs in 

crypto asset markets, but some 

significant liquidity providers in these 

markets may already be dealers under 

the Exchange Act.626 If affected PTFs 

curtail their crypto asset trading 

activities, then trading volumes in 

crypto asset markets could fall, harming 

the liquidity and efficiency of these 

markets. 

3. Effects on Efficiency, Competition, 

and Capital Formation 

a. Effects on Efficiency 

The previous section explains why we 

believe the final rules could have a 

small negative effect on market 

liquidity. More liquid markets tend to 

be more efficient markets since they 

allow new information to influence 

securities prices more quickly. 

Therefore, we also expect that the final 

rules could have a small negative effect 

on market efficiency, especially in the 

market for U.S. Government 

securities.627 However, as discussed in 

section III.C.1.b, adequately capitalized 

firms 628 may be less sensitive to market 

disruptions that could otherwise reduce 

their capacity to provide liquidity. 

Therefore, to the extent that the final 

rules lead to better capitalization for 

significant liquidity providers, the final 

rules could also promote market 

efficiency. 

b. Effects on Competition 

Section III.C.1.a describes how the 

final rules will promote competition 

among entities that regularly provide 

significant liquidity by applying 

consistent regulation to these entities, 

thus leveling the competitive playing 

field between liquidity provision 

conducted by entities that are currently 

registered as dealers and government 

securities dealers and by entities that 

are not. The section also discusses how 

the final rules’ costs may be 

proportionally greater for smaller 

affected parties, which may reduce the 

overall benefits to competition. 

Commenters also raised concerns that 

the final rules could harm competition. 

We respond to these concerns in the 

paragraphs below, but, in general, any 

negative effect on the competitiveness of 

liquidity provision in U.S. securities 

markets would likely be small because, 

as discussed in section III.B.3 (including 

Table 4 for the U.S. Treasury market), 

liquidity provision in securities markets 

is not concentrated, even among 

currently registered broker-dealers. The 

final rules may also affect some PTFs 

who conduct smaller trading volumes 

but nevertheless fit the final rules’ 

qualitative factor, and such PTFs may 

choose to cease their liquidity-providing 

activities. Because such PTFs would be 

less significant liquidity providers on 

account of their smaller volumes, and 

because currently registered brokerdealers are not concentrated, we expect 

that any exit of theirs from the market 

would have a negligible effect on the 

competitiveness of liquidity provision 

in U.S. securities markets. 

One commenter said that the final 

rules could put U.S. liquidity providers 

at a disadvantage versus foreign 

firms.629 However, other than central 

banks, foreign sovereign entities, and 

international financial institutions (as 

defined in the final rules), foreign firms 

that deal in U.S. markets are not 

excluded from the final rules. Therefore, 

we do not expect the final rules to create 

competitive disadvantages for U.S. 

liquidity providers. Finally, any 

competitive disadvantages that these 

final rules may create would already be 

borne by currently registered dealers. 

One commenter said that the final 

rules would harm competition by 

requiring some private funds to register 

but not others.630 The final rules would 

apply a similar regulatory treatment to 

persons conducting similar activities in 

securities markets, regardless of the 

persons’ legal organization or structure. 

The final rules may treat some private 

funds differently from others, but only 

in cases where those private funds 

engage in activities that have different 

characteristics than other funds’ 

activities. 

Another commenter said that the 

proposed rules would not have leveled 

the playing field because too many nondealing entities would have been swept 

up by the proposed quantitative factor, 

by ambiguity in the proposed qualitative 

factors (e.g., ‘‘the same or substantially 

similar securities’’) and by the 

aggregation language.631 The 

Commission has responded to these 

concerns by removing the proposed 

quantitative factor and the proposed 

first qualitative factor and by removing 

the aggregation provisions. With these 

changes, the final rules are more 

appropriately targeted to persons who 

are effectively dealers. 

Two commenters said that the 

proposed rules would harm competition 

in crypto asset markets.632 The effect on 

competition in crypto asset markets 

would be similar to the effects on 

competition already discussed for other 

markets.633

In addition, as stated above, some 

commenters requested that the 

Commission consider interactions 

between the economic effects of the 

proposed rules and other recent 

Commission rules, as well as practical 

realities such as implementation 

timelines.634 As discussed above, the 

Commission acknowledges that 

overlapping compliance periods may in 

some cases increase costs.635 This may 

be particularly true for smaller entities 

with more limited compliance 

resources.636 This effect can negatively 

impact some competitors because these 

entities may be less able to absorb or 

pass on these additional costs, making 

it more difficult for them to remain in 

business or compete. However, the final 

rules mitigate overall costs relative to 


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637See supra section II.A.3. 

638See supra section III.C.2.a.v. 

639See supra note 607. 

640See Gretz Comment Letter. 

641See Proposing Release at 23092–93. 

642See Citadel Comment Letter; MFA Comment 

Letter I; NAPFM Comment Letter; Overdahl 

Comment Letter. 

643See supra notes 203–204. 

the proposal,637 and we do not believe 

these increased compliance costs will be 

significant for most affected parties 

subject to the final rules.638 We 

therefore do not expect the risk of 

negative competitive effects from 

increased compliance costs due to 

simultaneous compliance periods to be 

significant. 

c. Effects on Capital Formation 

We expect the final rules’ effect on 

capital formation to be mixed. As 

described above in sections III.C.2.d and 

III.C.3.a, we agree with commenters 639

that the final rules could have small 

negative effects on market liquidity and 

efficiency. Lower liquidity and 

efficiency would tend to harm capital 

formation by reducing security prices 

and raising yields. 

The final rules will also promote 

market stability, resiliency, and investor 

confidence by helping to ensure that 

dealing activity is adequately 

capitalized, subject to regulatory 

oversight, and accompanied by 

regulated internal controls and 

deterrents to deceptive behaviors. More 

stable markets and strengthened 

investor confidence in U.S. markets may 

promote capital formation by increasing 

demand for securities issued in U.S. 

markets, raising security prices, and 

lowering yields. One commenter agreed 

that the ‘‘overall effects [on market 

participation, market liquidity, price 

efficiency, competition among liquidity 

providers, and capital formation] are 

positive.’’ 640

D. Reasonable Alternatives 

The Commission considered several 

alternatives to the final rules: (1) retain 

the quantitative factor; (2) add a 

quantitative threshold to the proposed 

first qualitative factor; (3) remove the 

exclusion for registered investment 

companies; (4) exclude registered 

investment advisers and private funds; 

(5) require registered investment 

advisers and private funds to report to 

TRACE (rather than comply with the 

full set of dealer rules and regulations); 

and (6) revise the final rules to carve out 

or narrow the application to crypto asset 

securities. 

1. Retain the Quantitative Standard 

Proposed Rule 3a44–2 would have 

required dealer registration of persons 

who purchased and/or sold a total of at 

least $25 billion in U.S. Government 

securities in each of 4 out of the last 6 

months. The Commission proposed the 

particular threshold value because 

available data suggested that $25 billion 

would appear to strike a balance 

between low values, which may affect 

many small-volume traders who are not 

dealing, and high values, which may 

miss entities whose activities provide 

significant liquidity in the market.641

Some commenters said the analysis 

behind the proposed quantitative factor 

was flawed due to the limitations of 

TRACE data and the assumptions the 

Commission used.642 In section 

III.B.2.d, we discuss the limitations of 

TRACE data. Based on comments 

received, we acknowledge that 

identifiable TRACE data may not 

represent trading patterns in the dealerto-customer market. This conclusion 

heightens the already high uncertainty 

around where to set the value of such 

a threshold. 

Market participants who would meet 

the quantitative standard by regularly 

conducting large volumes of securities 

trading activity would likely also meet 

the expressing trading interest and 

primary revenue factors. The overlap 

may exist either because large trading 

volumes accompany expressions of 

trading interest in line with the 

expressing trading interest factor or 

because significant liquidity-providers 

that earn revenue from capturing bidask spreads or from capturing any 

incentives offered by trading venues 

(primary revenue factor) also tend to 

have large trading volumes. 

Table 12 approximates the overlap 

between the proposed quantitative 

factor and the primary revenue factor by 

sorting identifiable firms based on their 

average monthly Treasury-trading 

volume in 2022 and then showing how 

many firms in each volume bucket 

appear to meet or not meet the primary 

revenue factor (i.e., firms that appear in 

the left-most bar in Figure 2). This table 

counts firms based on their average 

monthly volume—which does not 

precisely match the ‘‘4 out of the past 

6 months’’ in the proposed quantitative 

factor—but average monthly volume is 

sufficient to indicate the extent to which 

firms whose activities meet the primary 

revenue factor also have large trading 

volumes. 

TABLE 12—OVERLAP BETWEEN QUANTITATIVE STANDARD AND PRIMARY REVENUE FACTOR

Average monthly trading volume in 2022 

# firms meeting 

primary revenue 

factor 

# firms not 

meeting primary 

revenue factor 

<$10 billion .................................................................................................................................................. 4 174 

$10–25 billion ............................................................................................................................................... 8 18 

$25–50 billion ............................................................................................................................................... 7 6 

$50–100 billion ............................................................................................................................................. 2 3 

$100 billion or higher ................................................................................................................................... 10 0 

The quantitative factor could support 

the final rules in applying dealer 

registration to entities that provide 

significant liquidity, by specifically 

including the most active market 

participants (unless excluded). The 

bright-line test in the quantitative factor 

also could reduce self-evaluation costs 

for persons who regularly surpass the 

threshold, but it would not reduce the 

self-evaluation costs of persons who do 

not regularly surpass the threshold 

because such persons would still have 

to consider the expressing trading 

interest and primary revenue factors. 

The quantitative factor would 

potentially increase the costs of the final 

rules because the quantitative standard 

may apply to a greater number of 

entities.643 This factor would have the 

potential to affect persons who are not 

dealing, because it would not consider 

any other facts and circumstances other 

than total transaction volume. For 

example, a hypothetical long-only 

investor that regularly purchased $25 

billion Treasuries in a month and held 

them to maturity, would be defined as 

a dealer under this alternative. Many 

commenters said that the $25 billion 


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644See AIMA Comment Letter II; AIMA Comment 

Letter III; Citadel Comment Letter; Committee on 

Capital Markets Comment Letter; Element Comment 

Letter; FIA PTG Comment Letter I; Fried Frank 

Comment Letter; ICI Comment Letter; Lewis Study; 

MFA Comment Letter I; MFA Comment Letter II; 

NAPFM Comment Letter; Overdahl Comment 

Letter; SIFMA Comment Letter I; T. Rowe Price 

Comment Letter; Two Sigma Comment Letter I. A 

few commenters calculated that $25 billion, as a 

fraction of average daily activity in the U.S. 

Treasury market, may be as small as approximately 

0.2%. 

645The MFA Comment Letter I said that the 

quantitative factor would be redundant with the 

qualitative factors. 

646See U.S. Securities and Exchange 

Commission, Report on the Feasibility and 

Advisability of the Complete Segregation of the 

Functions of Dealer and Broker XIV (1936). 

647See section II.A.1.a. 

648See supra notes 74–76. 

649See section III.C.1.c. 

650See section III.B.4 for a discussion of the 

market externalities that such rules seek to address; 

see also section III.C.1 for a discussion on the 

benefits of such rules. 

651See ICI Comment Letter. 

652See 15 U.S.C. 80a–18 (Section 18 prohibits 

closed-end funds from issuing or selling senior 

securities that represent indebtedness unless it has 

at least 300% asset coverage, and open-end funds 

from issuing or selling a senior security other than 

borrowing from a bank, which are also subject to 

300% asset coverage, and defines ‘‘senior security,’’ 

in part, as ‘‘any bond, debenture, note, or similar 

obligation or instrument constituting a security and 

evidencing indebtedness.’’); 17 CFR 270.18f–4 

(‘‘Rule 18f–4’’) (generally requiring investment 

companies that use derivatives to adopt a 

derivatives risk management program that includes 

a limitation on leverage risk based on VaR). See also 

Use of Derivatives by Registered Investment 

Companies and Business Development Companies, 

Investment Company Act Release No. 34084 (Nov. 

