23054 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

1See Department of the Treasury, Notice Seeking 

Comment on the Evolution of the U.S. Treasury 

Market Structure, 81 FR 3928 (Jan. 22, 2016) 

(‘‘Treasury Request for Comment’’). See also Joint 

Staff Report: The U.S. Treasury Market on October 

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/special-studies/ 

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’’). 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. See also 

Concept Release Concerning Equity Market 

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

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

Market Structure Concept Release’’) at 3594–96 

(discussing the evolution from ‘‘a market structure 

with primarily manual trading to a market structure 

with primarily automated trading’’). 

2FEDS Notes, ‘‘Principal Trading Firm Activity in 

Treasury Cash Markets,’’ James Collin Harkrader 

and Michael Puglia (Aug. 4, 2020) (‘‘[Principal 

trading firms] dominate activity on the electronic 

[interdealer broker] platforms (61 [percent].’’). For 

purposes of this release, the terms ‘‘principal 

trading firms’’ and ‘‘proprietary trading firms’’ 

(collectively, ‘‘PTFs’’) will be used interchangeably. 

3As used in this release, the term ‘‘dealer’’ refers 

to both dealers and government securities dealers 

unless explicitly noted or the context indicates 

otherwise. 

4As discussed in Section V below, the 

Commission believes that the Proposed Rules 

would support orderly markets and protect 

investors by addressing negative externalities that 

may arise in relation to market participants’ 

financial and operational risks. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–94524; 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 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing 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: Comments should be received on 

or before May 27, 2022. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/

rules/submitcomments.htm); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

12–22 on the subject line. 

Paper Comments 

• Send paper comments to Vanessa 

A. Countryman, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–12–22. This file number 

should be included on the subject line 

if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (https://www.sec.gov/

rules/proposed.shtml). Comments also 

are available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Operating 

conditions may limit access to the 

Commission’s public reference room. 

Persons submitting comments are 

cautioned that we do not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make available publicly. 

Studies, memoranda, or other 

substantive items may be added by the 

Commission or staff to the comment file 

during this rulemaking. A notification of 

the inclusion in the comment file of any 

such materials will be made available 

on the Commission’s website. To ensure 

direct electronic receipt of such 

notifications, sign up through the ‘‘Stay 

Connected’’ option at www.sec.gov to 

receive notifications by email. 

FOR FURTHER INFORMATION CONTACT: 

Emily Westerberg Russell, Chief 

Counsel; John Fahey, Deputy Chief 

Counsel; Joanne Rutkowski, Assistant 

Chief Counsel; Shauna Sappington 

Vlosich, Senior Special Counsel; James 

Blakemore, Special Counsel; or 

Katherine Lesker, 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 proposing the following 

new rules under the Exchange Act: (1) 

17 CFR 3a5–4 (Rule 3a5–4) and (2) 17 

CFR 3a44–2 (Rule 3a44–2) (collectively, 

the ‘‘Proposed Rules’’). 

I. Introduction 

Advancements in electronic trading 

across securities markets have led to the 

emergence of certain market 

participants that play an increasingly 

significant liquidity providing role in 

overall trading and market activity—a 

role that has traditionally been 

performed by entities regulated as 

dealers.1 However, 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 2— 

may not be registered with the 

Commission as either dealers or 

government securities dealers under 

Sections 15 and 15C of the Exchange 

Act, respectively.3 Because of this, 

investors and the markets lack the 

important protections that result from 

an entity’s registration and regulation 

under the Exchange Act. In addition, 

obligations and regulatory oversight that 

promote market stability and investor 

protection are not being consistently 

applied to entities engaged in similar 

activities. 

The Commission believes that the 

identification and registration of these 

market participants as dealers, 

including those that are not currently 

regulated as dealers, would provide 

regulators with a more comprehensive 

view of the markets through regulatory 

oversight and would enhance market 

stability and investor protection.4

Accordingly, the Commission is 

proposing to further define what it 

means to be buying and selling 

securities ‘‘as a part of a regular 

business’’ within the definitions of 

‘‘dealer’’ and ‘‘government securities 

dealer’’ under Sections 3(a)(5) and 

3(a)(44), respectively. 

Evolution of the Market 

Advancements in technology have 

affected securities trading across 

markets and asset classes; however, 

regulation has not always kept pace. 

This is especially true in the U.S. 

Treasury market in view of the 

increasingly significant role played by 

market intermediaries that are not 

registered as dealers. The U.S. Treasury 

market has evolved significantly over 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23055 

5See IAWG Joint Staff Report, Recent Disruptions 

and Potential Reforms in the U.S. Treasury Market: 

A Staff Progress Report 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’’). 

6See id. 

7See Monthly Statement of the Public Debt of the 

United States (Dec. 31, 2021), available at https:// 

www.treasurydirect.gov/govt/reports/pd/mspd/ 

2021/opds122021.pdf; see also U.S. Bureau of 

Economic Analysis, Gross Domestic Product (GDP), 

FRED, Fed. Res. Bank of St. Louis, available at 

https://fred.stlouisfed.org/series/GDP. 

8The U.S. Treasury market is comprised of the 

cash market (purchases and sales of securities), the 

repo market, and the futures market. The U.S. 

Treasury cash market has been traditionally 

bifurcated between the interdealer market (whereby 

dealers trade with other dealers or with proprietary 

trading firms) and the dealer-to-customer market 

(whereby dealers trade with clients). Trading in 

electronic interdealer markets occurs anonymously 

on electronic trading platforms known as 

interdealer broker platforms (‘‘IDBs’’). Trading on 

the IDB platforms is similar to trading on other 

highly liquid markets and where certain market 

participants account for a significant trading 

volume. See Treasury Request for Comment at 3928. 

For purposes of this release, when discussing the 

U.S. Treasury market, we will be primarily focused 

on trading activities occurring in the interdealer 

market. 

9 2021 IAWG Joint Staff Report at 5. A bank 

engaged in these activities 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’’). As discussed infra note 41, 

a bank may nonetheless be a government securities 

dealer required to register under Section 15C. 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, and comply 

with rules adopted by the Treasury and the 

applicable Federal banking regulator. 

10See Treasury Request for Comment. See also 

Group of Thirty Working Group on Treasury Market 

Liquidity, U.S. Treasury Markets: Steps toward 

Increased Resilience, Group of Thirty (2021) (‘‘G30 

Report’’) at https://group30.org/publications/detail/ 

4950; 2021 IAWG Joint Staff Report at 5. 

11See Michael J. Fleming, Bruce Mizrach, and 

Giang Nguyen, Federal Reserve Bank of New York 

Staff Reports, The Microstructure of a U.S. Treasury 

ECN: The BrokerTec Platform, Staff Report No. 381 

(July 2009, rev. May 2014); see also Treasury 

Request for Comment (‘‘Trading on these platforms 

[in the Treasury cash market] has become 

increasingly automated, with transactions 

conducted using algorithmic and other trading 

strategies involving little or no human intervention 

. . . bear[ing] some resemblance to other highly 

liquid markets, including equities and foreign 

exchange markets, where PTFs and dealers transact 

in automated fashion, sometimes in large volumes 

and at high speed.’’); FEDS Notes, ‘‘Principal 

Trading Firm Activity in Treasury Cash Markets,’’ 

James Collin Harkrader and Michael Puglia (Aug. 4, 

2020); G30 Report at 1. The Commission separately 

has proposed, among other things, amendments to 

Exchange Act Rule 3b–16 to include within the 

definition of ‘‘exchange’’ systems that offer the use 

of non-firm trading interest and communication 

protocols to bring together buyers and sellers of 

securities. 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, Securities Exchange 

Act Release No. 94062 (Jan. 26, 2022), 87 FR 15496 

(Mar. 18, 2022) (‘‘2022 ATS Proposing Release’’). 

12See Staff Report on Algorithmic Trading in U.S. 