2, 2021), 85 FR 83162 (Dec. 21, 2020). 

653 15 U.S.C. 80a–30. 

654Registered investment companies report 

certain census information annually to the 

Commission on Form N–CEN. Registered 

investment companies also are required to report 

monthly portfolio-wide and position-level holdings 

data to the Commission on Form N–PORT. This 

includes information regarding repurchase 

agreements, securities lending activities, and 

counterparty exposures, terms of derivatives 

contracts, and discrete portfolio-level and positionlevel risk measures to better understand fund 

exposure to changes in market conditions. 

quantitative factor had a threshold that 

was too low or was otherwise not 

indicative of dealing.644 We agree that 

the $25 billion threshold could capture 

persons who are not dealing. This 

alternative would potentially burden 

non-dealers with the costs of 

registration and compliance, could harm 

their investors by lowering returns, and 

could potentially harm market liquidity, 

efficiency, competition, and capital 

formation if affected persons were to 

reduce their trading below the $25 

billion threshold to avoid becoming 

dealers. 

Given that the quantitative factor is 

unlikely to capture dealing activity that 

is not also captured by the expressing 

trading interest and primary revenue 

factors, and given the additional costs of 

requiring entities who are not dealing to 

register as dealers, the Commission has 

removed the quantitative standard from 

the final rules.645

2. Retain the First Qualitative Standard 

(e.g., ‘‘Routinely Making Roughly 

Comparable Purchases and Sales of the 

Same or Substantially Similar Securities 

[or Government Securities] in a Day’’) 

The Commission has long 

distinguished dealer activity from trader 

activity by focusing on, among other 

things, a dealer’s frequent turnover of 

positions—stating, for example, that the 

dealer ‘‘sells securities . . . he has 

purchased or intends to purchase 

elsewhere or buys securities . . . with a 

view to disposing of them 

elsewhere’’ 646 The proposed first 

qualitative factor was intended to 

describe activities that include such 

frequent turnover, and also to separate 

persons engaging in isolated or sporadic 

securities transactions from persons 

whose regularity of transacting 

demonstrates that they are acting as 

dealers. 

Commenters raised concerns about 

the proposed first qualitative factor, 

saying that the factor’s language was 

vague and that the factor could 

potentially capture significant nondealing activities.647 Commenters 

suggested that the Commission modify 

the factor, limit it with exclusions, or 

eliminate it from the final rules.648 The 

Commission considered changes to the 

rule, including revising the terms 

‘‘routinely,’’ ‘‘roughly comparable,’’ or 

‘‘in a day, or changing the factor to 

require that dealing mean trading in the 

same security instead of in ‘‘the same or 

substantially similar’’ securities. Upon 

consideration, the Commission agrees 

with commenters’ that the proposed 

first qualitative factor could capture 

more than dealing activity. The 

Commission also does not believe that 

modifications to this factor could 

appropriately limit its application to 

dealing activity, and dealing activity 

that would be captured by the factor 

would also likely be captured by at least 

one of the final rules’ qualitative 

factors—the trading interest factor and 

the primary revenue factor. 

Retaining the proposed first 

qualitative factor may improve 

regulators’ ability to analyze data on 

market activity,649 if persons who 

would not otherwise be affected by the 

final rules (including persons who may 

not be dealing) were to submit to dealer 

registration. However, retaining this 

factor may also substantially increase 

the final rules’ costs by capturing 

activities that are not dealing. To the 

extent that this factor would capture 

non-dealing, retaining it would require 

persons who are not dealing to either 

register as dealers and incur the costs 

described in section III.C.2, or else to 

cease certain non-dealing activities. 

3. Remove the Exclusion for Registered 

Investment Companies 

The final rules exclude registered 

investment companies from the 

application of the rules, even if their 

activities meet the final rules’ definition 

of dealing. The Commission could adopt 

the final rules without this exclusion, 

extending the rationale that all market 

participants engaged in activities that 

meet the final rules’ definition of 

dealing, including registered investment 

companies, ought to register as dealers. 

Including investment companies in 

the application of the rule would 

provide additional benefits by applying 

dealer regulation to more significant 

liquidity providers. First, we believe 

that standardizing the regulatory 

treatment of all significant liquidity 

providers would be beneficial because, 

as discussed previously, the uneven 

regulation potentially gives lessregulated entities an unfair advantage 

over registered dealers that engage in 

similar activities. Specifically, this 

alternative would further standardize 

regulatory treatment of significant 

liquidity providers in terms of 

capitalization, transaction reporting, 

books and records requirements, and 

anti-manipulation and anti-fraud 

provisions.650 However, the benefits of 

registering investment companies that 

are engaged in dealing activity as 

dealers would be less than the benefits 

of registering PTFs that are engaged in 

dealing activity, because the existing 

regulation that applies to registered 

investment companies under the 

Investment Company Act overlaps with 

the regulation that applies to dealers on 

several points.651 For example, 

registered investment companies are 

subject to rules that limit leverage 

risk; 652 they must maintain certain 

books and records; 653 and they must 

report to the Commission on many 

aspects of their operations and their 

portfolio holdings.654 As discussed 

above and in the Proposing Release, the 

benefits of registering investment 

companies engaged in the rules’ dealing 

activity as dealers would also be less 

than the benefits of registering private 

funds engaged in the rules’ dealing 

activity, because private funds are not 

subject to the extensive regulatory 


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655See supra notes 218–220 and accompanying 

text. 

656See section III.C.2.a for a discussion of these 

costs. 

657See supra notes 24, 26, and 27. 

658See supra note 218. 

659See supra notes 567 and 568 and 

accompanying text for a discussion of why the Net 

Capital Rule may necessarily restrict withdrawal 

rights of investors in a registered dealer. 

660Commenters suggested that affected private 

funds would respond to the final rules’ adoption in 

this way. See supra note 62. 

661See supra note 222. 

662See supra notes 223–229. 

663See discussion of registered investment 

advisers and private funds in section II.A.3.b. 

664 In section III.B.2.c, we identify up to 12 hedge 

funds that may be dealing under the final rules. 

665See section III.C.2.d. 

666See section III.C.2 for a discussion of these 

costs. 

667See supra note 27. 

668See supra notes 567 and 570. 

framework of the Investment Company 

Act.655

Removing the exclusion for registered 

investment companies would increase 

the costs of the final rules. Affected 

investment companies would bear the 

costs of registering with the Commission 

as dealers, joining FINRA or another 

SRO, reporting to TRACE and CAT, and 

becoming a member of SIPC.656 They 

would also be required to comply with 

dealer rules on financial responsibility 

and risk management, operational 

integrity, and books and records.657

Complying with these rules may be 

inefficient in cases where elements of 

the Investment Company Act overlap 

with dealer regulation—i.e., where 

segments of the investment company 

rules and the dealer rules serve the same 

purpose but may entail different 

disclosure, recordkeeping, or other such 

actions.658 The regulatory regime that 

has evolved around dealers might also 

be inadequate or inappropriate for 

affected investment companies. For 

example, investment companies may be 

unable to comply with the Net Capital 

Rule without substantially reducing 

their investors’ withdrawal rights.659

Instead of registering as dealers, 

affected investment companies could 

respond by curtailing or ceasing certain 

trading activities.660 Such a response 

would reduce the number of investment 

companies registering as dealers, and so 

would reduce or eliminate the benefits 

discussed above on net capital, 

transactions reporting, etc. The 

curtailing of profitable trading activities 

would also harm the affected 

investment companies and their 

investors. The changes in aggregate 

securities trading activity could also 

reduce market efficiency and liquidity, 

thus harming investors of all sizes 

throughout the markets. However, if the 

changes in market activity were to 

increase the profitability of certain 

activities (such as by increasing certain 

bid-ask spreads), then other registered 

dealers may increase their own trading 

activity and so offset at least some of the 

harm to market efficiency and liquidity. 

Commenters generally agreed with the 

exclusion for registered investment 

companies,661 and did not suggest any 

changes to the final rules’ treatment of 

investment companies. 

4. Exclude Registered Investment 

Advisers and Private Funds 

Registered investment advisers and 

private funds may engage in activities 

that meet the final rules’ definition of 

dealing. If so, the final rules would 

require them to register as dealers and 

comply with dealer regulations. Some 

commenters said that the Commission 

should exclude registered investment 

advisers, along with any private funds 

they may advise, from the final rules 

because the advisers are already subject 

to an extensive regulatory framework 

under the Advisers Act and because 

elements of the dealer regime—e.g., the 

Net Capital Rule, restrictions on 

participating in the IPO market—may be 

inappropriate or untenable for advisers 

and adviser-led funds.662 However, as 

stated in the Proposing Release, market 

participants that are engaged in dealing 

activity should be subject to dealer 

regulations. The Commission is mindful 

of concerns raised by commenters 

regarding the application of the dealer 

regime to investment advisers and 

private funds, and it has made 

significant changes to the definition of 

‘‘own account’’ to remove the 

aggregation standard in order to 

appropriately tailor the scope of 

advisers and funds captured by the final 

rules.663

Excluding registered investment 

advisers and their private fund clients 

could reduce many of the final rules’ 

benefits by applying dealer regulation to 

fewer significant liquidity providers.664

Advisers or private funds whose 

activities have the effect of providing 

liquidity would not have to report 

transactions to TRACE or comply with 

the Net Capital Rule or other dealer 

rules that govern internal controls and 

are designed to prevent fraud or 

manipulation. Advisers would continue 

to be subject to the adviser regulations 

described in the baseline, including 

conduct rules, books and records 

requirements, reporting requirements, 

and examinations. If advisers and 

private funds would have responded to 

the final rules by curtailing their trading 

instead of registering as dealers, then 

excluding them from the rules may not 

substantially reduce the benefits 

described in section III.C.1. 

This alternative would also reduce the 

final rules’ benefit to competition, by 

failing to level the playing field between 

significant liquidity providers who are 

registered as dealers and significant 

liquidity providers who may be 

investment advisers or private funds. 

However, if the final rules would have 

a net negative impact on competition by 

deterring private funds and advisers 

from providing liquidity,665 then this 

alternative could reduce that negative 

impact by not deterring such liquidity 

provision. 

Excluding registered investment 

advisers and private funds would 

reduce the final rules’ costs. Advisers 

and private funds who would otherwise 

be affected would not be required to 

register with the Commission as dealers, 

join FINRA or another SRO, report to 

TRACE and CAT, and become a member 

of SIPC.666 They would also not be 

required to comply with dealer rules on 

financial responsibility and risk 

management, operational integrity, and 

books and records.667 Since they would 

not be registered as dealers, they would 

not face dealer-specific restrictions 

against participating in the IPO market. 

Since they would not be subject to the 

Net Capital Rule, they would also not 

need to consider restricting their 

investors’ withdrawal rights in order to 

comply with that rule.668 If the costs of 

dealer registration and compliance 

would have lowered returns for 

investors in private funds, then this 

alternative would also reduce the harm 

to investors. 

Excluding private funds would also 

limit the final rules’ effects on market 

liquidity, efficiency, competition, and 

capital formation, since it would affect 

fewer parties who could respond by 

curtailing their trading activities. 

Section III.C.2.d describes how such a 

response could harm market liquidity 

and efficiency as well as how reductions 

in funds’ profitability could reduce 

investor participation in the market. If 

advisers and private funds were 

excluded, then they would not respond 

in this way, and so any potential 

negative impact of such curtailing on 

market functioning or investor 

participation could be less than under 

the final rules. 

Excluding advisers and private funds 

may allow current or future significant 

liquidity providers to avoid the dealer 

regime by registering as advisers. 

Commenters argued that principal 


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669See IAA Comment Letter I; AIMA Comment 

Letter II; MFA Comment Letter I; T. Rowe Price 

Comment Letter. 

670See sections II.A.3, III.B.3, and III.C.1; 

Proposing Release at 23078–79. 

671See Overdahl Comment Letter (stating ‘‘To the 

extent that the SEC does identify any material 

informational gaps, the SEC could explore whether 

additional recordkeeping requirements are 

appropriate.’’). 

672See section III.C.1.a. 

673See supra note 396 and surrounding text. 

674See sections III.C.1.a and III.C.1.d. See also 

FINRA Comment Letter. 

675See cost discussions in section III.C.2 for a 

detailed discussion of TRACE, self-evaluation, and 

other costs. The Commission estimates the initial 

combined cost of self-evaluation and TRACE 

reporting is at most approximately $600,000. This 

estimate is the sum of the initial cost estimate for 

TRACE reporting, which is $2,000, and the initial 

cost estimate for self-evaluation, which is up to 

$600,000. The combined initial costs’ sum is 

$602,000, which we round to $600,000 to reflect 

uncertainty in our estimate of these combined costs. 

The Commission estimates the ongoing costs for 

TRACE reporting and self-evaluation are 

approximately $100,000. This ongoing cost estimate 

is the sum of the $100,000 annual expense estimate 

for TRACE reporting and a $0 annual expense for 

self-evaluation. The Commission expects few firms’ 

trading operations to change sufficiently to merit 

ongoing self-evaluations because of the substantial 

investments in human-, technological-, and 

financial capital necessary to start a trading 

operation that satisfies the criteria necessary for 

registration as a dealer under the adopted rules. 

676See, e.g., Andreessen Horowitz Comment 

Letter; DeFi Foundation Comment Letter; ADAM 

Comment Letter; Gretz Comment Letter. 

677See ADAM Comment Letter. 

678See DeFi Fund Comment Letter. 

679See section II.A.3. 

680 Id. 

681See section III.C.1. 

682 44 U.S.C. 3501 et seq. 

trading firms are unlikely to attempt to 

avoid the dealer regime in this way.669

Though firms would incur significant 

costs to reorganize their business and 

register as advisers, an exclusion would 

nevertheless allow for the possibility. 

The possibility concerns us because, as 

discussed above and in the Proposing 

Release, registered investment advisers 

and private funds that are engaged in 

dealing activity should be subject to the 

dealer regulatory regime.670

5. Require Registered Investment 

Advisers and Private Funds To Report 

to TRACE 

As described above, private funds and 

private fund advisers not registered as 

dealers are not subject to the 

requirement to report transactions to 

TRACE. Rather than requiring liquidityproviding investment advisers and 

private funds to register as dealers, the 

Commission could instead require them 

to report their transactions to TRACE as 

if they were members of FINRA, without 

submitting to the other requirements of 

the dealer regime.671 This alternative 

would fall short of applying other 

important elements of the dealer regime 

that mitigate the problems discussed in 

sections III.B.3 and III.B.4. These 

important elements of the dealer regime 

include the Net Capital Rule,672

Exchange Act section 15(c),673 and SRO 

membership.674 Therefore, this 

alternative would not adequately 

address the potential for negative 

externalities discussed in section III.B.3 

in the baseline. However, the alternative 

would eliminate, for affected registered 

investment advisers and private funds, 

the final rules’ registration and 

compliance costs other than the costs of 

self-evaluation and of reporting to 

TRACE.675

6. Carve Out or Narrow Application to 

Crypto Asset Securities 

As described in section II.A.3 above, 

the Commission received comments 

regarding the application of the 

proposed rules to crypto asset securities. 

Commenters requested that if the 

Commission were to move forward with 

adopting the proposed rules, the 

Commission revise the final rules to 

carve out or narrow the application to 

crypto asset securities.676 For example, 

one commenter asserted that without an 

exclusion for digital assets, the 

proposed rules would hinder 

innovation, competition, and capital 

formation in the U.S.677 Another 

commenter stated that the Commission 

should limit the scope of the proposed 

rules to persons transacting in the U.S. 

Treasury and listed equity markets, for 

which the Commission has adequate 

data, and that to the extent the 

Commission intends to address digital 

assets, it should do so as part of a multiagency approach and in consultation 

with Congress.678 Consistent with the 

comments received, the Commission 

has considered an alternative that 

would treat crypto asset securities 

differently from other types of securities 

under the final rules. 

As noted in section II.A.3, the 

definitions of ‘‘dealer’’ and ‘‘government 

securities dealer’’ under sections 3(a)(5) 

and 3(a)(44) of the Exchange Act, and 

the requirement that dealers and 

government securities dealers register 

with the Commission pursuant to 

sections 15 and 15C of the Exchange 

Act, apply to dealers in all securities or 

government securities, including crypto 

asset securities. Rules 3a5–4 and 3a44– 

2, as adopted, apply to any person 

transacting in securities or government 

securities, irrespective of where, or the 

technology through which, the security 

or government security trades. 

The Commission is not changing this 

longstanding historical application of 

the Federal securities laws to securities, 

including crypto assets that are 

securities. After consideration of 

comments, the Commission continues to 

believe that Rules 3a5–4 and 3a44–2 

apply to persons transacting in crypto 

assets that meet the definition of 

‘‘securities’’ or ‘‘government securities’’ 

under the Exchange Act. As discussed 

above, certain persons engaging in 

crypto asset securities transactions may 

be operating as dealers as defined under 

the Exchange Act.679 The dealer 

framework is a functional analysis based 

on the securities trading activities 

undertaken by a person, not the type of 

security being traded.680 Regardless of 

the technology used, if a person meets 

the expressing trading interest and 

primary revenue factors in the final 

rules, the application of the dealer 

regulatory regime to that person’s 

activities 681 will be beneficial and 

critical to promoting the Commission’s 

mission. 

If the Commission were to revise the 

final rules to carve out or narrow the 

application to market participants who 

transact in crypto asset securities, that 

alternative would reduce costs for such 

market participants who are not dealers 

under current law and who, absent an 

exemption, would be required to 

register as dealers under the final rules. 

The alternative would also reduce the 

benefits of the final rules, discussed in 

section III.C.1, since it would not apply 

the dealer regime to market participants 

that provide liquidity in crypto asset 

securities markets. 

The alternative could also have 

negative competitive effects, since 

certain market participants that deal in 

crypto asset securities would be 

exempted from registering as dealers, 

while market participants that deal in 

other types of securities would not 

enjoy such an exemption. 

IV. Paperwork Reduction Act 

The new definitions adopted in this 

document do not, in and of themselves, 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).682 However, they may increase 

the number of respondents for 

collection of information requirements 

in other Commission rules. Specifically, 

the rules may increase the number of 

respondents for fourteen Commission 

rules with existing collections of 

information. These are explained in 

more detail below. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless the agency displays 

a currently valid control number. The 


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683See section III.B above for a description of the 

categories of respondents. 

Commission has submitted change 

requests to the Office of Management 

and Budget (‘‘OMB’’) to update the 

number of respondents for these 

fourteen rules. The titles of these 

existing collections of information are: 

Rule Rule title OMB control 

No. 

17 CFR 240.15b1–1 (‘‘Rule 15b1–1’’) and 17 CFR 249.501 

(‘‘Form BD’’).

Application for registration of brokers or dealers ........................ 3235–0012 

17 CFR 240.15Ca1–1 (‘‘Rule 15Ca1–1’’) and Form BD .............. Notice of government securities broker-dealer activities.

17 CFR 240.15Ca2–1 (‘‘Rule 15Ca2–1’’) and Form BD .............. Application for registration of government securities brokers or

government securities dealers.

17 CFR 240.15b3–1 (‘‘Rule 15b3–1’’) and 17 CFR 400.5 (‘‘Rule 

400.5’’).

Amendments to application.

17 CFR 240.15b6–1 (‘‘Rule 15b6–1’’) and 17 CFR 249.501a 

(‘‘Form BDW’’).

Withdrawal from registration ........................................................ 3235–0018 

17 CFR 240.15Cc1–1 (‘‘Rule 15Cc1–1’’) and Form BDW ........... Withdrawal from registration of government securities brokers 

or government securities dealers.

17 CFR 240.15c2–7 (‘‘Rule 15c2–7’’) ........................................... Identification of quotations ........................................................... 3235–0479 

17 CFR 240.15c3–1 (‘‘Rule 15c3–1’’) ........................................... Net capital requirements for brokers and dealers ....................... 3235–0200 

17 CFR 240.15c3–5 (‘‘Rule 15c3–5’’) ........................................... Risk management controls for brokers or dealers with market 

access.

3235–0673 

17 CFR 240.17a–3 (‘‘Rule 17a–3’’) .............................................. Records to be made by certain exchange members, brokers, 

and dealers.

3235–0033 

17 CFR 240.17a–4 (‘‘Rule 17a–4’’) .............................................. Records to be preserved by certain members, brokers, and 

dealers.

3235–0279 

17 CFR 240.17a–5 (‘‘Rule 17a–5’’) .............................................. Reports to be made by certain exchange members, brokers 

and dealers.

3235–0123 

17 CFR 240.17a–11 (‘‘Rule 17a–11’’) .......................................... Notification provisions for brokers and dealers ........................... 3235–0085 

17 CFR 242.613 (‘‘Rule 613’’) ...................................................... Consolidated audit trail ................................................................ 3235–0671 

A. Purpose and Use of the Collections of 

Information 

As stated above, new definitions 

adopted in this document do not create 

any new collections of information, but 

we believe they will add respondents to 

the 14 existing collections of 

information noted above. The 

collections of information applicable to 

the additional respondents,683 and the 

use of the information collected are 

summarized below. 

1. Rules 15b1–1, 15Ca1–1, 15Ca2–1, 

15b3–1, and 400.5 and Form BD 

Section 15(a)(1) of the Exchange Act 

provides that it is unlawful for persons 

who meet the definition of the term 

‘‘broker’’ or ‘‘dealer’’ to solicit or effect 

transactions in most securities unless 

they are registered as broker-dealers 

with the Commission pursuant to 

section 15(b) of the Exchange Act. 

Similarly, section 15C(a)(1) of the 

Exchange Act provides that it is 

unlawful for persons who meet the 

definition of the term government 

securities broker or government 

securities dealer, other than persons 

registered with the Commission as 

broker-dealers and certain financial 

institutions, to solicit or effect 

transactions in government securities 

unless they are registered with the 

Commission as government securities 

broker-dealers pursuant to section 

15C(a)(2) of the Exchange Act. To 

implement these provisions, the 

Commission adopted Rules 15b1–1, 

15Ca1–1, and 15Ca2–1 and Form BD. In 

addition, Rules 15b3–1 and 400.5 

require that registered broker-dealers 

and government securities brokerdealers submit an amended Form BD 

when information originally reported on 

Form BD changes or becomes 

inaccurate. 

The Commission uses the information 

disclosed by applicants in Form BD: (1) 

to determine whether the applicant 

meets the standards for registration set 

forth in the provisions of the Exchange 

Act; (2) to develop a central information 

resource where members of the public 

may obtain relevant, up-to-date 

information about broker-dealers and 

government securities broker-dealers, 

and where the Commission, other 

regulators, and SROs may obtain 

information for investigatory purposes 

in connection with securities litigation; 

and (3) to develop statistical 

information about broker-dealers and 

government securities broker-dealers. In 

addition, all information collected on 

Forms BD is public. The public may use 

this information to assist in determining 

whether to engage in business with a 

particular broker-dealer. 