Capital Markets As Required by Section 502 of the 

Economic Growth, Regulatory Relief, and Consumer 

Protection Act of 2018 (Aug. 5, 2020) (‘‘Algorithmic 

Trading Staff Report’’), at pp. 39–41 (‘‘Passive 

market-making involves submitting non-marketable 

orders on both sides (buy or ‘bid,’ and sell or ‘offer’) 

of the marketplace’’; ‘‘structural strategies attempt 

to exploit structural vulnerabilities in the market or 

in certain market participants’’; and ‘‘directional 

strategies generally involve establishing a shortterm long or short position in anticipation of a price 

move up or down’’); see also 2010 Equity Market 

Structure Concept Release. 

13See 2022 ATS Proposing Release at 15597. See 

also 2015 Joint Staff Report at 39; 2021 IAWG Joint 

Staff Report at 5 (‘‘PTFs tend to make trading 

decisions primarily based on immediate 

profitability and the level of market risk’’). 

14Nellie Liang and Pat Parkinson, Hutchins 

Center Working Paper #72, Enhancing Liquidity of 

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

2020) (‘‘Enhancing Liquidity’’), at 6. 

15See 2021 IAWG Joint Staff Report at 5. 

16See 2015 Joint Staff Report at 21. 

17FEDS Notes, ‘‘Principal Trading Firm Activity 

in Treasury Cash Markets,’’ James Collin Harkrader 

and Michael Puglia (Aug. 4, 2020) (citing data 

presented at the 2019 U.S. Treasury Market 

Conference showing that PTFs averaged 

approximately 61 percent of total trading volume on 

electronic interdealer broker platforms). 

18 2015 Joint Staff Report; Enhancing Liquidity at 

6. 

19See 2010 Equity Market Structure Concept 

Release at 3594. 

20See 2010 Equity Market Structure Concept 

Release at 3607 (stating that liquidity providers 

historically have been viewed as dealers, and that 

‘‘[a]lthough [PTFs] that employ passive market 

making strategies are a new type of market 

participant, the liquidity providing function they 

perform is not new.’’). 

recent decades in at least two important 

ways. First, the amount of U.S. Treasury 

securities outstanding has increased 

substantially.5 At the end of 2007, 

Treasury debt held by the public totaled 

$5.1 trillion, or 35 percent of that year’s 

gross domestic product (‘‘GDP’’).6 That 

number rose to $23.1 trillion, or 96.5 

percent of GDP, by the end of 2021.7

Second, a significant rise in electronic 

trading in the interdealer market 8 for 

U.S. Treasury securities has contributed 

to a dramatic change in the overall 

structure of the market. In particular, 

technological advances have 

increasingly enabled certain market 

participants that are not registered as 

dealers to perform critical market 

functions, including liquidity provision, 

that once were primarily performed by 

regulated dealers.9 Since the mid-2000s, 

electronic trading has come to dominate 

the interdealer market for U.S. Treasury 

securities, gradually supplanting 

manual transactions made via the 

telephone.10 The proliferation of fully 

electronic trading venues has been 

accompanied by the rise of certain 

market participants who are not 

registered as dealers and who today 

account for a majority of trading in the 

Treasury interdealer market.11 In 

particular, PTFs—businesses that often 

employ automated, algorithmic trading 

strategies (including passive market 

making, arbitrage, and structural and 

directional trading) 12 that rely on speed, 

which allows them to quickly execute 

trades, or cancel or modify quotes in 

response to perceived market 

events 13—account for about half of the 

daily volume in the interdealer 

market.14

These new market participants have 

established themselves as significant 

market intermediaries—and critical 

sources of liquidity—in the U.S. 

Treasury market. For example, by 2014, 

unregistered market participants trading 

U.S. Treasury securities, including 

PTFs, accounted for a majority of 

trading activity in the electronic 

interdealer market.15 The 2015 Joint 

Staff Report on the U.S. Treasury market 

found that more than 50 percent of 

trading volume in benchmark U.S. 

Treasury securities on the major trading 

platforms is attributable to PTFs.16 In 

2020, staff at the Board of Governors of 

the Federal Reserve published a paper 

estimating that PTFs account for 61 

percent of the trading activity on 

interdealer broker platforms.17 The 

significant presence of market 

participants that are not registered as 

dealers or government securities dealers 

in the U.S. Treasury market, the volume 

of their trading, the magnitude of their 

impact on the market, the regularity of 

their participation, and in many cases 

the nature of their electronic trading 

strategies have all contributed to the 

increasingly central role of these market 

participants as liquidity providers.18

The rise of electronic trading has 

similarly impacted the market structure 

of the securities markets generally. In 

the equity markets, for example, trading 

in exchange-listed equities, once 

concentrated on exchange floors, now 

largely occurs in an electronic, highly 

decentralized but interconnected market 

that is accessed by brokers, dealers, and 

other market participants using a large 

number and great variety of trading 

venues.19 In the equity markets, too, 

technological advances have enabled 

significant market participants to take 

on an increasingly central role as 

liquidity providers, largely replacing 

more traditional types of traditional 

liquidity providers, such as exchange 

specialists on manual trading floors and 

over-the-counter (‘‘OTC’’) market 

makers.20 Technological advancements 


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23056 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

21 In 2005, the Commission adopted 17 CFR 

242.600 through 242.614 (Regulation NMS), a series 

of initiatives designed to modernize and strengthen 

the national market system for equity securities 

through improved fairness in price execution, 

displaying of quotes, and access to market data. 

Exchange Act Release No. 51808 (June 9, 2005), 70 

FR 37495 (‘‘Regulation NMS Release’’). As these 

initiatives were implemented, regulations that had 

protected the manual quotes of floor exchanges 

from trade-throughs were rescinded. Id. In 2006, 

after decades of trading predominantly on the 

exchange floor, the New York Stock Exchange 

(‘‘NYSE’’) introduced a hybrid market structure that 

incorporated an ability to transact electronically. 

See 2010 Equity Market Structure Concept Release. 

Today, electronic trading dominates transactions in 

equity securities. 

22A significant portion of trading activity in the 

equity markets—once estimated at 40–50 percent of 

the daily trading volume in exchange-listed 

equities—is conducted by PTFs. See High 

Frequency Trading and Networked Markets, 

Federico Musciotto, Jyrki Piilo, Rosario N. 

Mantegna (Mar. 5, 2021); SEC Staff of the Division 

of Trading and Markets, Equities Market Structure 

Literature Review Part II: High Frequency Trading 

(Mar. 18, 2014); Do High-Frequency Traders 

Anticipate Buying and Selling Pressure?, Nicholas 

H. Hirschey (Nov. 2013); High-Frequency Trading 

and Price Discovery, Jonathan Brogaard, Terrance 

Hendershott, Ryan Riordan (May 14, 2014); High 

Frequency Trading: An Important Conversation, 

available at https://tabbforum.com/opinions/highfrequency-trading-an-important-conversation (Mar. 

24, 2014) (illustrating the percentage of high 

frequency trading of U.S. equity shares traded from 

2006 to 2014 in Exhibit 1). See also Section V.B.2. 

23 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’’) (stating that a 

person generally may satisfy the definition, and 

therefore, be acting as a dealer in the securities 

markets by conducting various activities, including 

‘‘acting as a market maker or specialist on an 

organized exchange or trading system’’). 

24See Section V.B.2.a, Table 1. 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.’’ 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.’’ See Section II.A. 

25Section V.C.2 describes the estimated costs 

associated with registering as a dealer or 

government securities dealer for those persons who 

meet the proposed standards. 