2. Rules 15b6–1 and 15Cc1–1 and Form 

BDW 

Section 15(b)(5) of the Exchange Act 

provides that any broker-dealer may, 

upon such terms and conditions as the 

Commission deems necessary or 

appropriate in the public interest or for 

the protection of investors, withdraw 

from registration by filing a written 

notice of withdrawal with the 

Commission. Similarly, section 

15C(c)(1)(B) of the Exchange Act 

provides that any registered government 

securities broker or government 

securities dealer may, upon such terms 

and conditions as the Commission may 

deem necessary in the public interest or 

for the protection of investors, withdraw 

from registration by filing a written 

notice of withdrawal with the 

Commission. To implement these 

statutory provisions of the Exchange 

Act, the Commission promulgated Rules 

15b6–1 and 15Cc1–1 and Form BDW 

(the uniform request for broker-dealer 

withdrawal). 

The Commission uses the information 

disclosed by applicants in Form BDW, 

as required by Rules 15b6–1, 15Bc3–1, 

and 15Cc1–1 to: (1) determine whether 

it is in the public interest to permit 

broker-dealers and notice-registered 

broker-dealers to withdraw from 

registration; (2) develop central 

information resources where the 

Commission and other government 

agencies and SROs may obtain 

information for investigatory purposes 

in connection with securities litigation; 

and (3) develop statistical information 

about broker-dealers, notice-registered 

broker-dealers, municipal securities 

dealers, and government securities 

broker-dealers. 


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684See Net Capital Rule, Exchange Act Release 

No. 39455 (Dec. 17, 1997), 62 FR 67996 (Dec. 30, 

1997). 

685See 17 CFR 240.15c3–1(e)(1). 

686See 17 CFR 240.15c3–1(a)(6)(vi). 

687See 17 CFR 240.15c3–1(c)(2)(iv)(B). 

688See 17 CFR 240.15c3–1(c). 

3. Rule 15c2–7 

The Commission adopted Rule 15c2– 

7 in 1964 to improve the reliability and 

transparency of the quotations brokerdealers submit to inter-dealer quotation 

systems. To ensure that an inter-dealer 

quotation system clearly reveals where 

two or more quotations in different 

names for a particular security represent 

a single quotation or where one brokerdealer appears as a correspondent of 

another, Rule 15c2–7 sets forth certain 

criteria that must be met for brokerdealers to furnish, or submit directly or 

indirectly, any quotation for a security 

(other than a municipal security) to an 

inter-dealer quotation system. More 

specifically, to furnish or submit any 

such quotation Rule 15c2–7 requires 

that: 

• Broker-dealers that are 

correspondents for other broker-dealers 

for a particular security and enter 

quotations inform the inter-dealer 

quotation system of both the existence 

of the arrangement and the identity of 

the correspondent; 

• Where two or more broker-dealers 

place quotations pursuant to any other 

arrangement between or among other 

broker-dealers, the identity of each 

broker-dealer participating in any such 

arrangement(s), and the fact that an 

arrangement exists, must be disclosed; 

• The inter-dealer quotation systems 

to which the quotation is furnished or 

submitted must make it a general 

practice to disclose, with each 

published quotation, these 

arrangements, along with the identities 

of all other broker-dealers that were 

disclosed to the inter-dealer quotation 

system; and 

• When a broker-dealer enters into 

any correspondent or other arrangement 

in which two or more broker-dealers 

furnish or submit quotations for a 

particular security, the broker-dealer 

must inform all broker-dealers 

furnishing or submitting such 

quotations of the existence of such 

correspondent or other arrangement and 

the identity of the parties thereto. 

The information required by Rule 

15c2–7 is designed to help the 

Commission prevent fraud, 

manipulation, and deceptive acts and 

practices. When Rule 15c2–7 was 

adopted in 1964, the information it 

required was critical to the 

Commission’s role in monitoring brokerdealers and protecting the integrity of 

over-the-counter markets. The 

disclosures required by Rule 15c2–7 

help assure that inter-dealer quotation 

systems reflect the demand for, and 

market activity related to, the securities 

quoted on their systems. 

4. Rule 15c3–1 

Rule 15c3–1 is designed to ensure that 

broker-dealers registered with the 

Commission at all times have sufficient 

liquid capital to protect the assets of 

customers and to meet their 

responsibilities to other brokerdealers.684 Rule 15c3–1 is an integral 

part of the Commission’s financial 

responsibility program for brokerdealers. In particular, Rule 15c3–1 

facilitates the monitoring of the 

financial condition of broker-dealers by 

the Commission and the broker-dealer’s 

designated examining authority (or 

‘‘DEA’’). 

Various provisions of Rule 15c3–1 

require that broker-dealers provide 

written notification to the Commission 

and/or their DEA under certain 

circumstances. For example, no equity 

capital of a broker-dealer may be 

withdrawn if the amount withdrawn 

exceeds specified levels unless notice is 

provided to the broker-dealer’s DEA and 

the Commission within prescribed 

timeframes.685 In addition, a brokerdealer carrying the account of an 

options market maker must file a notice 

with the Commission and the DEA of 

both the carrying firm and the market 

maker prior to effecting transactions in 

the account.686

There are also certain recordkeeping 

requirements under Rule 15c3–1. For 

example, a broker-dealer must keep a 

record of who is acting as an agent in 

a securities loan transaction and records 

with respect to obtaining DEA approval 

prior to withdrawing capital within one 

year of a contribution.687 The regulation 

at 17 CFR 240.15c3–1c (‘‘appendix C to 

Rule 15c3–1’’) requires registered 

broker-dealers that consolidate their 

financial statements with a subsidiary or 

affiliate to submit, under certain 

circumstances, an opinion of counsel to 

their DEA.688

These recordkeeping and reporting 

requirements are designed to inform the 

Commission and a broker-dealer’s DEA 

of certain financial situations involving 

broker-dealers’ financial situations. 

5. Rule 15c3–5 

Rule 15c3–5 requires that brokerdealers with access to trading directly 

on an exchange or ATS, including those 

providing sponsored or direct market 

access to customers or other persons, 

implement risk management controls 

and supervisory procedures reasonably 

designed to manage the financial, 

regulatory, and other risks of this 

business activity. More specifically, 

these broker-dealers must establish, 

document, and maintain certain risk 

management controls and supervisory 

procedures; regularly review those 

controls and procedures and document 

the review; and remediate issues 

discovered to assure overall 

effectiveness of such controls and 

procedures. These broker-dealers also 

must preserve a copy of their 

supervisory procedures and a written 

description of their risk management 

controls as part of their books and 

records. In addition, the Chief Executive 

Officer (or equivalent officer) is required 

to certify annually that the broker or 

dealer’s risk management controls and 

supervisory procedures comply with 

Rule 15c3–5, and that the broker-dealer 

conducted the required review. These 

documents are required to be preserved 

by the broker-dealer as part of its books 

and records. 

Rule 15c3–5 is generally designed to 

ensure that broker-dealers (which, 

under the current regulatory structure, 

are the only entities that may be 

members of exchanges or provide access 

to trading in securities on an ATS to 

non-broker-dealers) appropriately 

control the risks associated with market 

access, so as not to jeopardize their own 

financial condition, that of other market 

participants, the integrity of trading on 

the securities markets, and the stability 

of the financial system. 

6. Rules 17a–3 and 17a–4 

The Commission adopted Rules 17a– 

3 and 17a–4 (‘‘Recordkeeping Rules’’) in 

1939 to standardize recordkeeping 

practices by establishing minimum 

standards with respect to business 

records that broker-dealers registered 

with the Commission must create and 

maintain. Rule 17a–3 requires brokerdealers to make and keep current certain 

records relating to their financial 

condition, communications, customer 

information, and employees. Rule 17a– 

4 requires broker-dealers to preserve, for 

prescribed periods of time, the records 

required to be created under Rule 17a– 

3 and certain other Commission rules. 

In addition, Rule 17a–4 requires brokerdealers to preserve other records that 

may be created or received by the 

broker-dealer in the ordinary course of 

its business for prescribed periods of 

time. Rule 17a–4 also specifies the 

manner in which these records should 

be maintained. The Commission has 

periodically modified these rules to 

include additional records and to 


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689See 17 CFR 240.17a–5(a)(1). 

690See 17 CFR 240.17a–5(c). 

691See 17 CFR 240.17a–5(d). 

692See 17 CFR 240.17a–5(h). 

693See 17 CFR 240.17a–11(g). 

694See 17 CFR 242.613(a)(1) and (c)(1) and (7). 

695See 17 CFR 242.600(b)(54). 

696See 17 CFR 242.613(a)(1) and (c)(1), (6), and 

(7). 697See supra note 418. 

698Based on staff analysis (see section III.B.2.c), 

the 12 entities were identified through Form PF 

since we believe that any private funds employing 

trading strategies that would fit the final rules’ 

qualitative standard, as adopted, would likely 

report them as HFT. However, since reported HFT 

may apply to a broader set of activities than the 

final rules’ qualitative factors, the actual number of 

affected funds may be less than 12. However, for 

purposes of this PRA, we conservatively estimate 

that up to 12 entities could be required to register 

as dealers and submit order information to CAT. 

See infra note 766 and accompanying text. 

recognize new methods to maintain 

records. 

The records and the information 

created and maintained in accordance 

with Rules 17a–3 and 17a–4 are used by 

examiners and other representatives of 

the Commission, State securities 

regulatory authorities, and the selfregulatory organizations (e.g., FINRA, 

CBOE) (‘‘SROs’’) to determine whether 

broker-dealers are in compliance with 

the Commission’s antifraud and antimanipulation rules, financial 

responsibility program, and other 

Commission, SRO, and State laws, rules, 

and regulations. 

7. Rule 17a–5 

Rule 17a–5 requires that brokerdealers create, submit, and make 

available various reports. Paragraph 

(a)(1) of Rule 17a–5 requires brokerdealers to file quarterly or monthly 

(depending on a broker-dealer’s 

business) reports on Form X–17A–5, the 

Financial and Operational Combined 

Uniform Single Report (‘‘FOCUS 

Report’’).689 The FOCUS Report was 

designed to eliminate the overlapping 

regulatory reports required by various 

SROs and the Commission and to 

reduce reporting burdens. Paragraph (c) 

of Rule 17a–5 requires that certain 

broker-dealers furnish specified 

financial information to their 

customers.690 Paragraph (d) of Rule 17a– 

5 requires broker-dealers, subject to 

limited exceptions, to file annual 

reports prepared by an accountant 

registered with the PCAOB.691 The 

annual reports generally must be filed 

with the Commission, the SROs of 

which the broker-dealer is a member, 

and SIPC. Rule 17a–5 also requires 

additional notifications if an accountant 

identifies a material weakness in a 

broker-dealer’s internal control over 

compliance during the most recent 

fiscal year.692

Reports required to be filed under 

Rule 17a–5 are used, among other 

things, to monitor the financial and 

operational condition of a broker-dealer 

by Commission staff and by the brokerdealer’s DEA. The reports required 

under Rule 17a–5 are one of the primary 

means of ensuring compliance with the 

broker-dealer financial responsibility 

rules. In addition, FOCUS Report data 

are used in preparation for broker-dealer 

examinations. The completed forms also 

are used to determine which firms are 

engaged in various securities-related 

activities, the extent to which they are 

engaged in those activities, and how 

economic events and government 

policies might affect various segments of 

the securities industry. 

8. Rule 17a–11 

Rule 17a–11 requires broker-dealers 

that are experiencing financial or 

operational difficulties to provide notice 

to the Commission, the broker-dealer’s 

DEA, and the CFTC (if the broker-dealer 

is registered with the CFTC as a futures 

commission merchant). For example, if 

a registered broker-dealer determines 

that the net capital it has on hand has 

fallen below the amount it must 

maintain (as calculated under Rule 

15c3–1), it must immediately notify the 

Commission and its DEA (and, if 

applicable, the CFTC).693 Rule 17a–11 is 

an integral part of the Commission’s 

financial responsibility program, which 

enables the Commission, a brokerdealer’s DEA, and the CFTC to increase 

surveillance of a broker-dealer 

experiencing difficulties and to obtain 

any additional information necessary to 

gauge the broker-dealer’s financial or 

operational condition. The real-time 

information contained in these notices 

alerts the Commission, the DEA, and the 

CFTC of the need to increase 

surveillance of the broker-dealer’s 

financial and operational condition. 

9. Rule 613 

Rule 613 requires FINRA and the 

national securities exchanges 

(‘‘Participants’’) to submit an NMS plan 

to create, implement, and maintain the 

CAT to capture order event information 

for orders in NMS securities, across all 

markets, from the time of order 

inception through routing, cancellation, 

modification, or execution in a single, 

consolidated data source.694 The term 

‘‘NMS Security’’ is defined as ‘‘any 

security or class of securities for which 

transaction reports are collected, 

processed, and made available pursuant 

to an effective transaction reporting 

plan, or an effective national market 

system plan for reporting transactions in 

listed options.’’ 695 In general, the term 

‘‘NMS Security’’ refers to exchangelisted equity securities and standardized 

options, but does not include exchangelisted debt securities, securities futures, 

or open-end mutual funds, which are 

not currently reported pursuant to an 

effective transaction reporting plan. 

Rule 613 requires that each Participant 

and its member broker-dealers to record, 

and electronically report to the central 

repository, details for each order 

documenting the life of an order 

through the process of original receipt 

or origination, routing, modification, 

cancellation, and execution (in whole or 

in part) for each NMS security.696

This audit trail information is 

designed to allow regulators to 

efficiently and accurately monitor and 

surveil the securities markets and detect 

and investigate activity in NMS 

securities throughout the U.S. markets, 

whether on one market or across 

markets. The data collected and 

reported to the central repository can 

also be used by regulators to evaluate 

tips and complaints and for complex 

enforcement inquiries or investigations, 

as well as inspections and 

examinations. Further, regulators can 

use the data collected and reported to 

conduct more timely and accurate 

analysis of market activity for 

reconstruction of broad-based market 

events in support of regulatory policy 

decisions. 

B. Respondents 

As discussed above, new Rules 3a5– 

4 and 3a44–2 would further define 

activities that would cause a person 

engaged in a regular business of buying 

and selling securities for its own 

account within the meaning of the 

Exchange Act. A person who satisfies 

the factors described in the amended 

definitions would be considered a 

‘‘dealer’’ or ‘‘government securities 

dealer,’’ and thus would be required to 

register as such with the Commission, 

absent an exception or exemption. As 

detailed in section III.B.2.c, the TRACE 

analysis identifies as potential 

significant liquidity providers a total of 

31 firms that are not currently registered 

as dealers; including 22 entities 

classified as PTFs, 4 entities classified 

as hedge funds, and another 5 

entities.697 Further, the Form PF 

analysis identifies 12 hedge funds that 

are the most likely to meet the final 

rules’ factors due to their reported HFT 

activities.698 For purposes of this PRA, 

we will calculate the burdens based on 

an estimated 31 liquidity providers plus 

12 hedge funds, or 43 respondents. This 


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699Section III.B above includes a discussion of 

commenters’ concerns. 

700See 15 U.S.C. 78o–5(a). 

701Compare section 15(a) with section 15C. A 

government securities dealer that registers under 

section 15C(a)(l)(A) will be limited to conducting a 

government securities business only. 

702Compare 17 CFR 240.15b1–1(a) (‘‘Rule 15b1– 

1(a)’’) (‘‘An application for registration of a broker 

or dealer that is filed pursuant to section 15(b) of 

the Act (15 U.S.C. 78o(b)) shall be filed on Form 

BD (249.501 of this chapter) in accordance with the 

instructions to the form’’) and 17 CFR 240.15Ca1– 

1(a) (‘‘Rule 15Ca1–1(a)’’) (‘‘Every government 

securities broker or government securities dealer 

that is a broker or dealer registered pursuant to 

section 15 or 15B of the Act (other than a financial 

institution as defined in section 3(a)(46) of the Act) 

shall file with the Commission written notice on 

Form BD (249.501 of this chapter) in accordance 

with the instructions contained therein that it is a 

government securities broker or government 

securities dealer.’’) with 17 CFR 240.15Ca2–1(a) 

(‘‘Rule 15Ca2–1(a)’’) (‘‘An application for 

registration pursuant to section 15C(a)(1)(A) of the 

Act, of a government securities broker or 

government securities dealer that is filed on or after 

January 25, 1993, shall be filed with the Central 

Registration Depository (operated by the Financial 

Industry Regulatory Authority, Inc.) on Form BD in 

accordance with the instructions contained 

therein.’’). 

703See Rule 15b3–1. 

704For the previously approved estimates, see ICR 

Reference No. 202306–3235–010 (conclusion date 

June 13, 2023), available at https://

www.reginfo.gov/public/do/PRAViewDocument?

ref_nbr=202306-3235-010 (‘‘Form BD PRA 

Supporting Statement’’). The Commission’s 

currently approved burden associated with filing an 

amendment to Form BD is .33 hours. From 2019 

through 2021, the Commission received, on average, 

2.72 amendments per broker-dealer (see Form BD 

PRA Supporting Statement at 5). Thus, we 

extrapolate that each new broker-dealer would 

submit approximately 2.72 amendments. 2.72 

amendments × .33 hours = .90 hours per 

respondent. 

705 43 respondents multiplied by 2.75 hours per 

respondent. 

706 43 respondents multiplied by .90 hours per 

respondent. 

707For the previously approved estimates, see ICR 

Reference No. 202306–3235–014 (conclusion date 

Aug. 11, 2023), available at https://www.reginfo 

.gov/public/do/PRAViewDocument?ref_nbr 

=202306-3235-014 (‘‘Form BDW PRA Supporting 

Statement’’). 

708 1 respondent multiplied by 1 hour per 

respondent. 

709Form BDW PRA Supporting Statement at 5. 

710For the previously approved estimates, see ICR 

Reference No. 202008–3235–005 (conclusion date 

Feb. 1, 2021), available at https://www.reginfo.gov/ 

public/do/PRAViewDocument?ref_nbr=202008- 

3235-005 (‘‘Rule 15c2–7 PRA Supporting 

Statement’’). 

711Rule 15c2–7 PRA Supporting Statement at 3. 

712 Id. 

713For the previously approved estimates, see ICR 

Reference No. 202301–3235–012 (conclusion date 

June 2, 2023), available at https://www.reginfo.gov/ 

public/do/PRAViewICR?ref_nbr=202301-3235-012 

(‘‘Rule 15c3–1 PRA Supporting Statement’’) at 4. 

This justification also describes other collections of 

information associated with Rule 15c3–1, however 

the Commission determined that the business 

model of the firms expected to register as brokerdealers as a result of these new definitions would 

likely not require that they comply with those 

provisions (see supra section III.B (discussing types 

of entities that could be captured by the final 

rules)). 

714Based on FOCUS data. 

715 43 respondents × 35% = 15.05. 

estimate of 43 respondents differs from 

the estimate of 105 respondents used in 

the Proposing Release. As discussed 

more fully in the Economic Analysis, 

changes made to the proposed rule text 

to address commenters’ concerns 

(described in section I.B above), have 

decreased the number of persons that 

will likely need to register under the 

final rules.699 These respondents would 

be subject to some or all of the following 

collections of information described 

below. 

C. Paperwork Reduction Act Burdens 

1. Paperwork Burdens Associated With 

Rules 15b1–1, 15Ca1–1, 15Ca2–1, and 

15b3–1 and Form BD 

As discussed above, section 15C of 

the Exchange Act requires that 

government securities dealers register 

with the Commission.700 A government 

securities dealer has the flexibility to 

either register as a dealer pursuant to 

Rule 15b1–1 and file notice as a 

government securities dealer under Rule 

15Ca1–1, or register as a government 

securities dealer under Rule 15Ca2–1.701

In either case, the respondent is 

required to complete a Form BD.702 The 

Commission believes that new Rules 

3a5–4 and 3a44–2 would impose the 

same burden on these respondents 

irrespective of whether the respondent 

registers as a dealer or a government 

securities dealer. Once registered, a 

broker-dealer must file an amended 

Form BD when information it originally 

reported on Form BD changes or 

becomes inaccurate.703 The Commission 

estimates an initial burden of 2.75 hours 

for completing a Form BD and an 

annual burden of .90 hours per 

respondent for amending Form BD,704

resulting in a total initial burden of 

approximately 118 hours 705 and a total 

annual burden of approximately 39 

hours 706 associated with the 

amendments to the definitions. 

2. Paperwork Burdens Associated With 

Rules 15b6–1 and 15Cc1–1 and Form 

BDW 

The time necessary to complete and 

file Form BDW will vary depending on 

the nature and complexity of the 

applicant’s securities business. On 

average, the Commission estimates that 

it would take a broker-dealer 

approximately one hour 707 per 

respondent to complete and file a Form 

BDW to withdraw from Commission 

registration. For purposes of estimating 

this paperwork burden, the Commission 

posits that at least one of the 43 

respondents may withdraw as a dealer 

each year, resulting in a total annual 

burden of one hour.708 It is not 

anticipated that respondents will have 

to incur any capital or start-up costs, nor 

any additional operational or 

maintenance costs, to comply with the 

collection of information.709

3. Paperwork Burdens Associated With 

Rule 15c2–7 

Any broker-dealer could be a 

potential respondent for Rule 15c2–7. 

Only quotations entered into through an 

inter-dealer quotation system, such as 

OTC Link and Global OTC, are covered 

by Rule 15c2–7. According to 

representatives of OTC Link and Global 

OTC, none of those entities has recently 

received, nor anticipates receiving, any 

Rule 15c2–7 notices.710 However, 

because a respondent may be required 

to submit such notices, to estimate this 

paperwork burden the Commission 

posits that one filing, in the aggregate, 

by one broker-dealer, is made annually 

pursuant to Rule 15c2–7.711 Based on 

prior industry estimates, the time 

required to enter a notice pursuant to 

Rule 15c2–7 is 45 seconds, or .75 

minutes.712 The Commission believes 

that none of the respondents that are 

required to register as a result of the 

amended definitions will be required to 

file a Rule 15c2–7 notice. Accordingly, 

the Commission estimates that there 

will be no internal compliance cost 

associated with the burden hours for 

Rule 15c2–7. 

4. Paperwork Burdens Associated With 

Rule 15c3–1 

The respondents that must register 

with the Commission as a result of the 

new final rules may incur a collection 

of information burden to comply with 

Rule 15c3–1. The Commission estimates 

the hour burdens of the requirements 

associated with Rule 15c3–1 as follows. 

Notices: Based on the number of 

notices filed under Rule 15c3–1 

between November 1, 2021, and October 

31, 2022, the Commission estimated that 

broker-dealers annually file 

approximately 1,216 notices under Rule 

15c3–1.713 3,528 broker-dealers 

submitted annual audit reports for the 

year ending December 31, 2021.714

Thus, approximately 35% of brokerdealer respondents submitted a Rule 

15c3–1 notice during this timeframe. 

Based on this percentage, the 

Commission estimates that at least 

approximately 15 of the 43 respondents 

would likely file one notice under Rule 

15c3–1 annually.715 In addition, the 

Commission estimated that a brokerdealer will spend approximately 30 


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716Rule 15c3–1 PRA Supporting Statement at 4. 717 15 respondents multiplied by 0.5 hours per 

respondent. 718 In its 2023 PRA, the Commission estimated 

that broker-dealers would submit approximately 

238 notices annually. Rule 15c3–1 PRA Supporting 

Statement at 5. According to FOCUS data, 3,528 

broker-dealers submitted annual audit reports for 

the year ending Dec. 31, 2021. Thus, approximately 

7% of the active broker-dealers submitted a notice 

annually as of 2021. 43 respondents × 7% = 3.01. 719Rule 15c3–1 PRA Supporting Statement at 5. 

720 3 respondents multiplied by 1 hour per 

respondent. 

721See 17 CFR 240.15c3–5. 