26 In addition, earlier this year, the Commission 

proposed to amend 17 CFR 242.300 through 

242.304 (Regulation ATS) for alternative trading 

systems (‘‘ATSs’’) that trade government securities 

(as defined under Section 3(a)(42) of the Exchange 

Act) or repurchase and reverse repurchase 

agreements on government securities (‘‘repos’’) 

(such ATSs, together, ‘‘Government Securities 

ATSs’’) to: (1) Eliminate the current exemption from 

compliance with Regulation ATS for an ATS that 

limits its securities activities to government 

securities or repos, and registers as a broker-dealer 

or is a bank; (2) require the filing of public Form 

ATS–N for Government Securities ATSs, which 

would be subject to Commission review and 

ineffectiveness procedures, and would require a 

Government Securities ATS to disclose information 

about its manner of operations and the ATS-related 

activities of the registered broker-dealer or 

government securities broker or government 

securities dealer that operates the ATS and its 

affiliates; and (3) apply the fair access rule under 

17 CFR 242.301(b)(5) (Rule 301(b)(5) of Regulation 

ATS) to Government Securities ATSs that meet 

certain volume thresholds in U.S. Treasury 

Securities or in a debt security issued or guaranteed 

by a U.S. executive agency, or governmentsponsored enterprise (‘‘Agency Securities’’). See 

2022 ATS Proposing Release. The 2022 ATS 

Proposing Release is also re-proposing amendments 

to 12 CFR 242.1000 through 242.1007 (Regulation 

Systems Compliance and Integrity (‘‘Regulation 

SCI’’)) to apply it to Government Securities ATSs 

that meet certain volume thresholds in U.S. 

Treasury Securities or Agency Securities. 

27We have consulted with the staff of the U.S. 

Department of the Treasury on this proposal. 

28As discussed more fully below, the standards 

in the Proposed Rules do not apply to a person that 

has or controls total assets of less than $50 million, 

or an investment company registered under the 

Investment Company Act of 1940 (‘‘Investment 

Company Act’’) (such company a ‘‘registered 

investment company’’). See proposed Rule 3a5– 

4(a)(2) and proposed Rule 3a44–2(a)(3). Investment 

advisers are not required to aggregate accounts held 

in the name of clients of the adviser under certain 

circumstances as described in proposed Rule 3a5– 

4(b)(2)(ii) and proposed Rule 3a44–2(b)(2)(ii). See 

Section III.D. 

29There is an analogous exemption under the 

Treasury rules for certain foreign government 

securities dealers. See 17 CFR 401.7 (Treas. Reg. 

§ 401.7) (1987) (‘‘Exemption for certain foreign 

government securities brokers or dealers.’’). The 

Commission is not expressing any views concerning 

multilateral development banks, like the 

International Bank for Reconstruction and 

Development (or the World Bank) and the 

International Finance Corporation, or foreign 

sovereigns or foreign central banks, or any other 

sovereign or international bodies as to the 

immunities such entities may possess under U.S. or 

international law. See, e.g., Security-Based Swap 

Transactions Connected With a Non-U.S. Person’s 

Dealing Activity That Are Arranged, Negotiated, or 

Executed by Personnel Located in a U.S. Branch or 

Office or in a U.S. Branch or Office of an Agent; 

have prompted changes to trading 

practices, particularly with regard to the 

way in which orders are generated, 

routed, and executed. Developments in 

securities regulation also have 

contributed to the evolution of market 

structure and the rise of electronic 

trading.21 These technological and 

regulatory changes have resulted in the 

development of highly automated 

exchange systems and trading tools that 

have facilitated a business model for 

certain market participants, including 

PTFs, that perform functions similar to 

registered dealers.22

As discussed below, the Commission 

has long identified liquidity provision, 

including acting as a ‘‘market maker’’ or 

‘‘a de facto market maker whereby 

market professionals or the public look 

to the firm for liquidity,’’ as a factor that 

indicates ‘‘dealer’’ status.23 Analysis 

indicates a number of market 

participants that, despite their 

significant share of market volume and 

their central role as liquidity providing 

intermediaries in the U.S. Treasury 

market, are not registered with the 

Commission either as ‘‘government 

securities dealers’’ under Section 15C of 

the Exchange Act or ‘‘dealers’’ under 

Section 15 of the Exchange Act.24 This 

has resulted in an uneven playing field 

in which some participants are subject 

to regulation (and its attendant costs 

and benefits), and some are not. This 

uneven application of regulatory 

oversight of significant liquidity 

providers makes it difficult for 

regulators and market observers to 

detect, investigate, understand, or 

address market events, such as the 

‘‘flash rally’’ in October 2014. 

As discussed below, the regulatory 

regime applicable to dealers is a 

cornerstone of the U.S. Federal 

securities laws, and helps to promote 

the Commission’s long-standing mission 

to protect investors, maintain fair, 

orderly, and efficient markets, and 

promote capital formation. As discussed 

in Sections II.D, and V.C, the 

registration of market participants who 

engage in significant dealer-like 

activities—but who are not currently 

registered as dealers—would provide 

regulators with a more comprehensive 

view of the markets through regulatory 

oversight, as well as enhance market 

stability through compliance with 

dealer regulations that are designed to 

support orderly markets, and protect 

investors by minimizing the impact of 

market participants’ potential financial 

and operational risks.25 Accordingly, 

the Commission is taking steps to 

ensure that these market participants are 

registered and regulated,26 and is 

proposing for comment rules to further 

define the regulatory status of certain 

participants as ‘‘dealers’’ and 

‘‘government securities dealers,’’ within 

the meaning of Sections 3(a)(5) and 

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

respectively.27

Specifically, the Commission is 

proposing standards to identify those 

market participants that are providing 

an important liquidity provision 

function in today’s securities markets. 

Any person 28 that meets the activitybased standards identified in the 

Proposed Rules would be a dealer or 

government securities dealer required to 

register, absent an otherwise available 

and applicable statutory or regulatory 

exemption or exception (e.g., foreign 

broker-dealers exempted pursuant to 17 

CFR 240.15a–6 (Exchange Act Rule 15a– 

6)).29


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23057 

Security-Based Swap Dealer De Minimis Exception, 

Exchange Act Release No. 77104 (Feb. 10, 2016), 81 

FR 8598, available at https://www.govinfo.gov/ 

content/pkg/FR-2016-02-19/pdf/2016-03178.pdf. 

30A 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. 

31 ‘‘Investment adviser’’ is defined under the 

Investment Advisers Act of 1940 (‘‘Advisers Act’’) 

as ‘‘any person who, for compensation, engages in 

the business of advising others, either directly or 

through publications or writings, as to the value of 

securities or as to the advisability of investing in, 

purchasing, or selling securities, or who, for 

compensation and as part of a regular business, 

issues or promulgates analyses or reports 

concerning securities.’’ See 15 U.S.C. 80b–2(a)(11). 

32See Section III.D. 

33As discussed in Section III.D, for purposes of 

the definition of ‘‘own account,’’ an account held 

in the name of a person that is a registered 

investment company would not be attributed to a 

controlling person or another person under 

common control. 

34See Amendments to Form PF to Require 

Current Reporting and Amend Reporting 

Requirements for Large Private Equity Advisers and 

Large Liquidity Fund Advisers, Investment 

Advisers Act Release No. 5950 (Jan. 26. 2022), 87 

FR 9106 (Feb. 17, 2022) (‘‘Form PF Proposing 

Release’’). 

35Paragraph (b)(2)(ii)(B) of the Proposed Rules 

would not attribute to a registered investment 

adviser an account held in the name of a client of 

the registered investment adviser, unless the 

adviser controls 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. 

36Proposed Rule 3a5–4 would apply to securities 

as defined by Section 3(a)(10) of the Exchange Act, 

and proposed Rule 3a44–2 would apply to 

government securities as defined by Section 3(a)(42) 

of the Exchange Act, including any digital asset that 

is a security or a government security within the 

meaning of the Exchange Act. 

37Paragraph (b)(1) of the Proposed Rules provides 

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). 

38See 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. 

39See, e.g., 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 

Continued 

As the Proposed Rules focus on 

activity rather than label or status, they 

would potentially scope in other market 

participants as discussed below in 

Section V, thereby triggering a 

registration requirement and subjecting 

those entities to dealer regulation and 

oversight. As discussed further in 

Section V.B.2, the Commission’s 

analysis indicates that the Proposed 

Rules would primarily require 

registration by PTFs, and potentially 

some private funds.30 In addition, it is 

possible that the activities of some 

investment advisers 31 could meet the 

Proposed Rules 32 and trigger a dealer 

registration requirement. The 

Commission believes the scope of the 

Proposed Rules is appropriate in light of 

the important liquidity that these 

participants provide to the securities 

markets, which is similar to that 

historically provided by regulated 

dealers. 

The Commission is proposing to 

exclude certain smaller participants, as 

well as registered investment 

companies, from the ambit of the 

Proposed Rules. As discussed in Section 

III.A and V.B, these smaller 

participants—persons that have or 

control less than $50 million in total 

assets—are unlikely to be able to engage 

in the significant liquidity provision 

that is the focus of the Proposed Rules. 

As discussed below in Section III.A, in 

light of the regulatory structure that 

governs registered investment 

companies, which addresses, among 

other things, the types of concerns that 

we seek to address in the Proposed 

Rules, the Commission is proposing to 

exclude registered investment 

companies from the Proposed Rules.33

Conversely, the Proposed Rules 

would not exclude private funds 

because we are proposing to take a 

similar approach to regulating dealer 

activity across market participants and, 

unlike registered investment companies, 

private funds are not subject to the 

regulatory framework of the Investment 

Company Act. The Commission 

currently receives information about the 

operations, exposures, liabilities, 

liquidity, and strategies of private funds 

through filings of Form PF by registered 

private fund advisers and has recently 

proposed amendments to Form PF to 

enhance the reporting about private 

funds.34 If excluded from the Proposed 

Rules, however, private funds engaged 

in dealer activity would not 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. 

The Proposed Rules also would not 

exclude investment advisers registered 

under the Advisers Act (‘‘registered 

investment advisers’’). A registered 

investment adviser trading for its own 

proprietary account, for example, could 

trigger the dealer registration 

requirements under the Proposed Rules. 

And, under certain circumstances, a 

registered investment adviser could 

trigger application of the Proposed 

Rules because of aggregating trading in 

its own account with client accounts it 

controls. However, as described below 

in Section III.D, in determining whether 

its activity would be captured by the 

Proposed Rules, a registered investment 

adviser would not be required to 

aggregate its own trading activities with 

the trading activities of its clients’ solely 

based on an adviser-client discretionary 

investment management relationship.35

This exclusion is designed to attribute 

the dealer activity to the appropriate 

market actor. 

II. Background 

The Federal securities laws provide a 

comprehensive system of regulation of 

securities activities, and the definition 

of dealer is one of the Exchange Act’s 

most important definitions. As 

discussed below, the statutory 

definition of ‘‘dealer’’ in Section 3(a)(4) 

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.36 Registered dealers 

and government securities dealers are 

subject to a panoply of regulatory 

obligations and supervisory oversight 

intended to protect investors and the 

securities markets. Therefore, it is 

important that market participants 

whose securities activities fall within 

the broad definitions of ‘‘dealer’’ and 

‘‘government securities dealer’’ are 

registered and regulated under the 

Exchange Act. 

A. Definitions of ‘‘Dealer’’ and 

‘‘Government Securities Dealer’’ 

Section 3(a)(5) of the Exchange Act 

defines the term ‘‘dealer’’ to mean ‘‘any 

person 37 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.’’ 38 This statutory exclusion 

from the definition of ‘‘dealer’’ is often 

referred to as the ‘‘trader’’ exception.39


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

dealer/trader distinction’’). 

40See Loss, Securities Regulation 722 (1st ed. 

1951) (‘‘One aspect of the ‘business’ concept is the 

matter of drawing the line between a ‘dealer’ and 

a trader—an ordinary investor who buys and sells 

for his own account with some frequency.’’), cited 

in Further Definition of ‘‘Swap Dealer,’’ ‘‘SecurityBased 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 

n.250 (May 23, 2012) (‘‘Entities Adopting Release’’). 

41 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. Public Law 99–571, 100 Stat. 3208 (Oct. 28, 

1986). To the extent a financial institution is a 

government securities dealer required to register 

under Section 15C, 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, and 

comply with rules adopted by the Treasury and the 

applicable Federal banking regulator. See 

Regulations under Section 15C of the Securities 

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

at CFR-2018-title17-vol4-chapIV.pdf 

(treasurydirect.gov) (the ‘‘Treasury Rules’’). The 

Treasury Rules address financial responsibility, 

protecting customer securities and funds, 

recordkeeping, large position reporting, 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 Government Securities Act of 

1986, 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 NoAction 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 NoAction Letter (Dec. 10, 1987); Continental Grain 

Co., SEC No-Action Letter (Nov. 28, 1987); Louis 

Dreyfus Corp., SEC No-Action Letter (July 23, 1987); 

United Savings Association of Texas, SEC NoAction Letter (Apr. 2, 1987). Staff no-action letters, 

like all staff statements, have no legal force or effect: 

They do not alter or amend applicable law, and 

they create no new or additional obligations for any 

person. Upon the adoption of any final rule, some 

letters and other staff statements, or portions 

thereof, may be moot, superseded, or otherwise 

inconsistent with the final rules and, therefore, 

would be withdrawn or modified. 

42The legislative history relating to the enactment 

of the Government Securities Act of 1986 provides 

that the term government securities dealer ‘‘would 

utilize key concepts from the current definitions of 

. . . ‘dealer’ and ‘municipal securities dealer.’ ’’ 

H.R. Rep. No. 258, 99th Cong., 1st Sess. 24 (1985). 

S. Rep. No. 426, 99th Cong., 2d Sess. 19 (1986). 

43A 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). 

44Unless 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. 

45See, e.g., Registration Requirements for Foreign 

Broker-Dealers, Exchange Act Release No. 27017 

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

(stating that the definition of ‘‘dealer’’ and the 

registration requirements under the Exchange Act 

‘‘were broadly drawn by Congress to encompass a 

wide range of activities involving investors and the 

securities markets’’). Recognizing that the word 

‘‘business’’ is central to the dealer definition, courts 

have cited to Black’s Law Dictionary definition of 

business: ‘‘a commercial enterprise carried on for 

profit, a particular occupation or employment 

habitually engaged in for livelihood or gain.’’ SEC 

v. Justin W. Keener d/b/a JMJ Financial, No. 20–cv– 

21254, pp. 14–15 (S.D. Fla. Jan. 21, 2022) (citing 

SEC v. Big Apple Consulting USA, Inc., 783 F.3d 

786, 809 (11th Cir. 2015) which was quoting Black’s 

Law Dictionary 239 (10th ed. 2009)) (emphasis in 

original). The Eleventh Circuit elaborated that 

‘‘[c]entral to this definition is profit or gain.’’ Id. 

(emphasis in original). See also SEC v. Ibrahim 

Almagarby, 479 F. Supp. 3d 1266, 1272 (S.D. Fla. 

2020). 

46See Massachusetts Financial Services, Inc. v. 

Securities Investor Protection Corp., 411 F. Supp. 

411, 415 (D. Mass.), aff’d, 545 F.2d 754 (1st Cir. 