722 Id. 

723For the previously approved estimates, see ICR 

Reference No. 201907–3235–022 (conclusion date 

Dec. 10, 2019), available at https://

www.reginfo.gov/public/do/ 

PRAViewDocument?ref_nbr=201907-3235-022 

(‘‘Rule 15c3–5 PRA Supporting Statement’’). See 

Rule 15c3–5 PRA Supporting Statement at 4. 

724 Id. 

725 Id. at 5. Specifically, compliance attorneys 

who review, document, and update written 

compliance policies and procedures are expected to 

require an estimated 20 hours per year; a 

compliance manager who reviews, documents, and 

updates written compliance policies and 

procedures is expected to require 20 hours per year; 

and the Chief Executive Officer, who certifies the 

policies and procedures, is expected to require 

another 5 hours per year. Id. 

726 115 hours for technology + 45 hours for legal 

and compliance. 

727 43 respondents multiplied by 160 hours. 

728For the previously approved estimates, see ICR 

Reference No. 202107–3235–019 (conclusion date 

Dec. 1, 2021), available at https://www.reginfo.gov/ 

public/do/PRAViewDocument?ref_nbr=202107- 

3235-019 (‘‘Rule 17a–3 PRA Supporting 

Statement’’). Rule 17a–3 PRA Supporting Statement 

at 6. 

729 43 respondents multiplied by 249 hours per 

respondent a year. 

730These records that a broker-dealer is required 

to make regarding the broker-dealer’s associated 

persons include: (1) all agreements pertaining to the 

associated person’s relationship with the brokerdealer and a summary of each associated person’s 

compensation arrangement (17 CFR 240.17a– 

3(a)(19)(ii)), (2) a record delineating all 

identification numbers relating to each associated 

person (17 CFR 240.17a–3(a)(12)(ii)), (3) a record of 

the office at which each associated person regularly 

conducts business (17 CFR 240.17a–3(a)(12)(iii)), 

and (4) a record as to each associated person listing 

transactions for which that person will be 

compensated (17 CFR 240.17a3(a)(19)(i)). 

731Rule 17a–3 PRA Supporting Statement at 6. 

732 43 respondents multiplied by 0.5 hours per 

respondent. 

733See 17 CFR 240.17a–3(a)(20). 

734See 17 CFR 240.17a–3(a)(21) and (22). 

735Rule 17a–3 PRA Supporting Statement at 6. 

736 (43 respondents multiplied by 10 minutes per 

respondent) divided by 60 minutes. 

minutes preparing and filing these 

notices.716 Accordingly, the 

Commission estimates a total additional 

annual burden associated with 

submitting these Rule15c3–1 notices of 

approximately 7.5 hours.717

Capital Withdrawal Liability: 

Paragraph (c)(2)(i)(G)(2) of Rule 15c3–1 

requires that a broker-dealer treat as a 

liability any capital contribution that is 

intended to be withdrawn within one 

year of its contribution. The paragraph 

also includes the presumption that 

capital withdrawn within one year of 

contribution was intended to be 

withdrawn within one year, unless the 

broker-dealer receives permission in 

writing for the withdrawal from its DEA. 

For purposes of this PRA, the 

Commission estimates that 

approximately three respondents would 

likely seek permission in writing to 

withdraw capital 718 and that it will take 

each of those firms approximately one 

hour to prepare and submit the request 

to their DEAs.719 Accordingly, the 

Commission estimates that the total 

annual reporting burden will be 

approximately three hours.720

5. Paperwork Burdens Associated With 

Rule 15c3–5 

To comply with Rule 15c3–5, a 

respondent must maintain its risk 

management system by monitoring its 

effectiveness and updating its systems 

to address any issues detected.721 In 

addition, a respondent is required to 

preserve a copy of its written 

description of its risk management 

controls as part of its books and records 

in a manner consistent with Rule 17a– 

4(e)(7).722 The Commission estimates 

that the ongoing annualized burden for 

a respondent to maintain its risk 

management system will be 

approximately 115 burden hours.723 The 

Commission believes the ongoing 

burden of complying with the rule’s 

collection of information will include, 

among other things, updating systems to 

address any issues detected, updating 

risk management controls to reflect any 

change in its business model, and 

documenting and preserving a brokerdealer’s written description of its risk 

management controls.724 In addition, 

the Commission estimates that a brokerdealer’s legal and compliance burden of 

complying with Rule 15c3–5 will 

require approximately 45 hours per 

year.725 Accordingly, the Commission 

estimates the annual aggregate 

information burden per respondent 

would be 160 hours,726 for a total 

annual burden of 6,880 hours.727

6. Paperwork Burdens Associated With 

Rule 17a–3 

As discussed above, the respondents 

that must register as dealers or 

government securities as a result of 

these new definitions will incur a 

burden associated with the collections 

of information necessary to comply with 

Rule 17a–3. 

(i) Rule 17a–3 Generally 

While recordkeeping requirements 

will vary based on the size and 

complexity of the broker-dealer, the 

Commission estimates that one hour a 

day 728 is the average amount of time 

needed by a broker-dealer to comply 

with the overall requirements of Rule 

17a–3, in addition to the separate 

burdens described below. The number 

of working days per year is 249, and as 

a result the total annual estimated 

burden for respondents with respect to 

Rule 17a–3 generally would be 10,707 

hours.729

(ii) Rule 17a–3(a)(12) and (19) 

In addition to the hour burden 

estimate for Rule 17a–3 generally, the 

Commission also believes that 

paragraphs (a)(12) and (19) of Rule 17a– 

3 will impose specific burdens on 

respondents. Paragraphs (a)(12) and (19) 

of Rule 17a–3 require that a brokerdealer create certain records regarding 

its associated persons.730 The 

Commission estimates that each brokerdealer spends, on average, 

approximately 30 minutes each year 731

to ensure that it is in compliance with 

these requirements, resulting in a total 

annual compliance burden of 

approximately 21.5 hours for the 

respondents.732

(iii) Rule 17a–3(a)(20) Through (22) 

Paragraphs (a)(20) through (22) of 

Rule 17a–3 require broker-dealers to 

make, among other things, records 

documenting the broker-dealer’s 

compliance, or that the broker-dealer 

has adopted policies and procedures 

reasonably designed to establish 

compliance, with applicable Federal 

regulations and SRO rules that require 

approval by a principal of the brokerdealer of any advertisements, sales 

literature, or other communications 

with the public.733 Moreover, these 

rules require broker-dealers to create a 

record of the personnel responsible for 

establishing compliance policies and 

procedures and of the personnel capable 

of explaining the types of records the 

broker-dealer must maintain and the 

information contained in those 

records.734 The Commission estimates 

that, on average, each broker-dealer will 

spend 10 minutes each year 735 to 

ensure compliance with these 

requirements, resulting in a total annual 

burden for the respondents of about 

approximately 7.2 hours.736

7. Paperwork Burdens Associated With 

Rule 17a–4 

The respondents that registered as 

dealers or government securities would 

incur a collection of information burden 

to comply with Rule 17a–4. Rule 17a– 

4 establishes the records that must be 


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737See 17 CFR 240.17a–4. 

738For the previously approved estimates, see ICR 

Reference No. 202107–3235–021 (conclusion date 

Oct. 1, 2021), available at https://www.reginfo.gov/ 

public/do/PRAViewDocument?ref_nbr=202107- 

3235-021 (‘‘Rule 17a–4 PRA Supporting 

Statement’’). Rule 17a–4 PRA Supporting Statement 

at 7. 

739 43 respondents multiplied by 254 hours per 

respondent. 

740Registered government securities dealers are 

required to comply with Rule 17a–5, subject to the 

modifications enumerated in 17 CFR 405.1 (‘‘Rule 

405.1’’) and 405.2 (‘‘Rule 405.2’’). See 17 CFR 405.1 

and 405.2. 

741See 17 CFR 240.17a–5(a)(2)(iii). 

742For the previously approved estimates, see ICR 

Reference No. 202107–3235–022 (conclusion date 

Oct. 1, 2021), available at https://www.reginfo.gov/ 

public/do/PRAViewDocument?ref_nbr=202107- 

3235-022 (‘‘Rule 17a–5 PRA Supporting 

Statement’’). Rule 17a–5 PRA Supporting Statement 

at 6. 

743These filings must be made quarterly. Rule 

17a–5 PRA Supporting Statement at 6. 

744 43 respondents multiplied by 48 hours per 

respondent. 

745See 17 CFR 240.17a–5(d)(1)(i)(A). 

746Rule 17a–5 PRA Supporting Statement at 7. 

747 43 respondents multiplied by 12 hours per 

respondent. 

748See 17 CFR 240.17a–5(d)(1)(i)(B). 

749Rule 17a–5 PRA Supporting Statement at 8. 

750 43 respondents multiplied by 7 hours per 

respondent. 

751See 17 CFR 240.17a–5(d)(6). 

752Rule 17a–5 PRA Supporting Statement at 8. 

753 43 respondents multiplied by 0.5 hours per 

respondent. 

754See 17 CFR 240.17a–5(e)(4). 

755Rule 17a–5 PRA Supporting Statement at 9. 

756 43 respondents multiplied by 5 hours per 

respondent. 

757 17 CFR 240.17a–5(f)(2). 

758Rule 17a–5 PRA Supporting Statement at 9. 

759 43 respondents multiplied by 2 hours per 

respondent. 

760Registered government securities dealers are 

required to comply with Rule 17a–11, subject to the 

modifications enumerated in 17 CFR 405.3. See 17 

CFR 405.3. 

761For the previously approved estimates, see ICR 

Reference No. 202107–3235–023 (conclusion date 

Oct. 1, 2021), available at https://www.reginfo.gov/ 

public/do/PRAViewDocument?ref_nbr=202107- 

3235-023 (‘‘Rule 17a–11 PRA Supporting 

Statement’’). 

762Rule 17a–5 PRA Supporting Statement at 7. 

763Rule 17a–11 PRA Supporting Statement at 4. 

764 43 respondents multiplied by 9% = 

approximately 4 respondents. 4 respondents 

multiplied by 1 hour per respondent. 

preserved by broker-dealers.737 The 

Commission estimates that, on average, 

each broker-dealer spends 254 hours 

each year 738 to ensure that it preserves 

the records Rule 17a–4 requires all 

broker-dealers to preserve. Accordingly, 

the Commission estimates that there 

will be a total annual burden of 10,922 

hours to comply with the Rule 17a–4 

requirements applicable to the 

respondents.739

8. Paperwork Burdens Associated With 

Rule 17a–5 

This section summarizes the burdens 

associated with Rule 17a–5.740

FOCUS Report for Broker-Dealers that 

do not Clear Transactions or Carry 

Customer Accounts: Paragraph (a)(2)(iii) 

of Rule 17a–5 requires that brokerdealers that do not clear transactions or 

carry customer accounts and do not use 

ANC models to calculate net capital are 

required to file FOCUS Report Part IIA 

on a quarterly basis.741 The Commission 

believes that, based on their business 

models (as PTFs and hedge funds), the 

43 respondents that would be required 

to register with the Commission would 

need to comply with this provision of 

Rule 17a–5. The Commission estimates 

that each FOCUS Report Part IIA takes 

approximately 12 hours to prepare and 

file.742 As a result, each respondent is 

estimated to have an annual reporting 

burden of 48 hours,743 resulting in an 

annual burden of 2,064 hours.744

Annual Reports: Paragraph (d)(1)(i)(A) 

of Rule 17a–5 requires broker-dealers, 

subject to limited exception, to file 

annual reports, including financial 

statements and supporting schedules 

that generally must be audited by a 

PCAOB-registered independent public 

accountant in accordance with PCAOB 

standards.745 The Commission believes 

that each of the 43 respondents that 

would be required to register with the 

Commission would need to file an 

annual report. The Commission 

estimates that each respondent is 

estimated to have an annual reporting 

burden of 12 hours under this provision 

of Rule 17a–5,746 resulting in an annual 

burden of 516 hours for the 

respondents.747

Exemption Report: Paragraph 

(d)(1)(i)(B) of Rule 17a–5 requires a 

broker-dealer that claims it was exempt 

from Rule 15c3–3 throughout the most 

recent fiscal year to file an exemption 

report with the Commission on an 

annual basis.748 The Commission 

believes, based on their business models 

(as PTFs and hedge funds), that the 

respondents generally would claim 

exemptions from Rule 15c3–3 and be 

required to file an exemption report. 