1976), cert. denied, 431 U.S. 904 (1977) (noting that 

the dealer definition: ‘‘connote[s] a certain 

regularity of participation in securities transactions 

at key points in the chain of distribution.’’); see also 

Eastside Church of Christ v. National Plan, Inc., 391 

F.2d at 361–362 (an entity that purchased many 

securities for its own account as part of its regular 

business and sold some of them was deemed a 

dealer); SEC v. Century Inv. Transfer Corp., 1971 

U.S. Dist. LEXIS 11364, at *14 (S.D.N.Y. Oct. 5, 

1971) (a limited partnership that bought and sold 

securities for its own account on numerous 

occasions was deemed a dealer); SEC v. Corporate 

Rels. Group, Inc., 2003 U.S. Dist. LEXIS 24925, at 

*60–61 (M.D. Fla. Mar. 28, 2003) (an unregistered 

stock promotion company that was operating as a 

broker was also operating as a dealer because it 

bought securities on more than a dozen occasions 

and sold those securities in hundreds of 

transactions through accounts it maintained or in 

which it had an interest). 

47See SEC v. Am. Inst. Counselors, Inc., Fed. Sec. 

L. Rep. (CCH) ¶ 95388 (D.D.C. 1975) (citing Loss, 

Securities Regulation (2d ed. 1961)). 

48See 2002 Release at 67498. 

49See Entities Adopting Release, 77 FR 30617 

(discussing application of the dealer/trader 

distinction in the context of security-based swap 

dealers); see also 2002 Release at 67499. 

As one commentator has described it, at 

the core of the ‘‘dealer/trader’’ 

distinction is an attempt to draw a line 

between a dealer and ‘‘an ordinary 

investor who buys and sells for his own 

account with some frequency.’’ 40 Read 

together, these provisions identify as a 

‘‘dealer’’ a person engaged in the 

business of buying and selling securities 

for its own account as part of a regular 

business. 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. 

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.’’ 41 Read together, these 

provisions identify as a ‘‘government 

securities dealer’’ a person engaged in 

the business of buying and selling 

government securities for its own 

account as part of a regular business.42

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).43

Under both the dealer and 

government securities dealer 

definitions, a person acts as a dealer or 

a government securities dealer when it 

is engaged in the business of buying and 

selling securities or government 

securities, respectively, for its own 

account as part of a ‘‘regular 

business.’’ 44

Factors Considered in Evaluating 

‘‘Regular Business’’ 

Because the Exchange Act does not 

define what it means to be engaged in 

a ‘‘regular business,’’ courts and the 

Commission have looked to an array of 

factors in determining whether someone 

is a ‘‘dealer’’ within the meaning of the 

statute.45 In determining whether a 

person is engaged in the business of 

buying and selling securities for its own 

account as part of a ‘‘regular business,’’ 

courts and the Commission assess the 

frequency with which the person buys 

and sells securities for its own 

account.46 The ‘‘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.47

In addition to frequency of activity, 

the nature of the trading activity is a 

factor in determining whether a person 

is a dealer.48 Over time, the Commission 

has identified activities that, in context 

and when engaged in with regularity, 

may be indicative of being a dealer.49

For example, the Commission has 

identified certain factors that would be 

indicators of dealer activity, including, 


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50For example, a person may be acting as a dealer 

if they ‘‘turned a profit not from selling only after 

market prices increased (like a trader), but rather 

from quickly reselling at a marked-up price.’’ River 

North, 415 F. Supp. 3d at 859; see also SEC v. Big 

Apple Consulting USA, Inc., 783 F.3d 786, 809–10 

(11th Cir. 2015); In re Sodorff, 50 SEC. 1249, 1992 

WL 224082, at *5 (Sep. 2, 1992). 

51See 2002 Release. These factors were confirmed 

by the Commission in 2012 when it defined certain 

terms, including ‘‘security-based swap dealer,’’ in 

accordance with Title VII of the Dodd-Frank Act. 

See Entities Adopting Release at 30607 

(distinguishing traders from dealers by noting that 

a trader, among other things, does not make a 

market). These indicia have been developed in a 

range of contexts over time as the markets and 

dealer activity have evolved, and do not represent 

an exclusive or exhaustive list of activities relevant 

for determining whether registration as a dealer is 

required. Further, a person not meeting the 

standards in the Proposed Rules may still be a 

dealer under otherwise applicable dealer precedent. 

Whether or not a person is a ‘‘dealer’’ is based on 

the facts and circumstances, where various factors 

are ‘‘neither exclusive, nor function as a checklist,’’ 

and meeting any one factor may be sufficient to 

establish dealer status. SEC v. River North Equity 

LLC, 415 F. Supp. 3d 853, 858 (N.D. Ill. 2019); 

accord SEC v. Fierro, No. 20–cv–2104, 2020 WL 

7481773, at *3 (D.N.J. Dec. 18, 2020); SEC v. Keener, 

No. 20–cv–21254, 2020 WL 4736205, at *3–*4 (S.D. 

Fla. Aug. 14, 2020); SEC v. Almagarby, 479 F. Supp. 

3d 1266, 1272–73 (S.D. Fla. 2020); SEC v. Benger, 

697 F. Supp. 2d 932, 945 (N.D. Ill. 2010). 

52Sections 3(a)(5)(B) and 3(a)(44)(A) of the 

Exchange Act. 

53See Loss, supra note 40, at 720 (noting that the 

distinction between a trader and a dealer seeks to 

separate the ‘‘ordinary investor who buys and sells 

for his own account with some frequency’’ by 

establishing that dealers engage in the business of 

buying and selling securities as part of a regular 

business). 

54 2002 Release. 

55 2010 Equity Market Structure Concept Release 

at 3603, n. 52 (citing Regulation NMS Release, 70 

FR 37500). 

56See SEC v. Am. Inst. Counselors, Inc., Fed. Sec. 

L. Rep. (CCH) ¶ 95,388 (D.D.C. 1975) (citing Loss, 

Securities Regulation (2d ed. 1961)). See also 2002 

Release (‘‘[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’’); River North, 415 F. Supp. at 859 

(traders purchase securities already in the 

marketplace and turn a profit from selling them 

after they appreciate in value); Sodorff, 1992 WL 

224082, at *5 (same). 

57See 2010 Equity Market Structure Concept 

Release at 3612. 

58 Id. 

59See Letter from Donald R. Wilson, Jr., DRW 

Trading, LLC (Apr. 21, 2010); Letter from Peter 

Kovac, Chief Operating Officer and Financial and 

Operations Principal, EWT (Feb. 22, 2010); Letter 

from Senator Edward Kaufman (Aug. 5, 2010); 

Article from Stephen M. Barnes, J.D., Regulating 

High-Frequency Trading: An Examination of U.S. 

Equity Market Structure in Light of the May 6, 2010 

Flash Crash (Dec. 2010); Letter from R.T. 

Leuchtkafer (Apr. 16, 2010); Letter from R.T. 

Leuchtkafer (July 15, 2010); Letter from Micah 

Hauptman, Financial Services Counsel, Consumer 

Federation of America (Sept. 9, 2014); Letter from 

Berkowitz, Trager & Trager, LLC (Apr. 21, 2010); 

Letter from Alston Trading, LLC, RGM Advisors, 

LLC, Hudson River Trading, LLC, and Quantlab 

Financial, LLC (Apr. 23, 2010); Letter from Marcia 

E. Asquith, Senior Vice President and Corporate 

Secretary, Financial Industry Regulatory Authority 

(Apr. 23, 2010); Letter from James J. Angel, 

Associate Professor, McDonough School of 

Business, Georgetown University, Lawrence E. 

Harris, Fred V. Keenan Chair in Finance, Professor 

of Finance and Business Economics, Marshall 

School of Business, University of Southern 

California, and Chester S. Spatt, Pamela R. and 

Kenneth B. Dunn Professor of Finance, Director, 

Center for Financial Markets, Tepper School of 

Business, Carnegie Mellon University, Equity 

Trading in the 21st Century (Feb. 23, 2010); and 

Letter from Kurt N. Schacht, Managing Director and 

Linda L. Rittenhouse, Director, Capital Markets 

Policy, CFA Institute (June 22, 2010). 

60See Letter from Peter Kovac, Chief Operating 

Officer and Financial and Operations Principal, 

EWT (Feb. 22, 2010); Letter from Senator Edward 

Kaufman (Aug. 5, 2010); Article from Stephen M. 

Barnes, J.D., Regulating High-Frequency Trading: 

An Examination of U.S. Equity Market Structure in 

Light of the May 6, 2010 Flash Crash (Dec. 2010); 

Letter from R.T. Leuchtkafer (Apr. 16, 2010); Letter 

from R.T. Leuchtkafer (July 15, 2010); Letter from 

Micah Hauptman, Financial Services Counsel, 

Consumer Federation of America (Sept. 9, 2014). 

See also Letter from Donald R. Wilson, Jr., DRW 

Trading, LLC (Apr. 21, 2010), pp 3–4 (supporting 

registration only for those firms that engage in highvolume and high-speed trading). 

61See Letter from Berkowitz, Trager & Trager, 

LLC (Apr. 21, 2010); Letter from Alston Trading, 

LLC, RGM Advisors, LLC, Hudson River Trading, 

LLC, and Quantlab Financial, LLC (Apr. 23, 2010). 

62See Treasury Request for Comment. 

63See Treasury Request for Comment at 3930. 

64See Treasury Request for Comment at 3931 

(Questions 2.6, 2.6(a) and 2.6(b)). 

65See Letter from Deirdre K. Dunn, Managing 

Director—Head of NA G10 Rates, Citi Global 

Continued 

among other things: (1) Acting as a 

market maker or specialist on an 

organized exchange or trading system; 

(2) acting as a de facto market maker or 

liquidity provider; 50 and (3) holding 

oneself out as buying or selling 

securities at a regular place of 

business.51

Trader Exclusion 

The Exchange Act excludes from the 

definition of dealer any ‘‘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.’’ 52 While traders and dealers 

engage in the same core activity— 

buying and selling securities for their 

own account—their level of activity 

varies in absolute terms and in 

regularity.53 The Commission has stated 

that dealers include those who are 

willing to buy and sell 

contemporaneously and often quickly 

enter into offsetting transactions to 

minimize the risk associated with a 

position.54 In contrast, traders are 

‘‘market participants who provide 

capital investment and are willing to 

accept the risk of ownership in listed 

companies for an extended period of 

time,’’ and the Commission has stated 

that ‘‘it makes little sense to refer to 

someone as ‘investing’ in a company for 

a few seconds, minutes, or hours.’’ 55

The purpose of the ‘‘trader’’ exception is 

to ‘‘exclude from the definition of 

‘dealer’ members of the public who buy 

and sell securities for their own account 

as ordinary traders.’’ 56

B. 2010 Equity Market Structure 

Concept Release 

The Commission raised the issue of 

broker-dealer registration for PTFs in its 

2010 Equity Market Structure Concept 

Release.57 Specifically, as part of its 

discussion relating to the potential risks 

to the markets posed by PTFs, the 

Commission requested comment on 

whether all PTFs should be required to 

register as broker-dealers.58 Comments 

were mixed.59 A number of commenters 

explicitly supported registration as an 

effective means for providing oversight 

of trading activity.60 Others commenters 

opposed registration, citing costs, 

burdens, and barriers to competition.61

C. Department of the Treasury Request 

for Comment 

In 2016, Treasury published notice 

seeking public comment on the 

evolution of the U.S. Treasury market 

structure and the implications for 

market functions, trading and risk 

management practices across the U.S. 

Treasury market, considerations with 

respect to more comprehensive official 

sector access to U.S. Treasury market 

data, and the benefits and risks of 

increased public disclosure of U.S. 

Treasury market activity.62 In that 

Request for Comment, Treasury raised 

the issue of registration for certain 

market participants, including those 

persons engaging in automated trading 

or conducting a certain volume of 

trading.63 Specifically, concerning its 

continued monitoring of trading and 

risk management practices across the 

U.S. Treasury market and reviewing 

regulatory requirements applicable to 

the government securities market and its 

participants, Treasury requested 

comment on: (1) Aligning standards 

between U.S. securities, commodities, 

and derivatives markets and the U.S. 

Treasury cash market; (2) the 

implications of a registration 

requirement for certain market 

participants, including those persons 

engaging in automated trading or 

conducting a certain volume of trading; 

and (3) whether such firms should be 

subject to capital requirements, 

examinations and supervision, conduct 

rules, and/or other standards.64 A 

number of comment letters were 

submitted directly or indirectly 

responding to these questions.65 Most 


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Markets (Apr. 22, 2016) (‘‘Citi Global’’); Letter from 

Shane O’Cuinn, Managing Director, Credit Suisse/ 

Global Markets (Apr. 22, 2016) (‘‘Credit Suisse’’); 

Letter from Joanna Mallers, Secretary, FIA Principal 

Traders Group (Apr. 22, 2016) (‘‘FIA PTG’’); 

Comment from Kermit Kubitz (Apr. 22, 2016); 

Letter from William Harts, Modern Market Initiative 

(Apr. 22, 2016) (‘‘MMI’’); Letter from Prudential 

Fixed Income (Apr. 21, 2016) (‘‘Prudential’’); Letter 

from Alan Mittleman, Managing Director, Head of 

USD Rates Trading, RBS Securities Inc. (Apr. 22, 

2016) (‘‘RBS Securities’’); Letter from Reserve Bank 

of India (Apr. 22, 2016); Letter from Mike Zolik, 

Nate Kalich, and Larry Magargal, Ronin Capital, 

LLC (Mar. 19, 2016) (‘‘Ronin Capital’’); Letter from 

Timothy W. Cameron, Esq., Asset Management 

Group—Head and Lindsey Weber Keljo, Vice 

President and Assistant General Counsel, Asset 

Management Group, Securities Industry and 

Financial Markets Association (Apr. 22, 2016) 

(‘‘SIFMA–AMG’’); Letter from Greg Moore, 

Managing Director and Head of FICM New York, TD 

Securities (USA) LLC (Apr. 22, 2016) (‘‘TD 

Securities’’); and Letter from C. Thomas 

Richardson, Managing Director, Head of Market 

Structure, Head of Electronic Trading Services, and 

Cronin McTigue, Managing Director, Head of Liquid 

Products, Wells Fargo Securities (Apr. 21, 2016) 

(‘‘Wells Fargo’’). 

66See Letter from Citi Global; Letter from Credit 

Suisse; Comment from Kermit Kubitz; Letter from 

MMI; Letter from Prudential; Letter from RBS 

Securities; Letter from Reserve Bank of India; Letter 

from Ronin Capital; Letter from SIFMA–AMG; 

Letter from TD Securities; and Letter from Wells 

Fargo. 

67See Letter from Prudential; Letter from MMI; 

Letter from TD Securities; Letter from Reserve Bank 

of India; Letter Citi Global; and Letter from Ronin 

Capital. 

68See Letter from FIA PTG. 

69See Letter from Stuart Kaswell, Executive Vice 

President and Managing Director, General Counsel, 

and Jirˇı ́ Kro ́l, Deputy CEO, Global Head of 

Government Affairs, Alternative Investment 

Management Association (Apr. 22, 2016) at 2 

(describing the evolution of market structure 

generally). 

70See Section V for discussion of competition; 

see also Algorithmic Trading Staff Report. 

71See 2021 IAWG Report. 

72See 2021 IAWG Joint Staff Report (stating that 

the October 15, 2014 market disruption made clear 

that, among other things, ‘‘electronic trading 

permitted rapid increases in orders that removed 

liquidity’’) at 18, and G30 Report. 

73See Section V. 

74River North, 415 F. Supp. 3d 853, 858 (citing 

Benger, 697 F. Supp. 2d at 944 (quoting Celsion 

Corp. v. Stearns Mgmt. Corp., 157 F. Supp. 2d 942, 

947 (N.D. Ill. 2001)); see also 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.’’); see 

Section 15(b)(7) of the Exchange Act, 15 U.S.C. 