The Commission estimates that it takes 

a broker-dealer claiming an exemption 

from Rule 15c3–3 approximately 7 

hours to complete the exemption 

report,749 resulting in an annual burden 

of 301 hours.750

SIPC Annual Reports: Paragraph (d)(6) 

of Rule 17a–5 requires that each SIPC 

member broker-dealer file a copy of its 

annual report with SIPC.751 The 

Commission estimates that it takes a 

broker-dealer approximately 30 minutes 

to file the annual report with SIPC.752

As a result, each firm is estimated to 

have an annual burden of .5 hour, 

resulting in an annual burden of 21.5 

hours for the respondents.753

SIPC Annual General Assessment 

Reconciliation Report or Exclusion from 

Membership Forms: Paragraph (e)(4) of 

Rule 17a–5 requires broker-dealers to 

file with SIPC a report on the SIPC 

annual general assessment 

reconciliation or exclusion from 

membership forms.754 The Commission 

estimates that it takes a broker-dealer 

approximately 5 hours to complete and 

submit its SIPC annual assessment 

reconciliation form or certification of 

exclusion from membership form,755

resulting in an estimated annual burden 

of about 215 hours for the 

respondents.756

Statement Regarding Independent 

Public Accountant: Paragraph (f)(2) of 

Rule 17a–5 requires broker-dealers to 

prepare a statement providing 

information regarding the brokerdealer’s independent public accountant 

and to file it each year with the 

Commission and its DEA (except that if 

the engagement is of a continuing 

nature, no further filing is required).757

The Commission estimates that it takes 

a broker-dealer that neither carries 

customer accounts nor clears 

transactions approximately 2 hours to 

file the Statement Regarding 

Independent Public Accountant with 

the Commission.758 As a result, each 

broker-dealer that neither carries nor 

clears transactions is estimated to have 

an annual burden of 2 hours, resulting 

in an annual burden of 86 hours for the 

respondents.759

9. Paperwork Burdens Associated With 

Rule 17a–11 760

In 2019, the Commission received 343 

Rule 17a–11 notices from brokerdealers.761 Approximately 3,679 brokerdealers filed annual audited financial 

statements for fiscal year 2019.762 Thus, 

approximately 9% of registered brokerdealers submitted Rule 17a–11 notices. 

The Commission estimated that it will 

take approximately one hour to prepare 

and transmit each notice.763 Based on 

this, the Commission believes that 9% 

of the respondents may need to submit 

17a–11 notices, resulting in a burden of 

four hours.764

10. Paperwork Burdens Associated With 

Rule 613 

Paragraph (c) of Rule 613 provides 

that certain requirements are placed 

upon broker-dealers to record and report 

CAT information to the central 

repository in accordance with specified 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 15007 

765See 17 CFR 242.613(c). 

766Additionally, we acknowledge that fewer 

entities may actually need to report to CAT because 

some entities identified in the data as engaging in 

equity strategies could be effecting transactions in 

futures rather than transactions in NMS securities. 

767For the previously approved estimates, see ICR 

Reference No. 202306–3235–008 (Oct. 13, 2023), 

available at https://www.reginfo.gov/public/do/ 

PRAViewDocument?ref_nbr=202306-3235-008 

(‘‘2023 CAT PRA Supporting Statement’’). 

768See 2023 CAT PRA Supporting Statement at 

37. 

769The 2023 CAT PRA Supporting Statement 

largely eliminated the initial burden estimate; 

stating that as the CAT reporting obligations have 

been in place for some time, the Commission 

assumes that the initial one-time hour burdens 

associated with implementation of the system have 

already been incurred. However, the 12 respondents 

may incur these initial burdens. The prior burden 

estimates (which include a description of the initial 

burdens) can be found at https://www.reginfo.gov/ 

public/do/PRAViewDocument?ref_nbr=201911- 

3235-003 (‘‘2020 CAT Supporting Statement’’). 

770 12 respondents multiplied by 14,490 hours. 

771See 2020 CAT PRA Supporting Statement at 

39. 

772 Id. at 39–40. 

773 12 respondents multiplied by 13,338 hours. 

774Rule 15c3–1 PRA Supporting Statement at 11. 

775Rule 15c3–5 PRA Supporting Statement at 6. 

776 43 respondents multiplied by $20,500 per 

respondent. 

777Rule 17a–4 PRA Supporting Statement at 13. 

Costs include the cost of physical space, computer 

hardware and software, etc., which vary widely 

depending on the size of the broker-dealer and the 

type of storage media employed. Id. 

778 43 respondents multiplied by $5,000 per 

respondent. 

779Rule 17a–5 PRA Supporting Statement at 15. 

780 43 respondents multiplied by $7.75 per 

respondent. 

781See 17 CFR 240.17a–5(d)(1)(i)(B). 

782Rule 17a–5 PRA Supporting Statement at 16. 

783 43 respondents multiplied by $3,000 per 

respondent. 

timelines.765 The CAT is designed to 

capture customer and order event 

information for orders in NMS 

securities, across all markets, from the 

time of order inception through routing, 

cancellation, modification, or execution 

in a single, consolidated data source. If 

an affected party does not trade NMS 

stocks, OTC equities, or listed options, 

then the affected party will not incur 

CAT-related reporting costs because the 

affected party does not trade securities 

that must be reported to CAT. Based on 

staff analysis (see section III.B.2.c), the 

12 entities were identified through Form 

PF since we believe that any private 

funds employing trading strategies that 

would fit the final rules’ qualitative 

standard, as adopted, would likely 

report them as HFT. However, since 

reported HFT may apply to a broader set 

of activities than the final rules’ 

qualitative factors, the actual number of 

affected funds may be less than 12. 

However, for purposes of this PRA, we 

conservatively estimate that up to 12 

entities could be required to submit 

order information to CAT.766

The Commission recognizes that 

broker-dealers may insource or 

outsource CAT data reporting 

obligations.767 The Commission believes 

all 12 of the respondents that may be 

required to submit order information to 

CAT would likely strategically decide to 

insource their data reporting functions 

as a result of their high level of trading 

activity.768 The Commission estimates 

that the average initial burden 

associated with implementing 

regulatory data reporting to capture the 

required information and transmit it to 

the central repository in compliance 

with Rule 613 for each respondent to be 

approximately 14,490 initial burden 

hours,769 totaling an initial burden of 

173,880 hours for these respondents.770

After a respondent establishes the 

appropriate systems and processes 

required for collection and transmission 

of the required information, the 

Commission estimates that Rule 613 

imposes ongoing annual burdens 

associated with, among other things, 

personnel time to monitor each 

respondent’s reporting of the required 

data, maintenance of the systems to 

report the required data, and 

implementing changes to trading 

systems that might result in additional 

reports.771 The Commission believes 

that it would take each respondent 

approximately 13,338 burden hours per 

year 772 to continue to comply with Rule 

613, totaling an annual ongoing burden 

of 160,056 hours for the respondents.773

C. Paperwork Reduction Act Costs 

In addition to the hour burdens 

associated with these rules, there may 

also be external costs associated with 

the paperwork burdens imposed by 

these rules. 

1. Costs Associated With Rule 15c3–1 

Paperwork Burden 

Broker-dealers that file consolidated 

financial reports must obtain an opinion 

of counsel in accordance with appendix 

C to Rule 15c3–1.774 The Commission 

indicated, when this rule was proposed, 

that it believed there will not be any 

respondents that are required to register 

as a result of the proposed rules that 

will obtain an opinion of counsel to file 

the consolidated financial reports as 

required under appendix C to Rule 

15c3–1. We received no comment on 

this issue, and the Commission does not 

anticipate that respondents will incur 

any capital or start-up costs, nor any 

additional operational or maintenance 

costs, to comply with the collection of 

information under Rule 15c3–1. 

2. Costs Associated With Rule 15c3–5 

Paperwork Burden 

The Commission estimates that the 

average ongoing external hardware and 

software expenses relating to the 

paperwork burden associated with Rule 

15c3–5 would be approximately $20,500 

per respondent,775 for a total annualized 

external cost for all respondents of 

$881,500.776

3. Costs Associated With Rule 17a–4 

Paperwork Burden 

The Commission estimates that the 

average broker-dealer spends 

approximately $5,000 each year to store 

documents required to be retained 

under Rule 17a–4.777 Accordingly, the 

Commission estimates that the annual 

reporting and recordkeeping cost 

burden for the respondents to be 

$215,000.778

4. Costs Associated With Rule 17a–5 

Paperwork Burden 

The Commission estimates that Rule 

17a–5 causes a broker-dealer to incur an 

annual dollar cost to meet its reporting 

obligations. Those requirements that are 

anticipated to impose an annual cost are 

discussed below. 

Annual Reports: The Commission 

estimates that postage costs to comply 

with paragraph (d) of Rule 17a–5, 

impose on broker-dealers an annual 

dollar cost of $7.75 per firm,779 resulting 

in a total annual cost for the 

respondents of approximately $333.780

Exemption Report: A broker-dealer 

that claims it was exempt from Rule 

15c3–3 throughout the most recent 

fiscal year must file an exemption report 

with the Commission on an annual 

basis.781 The cost associated with an 

independent public accountant’s review 

of the exemption report is estimated to 

create an ongoing cost of $3,000 per 

non-carrying broker-dealer per year,782

for a total annual reporting cost of 

approximately $129,000.783

SIPC Annual Reports: The 

Commission estimates that postage costs 

to comply with paragraph (d)(6) of Rule 


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15008 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

784Rule 17a–5 PRA Supporting Statement at 16. 

785 43 respondents multiplied by $0.50 per 

respondent. 

786Rule 17a–5 PRA Supporting Statement at 16. 

787 43 respondents multiplied by $0.50 per 

respondent. 

788Rule 17a–5 PRA Supporting Statement at 17. 

789 43 respondents multiplied by $0.50 per 

respondent. 

790See 2020 CAT PRA Supporting Statement at 

63–64. 

791 12 respondents multiplied by (($450,000 in 

external hardware and software costs) + ($250,000 

to implement the modified allocation timestamp 

requirement) + ($9,500 initial third party/ 

outsourcing costs) = $709,500). 

792See 2020 CAT PRA Supporting Statement at 

66. 

793 Id. 

794 12 respondents multiplied by (($80,000 in 

external hardware and software costs) + ($29,167 to 

maintain the modified allocation timestamp 

requirement) + ($1,300 ongoing external third 

party/outsourcing costs) = $110,467). 

795 5 U.S.C. 603(a). 

796Although section 601(b) of the RFA defines 

the term ‘‘small entity,’’ the statute permits agencies 

to formulate their own definitions. The Commission 

has adopted definitions for the term ‘‘small entity’’ 

for the purposes of Commission rulemaking in 

accordance with the RFA. Those definitions, as 

relevant to this rulemaking, are set forth in Rule 0– 

10 under the Exchange Act. See also Exchange Act 

Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 

4, 1982) (File No. AS–305). 

797 5 U.S.C. 605(b). 

798 Id. 

799See ABA Comment Letter. 

800See supra section II.B.3. 

801 5 U.S.C. 601(6). 

802Exchange Act Rule 0–10 contains applicable 

definitions. 

803 Id. 

804See Rules 3a5–4(a)(2)(i) and 3a44–2(a)(2)(i). 

See also section II.B.3. 

805 5 U.S.C. 801 et seq. 