78o(b)(7), and 17 CFR 240.15b7–1 (Rule 15b7–1 

thereunder) (requiring natural persons associated 

with a broker-dealer to be registered or approved 

‘‘in accordance with the standards of training, 

experience, competence, and other qualification 

standards’’); see also Financial Industry Regulatory 

Authority (‘‘FINRA’’) Rule 1210 (Registration 

Requirements) and FINRA Rule 1220 (Registration 

Categories), which require, for example, an 

associated person of a member broker-dealer of 

FINRA who is primarily responsible for the design, 

development, or significant modification of an 

algorithmic trading strategy, or who is responsible 

for supervising or directing such activities, to pass 

the Series 57 exam, register as a Securities Trader, 

and comply with continuing education 

requirements. 

75See 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, 

other than certain financial institutions, 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 need to become a member of a 

registered national securities association (FINRA is 

the only registered national securities association). 

Currently, however, a person that is engaged in a 

regular business of buying and selling both 

government securities and other securities for its 

own account, and therefore registers as a dealer 

under Section 15, could potentially be exempt from 

Section 15(b)(8)’s national securities association 

membership requirement if it is or becomes a 

member of a national securities exchange and 

satisfies other requirements. See 17 CFR 240.15b9– 

1. Section 17(b) of the Exchange Act provides, 

among other things, that all records of a brokerdealer 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 brokerdealer 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. 

76See, e.g., 17 CFR 240.15c3–1 (Exchange Act 

Rule 15c3–1) (the ‘‘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 

commenters explicitly supported 

consistent regulatory standards to be 

applied to certain market participants, 

including those persons engaging in 

automated trading or conducting a 

certain volume of trading,66 with some 

commenters explicitly supporting the 

registration of market participants that 

are not currently registered as dealers.67

One commenter was opposed to the 

registration of certain market 

participants citing disapproval of the 

‘‘application of arbitrary thresholds 

when determining the applicability of 

regulation.’’ 68 Another commenter 

stated that ‘‘principal trading firms have 

played an increasingly larger role in 

offering liquidity in these markets, and 

have become de facto market 

makers.’’ 69

D. Need for Commission Action 

While the participation of these PTFs 

and other significant market 

participants that are not registered as 

dealers may have positive effects, such 

as through increased competition, there 

are risks that accompany such market 

participants’ trading activities and the 

accompanying lack of regulatory 

obligations or oversight relating to such 

activity.70 Among other things, scrutiny 

of the U.S. Treasury market, in light of 

recent market disruptions,71 has 

identified a regulatory gap in terms of 

the registration status and regulation of 

significant market participants in the 

U.S. Treasury market. Not only does 

such a regulatory gap mean inconsistent 

oversight of market participants 

performing similar functions either in 

the same market or across asset classes 

but, as described below, the activity of 

significant market participants that are 

not registered may pose certain risks to 

the markets. 

In particular, certain market 

participants, such as PTFs that are not 

registered as dealers, play an 

increasingly significant role as major 

liquidity providers across asset classes 

in the U.S. securities markets, including 

the U.S. Treasury market. These market 

participants engage in a significant 

volume of trading across many trading 

platforms for their own accounts, 

generally ending the day with a 

relatively small position. In the U.S. 

Treasury market, in particular, market 

commenters and financial regulators 

have stated that the rise of electronic 

trading and emergence of unregulated 

significant market participants over the 

years could be a contributing factor to 

the more frequent market disruptions, 

specifically stating that these changes 

are directly affecting liquidity 

provision.72

The Commission believes that, 

although the Proposed Rules will not by 

themselves necessarily prevent future 

market disruptions, the operation of the 

rules will support transparency; market 

integrity and resiliency; and investor 

protection; across the U.S. Treasury and 

other securities markets by closing the 

regulatory gap that currently exists and 

ensuring consistent regulatory oversight 

of persons engaging in the type of 

activities described in the Proposed 

Rules.73 The requirement that dealers 

register has been repeatedly recognized 

as being ‘‘of the utmost importance in 

effecting the purposes of the [Exchange] 

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.’’ 74 For example, as described 

below in Section V.C, dealers and 

government securities dealers must 

register with the Commission and 

become members of a self-regulatory 

organization (‘‘SRO’’); 75 comply with 

Commission and SRO rules, including 

certain financial responsibility and risk 

management rules,76 transaction and 


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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. 

77See, 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 members has violated 

certain specified regulatory requirements, is subject 

to written customer complaint, 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) (Exchange Act 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. 

78See, e.g., 17 CFR 240.15c3–5 (Exchange Act 

Rule 15c3–5)—Risk Management Controls for 

Brokers or Dealers with Market Access (the ‘‘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. 

79See, e.g., Section 17(a) of the Exchange Act and 

17 CFR 240.17a–3 and 240.17a–4 (Rules 17a–3 and 

17a–4 thereunder); 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.’’). 

80See, 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. 

81Under Title I of the Government Securities Act 

(‘‘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. For the most part, Treasury’s GSA 

regulations incorporate with some modifications: 

(1) Commission rules for non-financial 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; 17 CFR 

part 420, Large position reporting; 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 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) (Treas. Reg. § 402.1(b)) (‘‘This 

part does not apply to a registered broker or dealer 

. . . that is subject to [Exchange Act Rule 15c3– 

1].’’); 17 CFR 403.1 (Treas. Reg. § 403.1) (regarding 

application to registered brokers or dealers); 17 CFR 

404.1 and 405.1(a) (Treas. Reg. §§ 404.1 and 

405.1(a)) (same). 

82See 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 ability of the Commission 

with respect to government securities dealers that 

are not registered with the Commission). 

83As discussed above, the definitions of ‘‘dealer’’ 

and ‘‘government securities dealer’’ under the 

Exchange Act exclude from dealer status a person 

that buys or sells securities for such person’s own 

account ‘‘but not as a part of a regular business.’’ 

See 15 U.S.C. 78c(a)(5)(A) and (B) and 15 U.S.C. 

78c(a)(44)(A). 

84See Exchange Act Section 15 (regarding 

registration of dealers) and Section 15C (regarding 

registration of government securities dealers). 

85Status as a securities ‘‘dealer’’ or ‘‘government 

securities dealer’’ as a result of engaging in 

securities or government securities transactions ‘‘as 

part of a regular business’’ under proposed Rules 

3a5–4 or 3a44–2 is not determinative of a person’s 

status for purposes of the exclusions in Section 

3(c)(2) of the Investment Company Act. Although 

that exclusion uses some terminology that is similar 

to that in the Proposed Rules, Section 3(c)(2) 

includes a number of conditions in addition to the 

requirement that a person regularly engage in 

transactions on both sides of the market, each of 

which an entity would have to satisfy to be able to 

rely on the investment company exclusion. 