17a–5 impose an annual dollar cost of 

50 cents per firm registered with SIPC 

as a SIPC member broker-dealer 784

totaling, an estimated cost burden for 

the respondents of $21.50.785

SIPC Annual General Assessment 

Reconciliation Report or Exclusion from 

Membership Forms: The Commission 

estimates that postage costs to comply 

with paragraph (e)(4) of Rule 17a–5 

impose an annual dollar cost of 50 cents 

per firm.786 The Commission estimates 

that the respondents will file with SIPC 

a report on the SIPC annual general 

assessment reconciliation or exclusion 

from membership form, such that the 

estimated annual cost burden totals 

$21.50.787

Statement Regarding Independent 

Public Accountant: The Commission 

estimates that postage costs to comply 

with paragraphs (f)(2) and (3) of Rule 

17a–5, impose an annual dollar cost of 

50 cents per firm.788 Accordingly, the 

Commission estimates that a cumulative 

total cost of $21.50 per year.789

5. Costs Associated With Rule 613 

Paperwork Burden 

The Commission estimates that each 

of the 12 respondents that may engage 

in effecting transactions in NMS 

securities will, on average, incur 

approximately $450,000 in initial costs 

for hardware and software to implement 

the systems changes needed to capture 

the required information and transmit it 

to the central repository, an additional 

$9,500 in initial third party costs, and 

an additional $250,000 in costs to 

implement the modified allocation 

timestamp requirement,790 totaling a 

cumulative initial cost of $8,514,000 for 

the respondents.791

After each respondent has established 

the appropriate systems and processes, 

the Commission believes that Rule 613 

imposes ongoing annual burdens 

associated with, among other things, 

personnel time to monitor each 

respondent’s reporting of the required 

data, maintenance of the systems to 

report the required data, and 

implementing changes to trading 

systems that might result in additional 

reports to the central repository.792 The 

Commission estimates costs for each 

respondent, on average, of 

approximately $80,000 per year to 

maintain systems connectivity to the 

central repository and purchase any 

necessary hardware, software, and other 

materials, an additional $1,300 per year 

in third party costs, and an additional 

$29,167 per year to maintain the 

modified allocation timestamp 

requirement,793 totaling an estimated a 

cumulative annual ongoing cost of 

$1,325,604 for the respondents.794

V. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires Federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

Section 603(a) of the Administrative 

Procedures Act (‘‘APA’’),795 as amended 

by the RFA, generally requires the 

Commission to undertake a regulatory 

flexibility analysis of all proposed rules, 

or proposed rule amendments, to 

determine the impact of the rulemaking 

on ‘‘small entities.’’ 796 Section 605(b) of 

the RFA 797 states that this requirement 

shall not apply to any proposed rule or 

proposed rule amendment which, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities.798

The Commission received one 

comment on this certification.799 The 

commenter stated that the Commission 

should consider as part of its regulatory 

flexibility analysis that requiring a new 

category of registrants (i.e., funds) to 

register as dealers under the proposed 

rules would require FINRA to provide 

new registration categories.800 For the 

reasons described below, the final rules 

will not have a significant economic 

impact on a substantial number of small 

entities; nor does the Commission 

believe that there is a correlation 

between the regulatory flexibility 

analysis and the particular issue that the 

commenter raised. 

As stated in the Proposing Release, 

the RFA defines ‘‘small entity’’ to mean 

‘‘small business,’’ ‘‘small organization,’’ 

or ‘‘small governmental 

jurisdiction.’’ 801 The Commission’s 

rules define ‘‘small business’’ and 

‘‘small organization’’ for purposes of the 

RFA for each of the types of entities 

regulated by the Commission.802 A 

‘‘small business’’ and ‘‘small 

organization,’’ when used in reference 

to a person other than an investment 

company, generally means a person 

with total assets of $5 million or less on 

the last day of its most recent fiscal 

year.803

The final rules would not apply to 

persons that have or control total assets 

of less than $50 million.804 Therefore, 

because small businesses and small 

organizations with total assets of $50 

million or less would not meet the 

requirements of the final rules, the final 

rules would not have a significant 

economic impact on a substantial 

number of small entities. 

For the foregoing reasons, the 

Commission certifies, pursuant to 

section 605(b), that the final rules will 

not have a significant economic impact 

on a substantial number of small entities 

for purposes of the RFA. 

VI. Other Matters 

Pursuant to the Congressional Review 

Act,805 the Office of Information and 

Regulatory Affairs has designated these 

rules as a ‘‘major rule,’’ as defined by 5 

U.S.C. 804(2). 

If any of the provisions of these final 

rules, or the application thereof to any 

person or circumstance, is held to be 

invalid, such invalidity shall not affect 

other provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

Statutory Authority 

The Commission is adopting Rules 

3a5–4 and 3a44–2 pursuant to authority 

set forth in sections 3 and 23 of the 

Exchange Act (15 U.S.C. 78c and 78w). 


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Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 15009 

Text of Final Rules 

List of Subjects in 17 CFR Part 240 

Securities dealers, Government 

securities dealers. 

For the reasons set out in the 

preamble, the Commission is amending 

title 17, chapter II, of the Code of 

Federal Regulations as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The general authority citation for 

part 240 continues to read as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78j–4, 78k, 78k–1, 78l, 

78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 

78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 

U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; and Pub. L. 111–203, 939A, 124 

Stat. 1376 (2010); and Pub. L. 112–106, sec. 

503 and 602, 126 Stat. 326 (2012), unless 

otherwise noted. 

* * * * * 

■ 2. Add § 240.3a5–4 to read as follows: 

§ 240.3a5–4 Further definition of ‘‘as a part 

of a regular business’’ in connection with 

certain liquidity providers. 

(a) A person that is engaged in buying 

and selling securities for its own 

account is engaged in such activity ‘‘as 

a part of a regular business’’ as the 

phrase is used in section 3(a)(5)(B) of 

the Act (15 U.S.C. 78c(a)(5)(B)) if that 

person: 

(1) Engages in a regular pattern of 

buying and selling securities that has 

the effect of providing liquidity to other 

market participants by: 

(i) Regularly expressing trading 

interest that is at or near the best 

available prices on both sides of the 

market for the same security and that is 

communicated and represented in a way 

that makes it accessible to other market 

participants; or 

(ii) Earning revenue primarily from 

capturing bid-ask spreads, by buying at 

the bid and selling at the offer, or from 

capturing any incentives offered by 

trading venues to liquidity-supplying 

trading interest; and 

(2) Is not: 

(i) A person that has or controls total 

assets of less than $50 million; 

(ii) An investment company registered 

under the Investment Company Act of 

1940; or 

(iii) A central bank, sovereign entity, 

or international financial institution. 

(b) For purposes of this section: 

(1) The term person has the same 

meaning as prescribed in section 3(a)(9) 

of the Act (15 U.S.C. 78c(a)(9)). 

(2) A person’s own account means 

any account: 

(i) Held in the name of that person; or 

(ii) Held for the benefit of that person. 

(3) The term central bank means a 

reserve bank or monetary authority of a 

central government (including the Board 

of Governors of the Federal Reserve 

System or any of the Federal Reserve 

Banks) and the Bank for International 

Settlements. 

(4) The term international financial 

institution means the African 

Development Bank; African 

Development Fund; Asian Development 

Bank; Banco Centroamericano de 

Integracio ́n Econo ́mica; Bank for 

Economic Cooperation and 

Development in the Middle East and 

North Africa; Caribbean Development 

Bank; Corporacio ́n Andina de Fomento; 

Council of Europe Development Bank; 

European Bank for Reconstruction and 

Development; European Investment 

Bank; European Investment Fund; 

European Stability Mechanism; InterAmerican Development Bank; InterAmerican Investment Corporation; 

International Bank for Reconstruction 

and Development; International 

Development Association; International 

Finance Corporation; International 

Monetary Fund; Islamic Development 

Bank; Multilateral Investment Guarantee 

Agency; Nordic Investment Bank; North 

American Development Bank; and any 

other entity that provides financing for 

national or regional development in 

which the U.S. Government is a 

shareholder or contributing member. 

(5) The term sovereign entity means a 

central government (including the U.S. 

Government), or an agency, department, 

or ministry of a central government. 

(c) No person shall evade the 

registration requirements of this section 

by: 

(1) Engaging in activities indirectly 

that would satisfy paragraph (a) of this 

section; or 

(2) Disaggregating accounts. 

(d) No presumption shall arise that a 

person is not a dealer within the 

meaning of section 3(a)(5) of the Act 

solely because that person does not 

satisfy paragraph (a) of this section. 

■ 3. Add § 240.3a44–2 to read as 

follows: 

§ 240.3a44–2 Further definition of ‘‘as a 

part of a regular business’’ in connection 

with certain liquidity providers. 

(a) A person that is engaged in buying 

and selling government securities for its 

own account is engaged in such activity 

‘‘as a part of a regular business’’ as the 

phrase is used in section 3(a)(44)(A) of 

the Act (15 U.S.C. 78c(a)(44)(A)) if that 

person: 

(1) Engages in a regular pattern of 

buying and selling government 

securities that has the effect of 

providing liquidity to other market 

participants by: 

(i) Regularly expressing trading 

interest that is at or near the best 

available prices on both sides of the 

market for the same security and that is 

communicated and represented in a way 

that makes it accessible to other market 

participants; or 

(ii) Earning revenue primarily from 

capturing bid-ask spreads, by buying at 

the bid and selling at the offer, or from 

capturing any incentives offered by 

trading venues to liquidity-supplying 

trading interest; and 

(2) Is not: 

(i) A person that has or controls total 

assets of less than $50 million; or 

(ii) An investment company registered 

under the Investment Company Act of 

1940; or 

(iii) A central bank, sovereign entity, 

or international financial institution. 

(b) For purposes of this section: 

(1) The term person has the same 

meaning as prescribed in section 3(a)(9) 

of the Act (15 U.S.C. 78c(a)(9)). 

(2) A person’s own account means 

any account: 

(i) Held in the name of that person; or 

(ii) Held for the benefit of that person. 

(3) The term central bank means a 

reserve bank or monetary authority of a 

central government (including the Board 

of Governors of the Federal Reserve 

System or any of the Federal Reserve 

Banks) and the Bank for International 

Settlements. 

(4) The term international financial 

institution means the African 

Development Bank; African 

Development Fund; Asian Development 

Bank; Banco Centroamericano de 

Integracio ́n Econo ́mica; Bank for 

Economic Cooperation and 

Development in the Middle East and 

North Africa; Caribbean Development 

Bank; Corporacio ́n Andina de Fomento; 

Council of Europe Development Bank; 

European Bank for Reconstruction and 

Development; European Investment 

Bank; European Investment Fund; 

European Stability Mechanism; InterAmerican Development Bank; InterAmerican Investment Corporation; 

International Bank for Reconstruction 

and Development; International 

Development Association; International 

Finance Corporation; International 

Monetary Fund; Islamic Development 

Bank; Multilateral Investment Guarantee 

Agency; Nordic Investment Bank; North 

American Development Bank; and any 

other entity that provides financing for 

national or regional development in 


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15010 Federal Register / Vol. 89, No. 41 / Thursday, February 29, 2024 / Rules and Regulations 

which the U.S. Government is a 

shareholder or contributing member. 

(5) The term sovereign entity means a 

central government (including the U.S. 

Government), or an agency, department, 

or ministry of a central government. 

(c) No person shall evade the 

registration requirements of this section 

by: 

(1) Engaging in activities indirectly 

that would satisfy paragraph (a) of this 

section; or 

(2) Disaggregating accounts. 

(d) No presumption shall arise that a 

person is not a government securities 

dealer within the meaning of section 

3(a)(44) of the Act (15 U.S.C. 78c(a)(44)) 

solely because that person does not 

satisfy paragraph (a) of this section. 

By the Commission. 

Dated: February 6, 2024. 

J. Matthew DeLesDernier, 

Deputy Secretary. 

[FR Doc. 2024–02837 Filed 2–28–24; 8:45 am] 

BILLING CODE 8011–01–P 


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