86See 2002 Release (stating that a person 

generally may satisfy the definition, and therefore, 

be acting as a dealer in the securities markets, by 

conducting various activities, including ‘‘acting as 

a market maker or specialist on an organized 

exchange or trading system’’ or ‘‘acting as a de facto 

market maker whereby market professionals or the 

public look to the firm for liquidity’’). 

other reporting requirements,77

operational integrity rules,78 and books 

and records requirements,79 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, as appropriate, 

market risks. In addition, registered 

dealers and government securities 

dealers are required to comply with 

specific anti-manipulative and other 

anti-fraud rules that are promulgated 

pursuant to Section 15(c) of the 

Exchange Act, thereby contributing to 

fair and orderly markets.80 Firms that 

are government securities dealers 

(including registered broker-dealers 

trading government securities) must also 

comply with rules adopted by Treasury, 

including but not limited to rules 

relating to financial responsibility, 

recordkeeping, financial condition 

reporting, risk oversight, and large 

trader reporting.81 Importantly, dealers 

and government securities dealers are 

subject to Commission and SRO 

examination, inspection, and 

enforcement for compliance with 

applicable Federal securities laws and 

SRO rules.82

III. Overview of Proposed Rules 

The operative concept in the 

definitions of ‘‘dealer’’ and ‘‘government 

securities dealer’’—that distinguishes 

the regulated entity from the 

unregulated trader—is that the dealer is 

engaged in buying and selling securities 

for its own account ‘‘as part of a regular 

business.’’ 83 The Commission is 

proposing two rules—proposed Rules 

3a5–4 and 3a44–2—to further define 

these terms to identify certain activities 

that would constitute a ‘‘regular 

business’’ requiring a person engaged in 

those activities to register as a ‘‘dealer’’ 

or a ‘‘government securities dealer,’’ 

absent an exception or exemption.84 A 

person (as defined below) who engages 

in any one of the activities identified in 

either proposed Rule 3a5–4 or 3a44–2 

would be considered a dealer under that 

rule.85

As explained above, over the years the 

Commission and the courts have 

identified a number of qualitative 

factors, including acting as a market 

maker, de facto market maker, or 

liquidity provider, that might indicate a 

person may be engaged in a regular 

business of buying and selling securities 

for its own account.86 The Proposed 

Rules would expand upon these 

statements to further define three 

qualitative standards designed to more 

specifically identify activities of certain 

market participants who assume dealerlike roles, specifically, persons whose 

trading activity in the market ‘‘has the 

effect of providing liquidity’’ to other 


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23062 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

87As noted below, the Proposed Rules are not the 

exclusive means of establishing that a person is a 

dealer or government securities dealer—to the 

extent consistent with the Proposed Rules, existing 

Commission interpretations and precedent will 

continue to apply. See above Section II.A. For 

example, facts indicating a person may be acting as 

a ‘‘dealer’’ include underwriting, as well as buying 

and selling directly to securities customers together 

with conducting any of an assortment of 

professional market activities such as providing 

investment recommendations, extending credit, and 

lending securities in connection with transactions 

in securities, and carrying a securities account. See 

2002 Release. See also SEC v. Justin W. Keener d/ 

b/a JMJ Financial, No. 20–cv–21254 (S.D. Fla. Jan. 

21, 2022). Accordingly, a person may still be acting 

as a dealer even if they do not, under the Proposed 

Rules, engage in a routine pattern of buying and 

selling securities that has the effect of providing 

liquidity to other market participants. See proposed 

Rule 3a5–4(c) and proposed Rule 3a44–2(c), 

discussed below in Section III.E. 

88PTFs engaging in passive market making, for 

example, earn revenue primarily from the provision 

of liquidity, specifically ‘‘by buying at the bid and 

selling at the offer and capturing any liquidity 

rebates offered by trading centers to liquidity 

supplying orders.’’ See, e.g., 2010 Equity Market 

Structure Concept Release at 3607. 

89See Section III.C. 

90See id. 

91The Proposed Rules focus on effect regardless 

of a person’s intention. The fact that the provision 

of liquidity is a fundamental aspect of the activities 

captured by the qualitative standards does not mean 

that such liquidity provision need be deliberate to 

come within the Proposed Rules. Intent is not 

required by the statutory language, nor is it relevant 

in every circumstance. 92The Proposed Rules would exclude from 

aggregation under paragraph (b)(2)(ii): (A) An 

account in the name of a registered broker, dealer, 

government securities dealer, or an investment 

company registered under the Investment Company 

Act; (B) with respect to an investment adviser 

registered under the Advisers Act, an account held 

in the name of a client of the adviser unless the 

adviser controls 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; or (C) with 

respect to any person, an account in the name of 

another person that is under common control with 

that person solely because both persons are clients 

of an investment adviser registered under the 

Advisers Act unless those accounts constitute a 

parallel account structure. 

93Cf. 2002 Release (‘‘[T]he analysis of whether a 

person meets the definition of a dealer depends 

upon all of the relevant facts and circumstances.’’). 

94See Section II.A. For example, a person 

generally may satisfy the statutory definition of 

‘‘dealer’’ by underwriting, or buying and selling 

directly to securities customers together with 

conducting any of an assortment of professional 

market activities such as providing investment 

recommendations, extending credit, and lending 

securities in connection with transactions in 

securities, and carrying a securities account. See 

2002 Release. 

95After receiving a substantially complete 

application package, FINRA, for instance, must 

review and process it within 180 calendar days. See 

‘‘How to Become a Member—Member Application 

Time Frames,’’ available at https://www.finra.org/ 

registration-exams-ce/broker-dealers/how-becomemember-membership-application-time-frames. See 

also FINRA Rule 1014. 

96See proposed Rule 3a5–4(b)(1) and proposed 

Rule 3a44–2(b)(1). 

97See proposed Rule 3a5–4(a)(2)(i) and proposed 

Rule 3a44–2(a)(3)(i). While a person who has or 

controls less than $50 million in total assets would 

not be subject to the Proposed Rules, that person’s 

trading volume or activities may still be aggregated 

with those of another person under the Proposed 

Rules definitions of ‘‘own account’’ and ‘‘control.’’ 

See Section III.D. 

98See proposed Rule 3a5–4(a)(2)(ii) and proposed 

Rule 3a44–2(a)(3)(ii). 

market participants.87 While all market 

participants who buy or sell securities 

in the marketplace arguably contribute 

to a market’s liquidity, the Proposed 

Rules focus on market participants who 

engage in a routine pattern of buying 

and selling securities for their own 

account that has the effect of providing 

liquidity. Said differently, for market 

participants engaging in any of the 

activities identified by the qualitative 

standards of the Proposed Rules, 

liquidity provision is not incidental to 

their trading activities. Rather, these 

persons are ‘‘in the business’’ of buying 

and selling securities for their own 

account and providing liquidity as part 

of a regular business.88 The Proposed 

Rules would set forth three standards 

that the Commission believes would 

appropriately distinguish and identify 

such liquidity provision as a ‘‘regular 

business.’’ 

In addition, proposed Rule 3a44–2, 

which would apply only to government 

securities dealers, would include a 

quantitative standard.89 This 

quantitative standard would establish a 

bright-line test, under which a person 

engaging in certain specified levels of 

activity would be deemed to be buying 

and selling government securities ‘‘as a 

part of a regular business,’’ regardless of 

whether it meets any of the qualitative 

standards.90

A person whose activity meets the 

quantitative or any of the qualitative 

standards would be a dealer and so 

subject to the Exchange Act registration 

requirements, regardless of whether the 

liquidity provision is a chosen 

consequence of its activities.91

To account for variations in corporate 

structure and ownership, the Proposed 

Rules additionally would define the 

terms ‘‘own account’’ and ‘‘control.’’ 

The Proposed Rules would define a 

person’s ‘‘own account’’ to mean, 

subject to certain exceptions, any 

account: (i) Held in the name of that 

person; (ii) held in the name of a person, 

over whom that person exercises control 

or with whom that person is under 

common control; 92 or (iii) held for the 

benefit of those persons identified in (i) 

and (ii). In addition, the Proposed Rules 

would give ‘‘control’’ the ‘‘same 

meaning as prescribed in § 240.13h–l 

(Rule 13h–l), under the Exchange Act.’’ 

While the Proposed Rules would 

establish standards that identify when a 

person is acting as a dealer or 

government securities dealer, whether a 

person’s activities meet these standards 

would remain a facts and circumstances 

determination.93 Importantly, the 

Proposed Rules are not the exclusive 

means of establishing that a person is a 

dealer or government securities dealer— 

to the extent consistent with the 

Proposed Rules, existing Commission 

interpretations and precedent will 

continue to apply.94

A market participant that is not 

registered as a dealer that comes within 

the scope of the Proposed Rules would 

need to register with the Commission as 

a dealer or government securities dealer 

and become a member of an SRO. This 

would involve filing Form BD with the 

Commission and completing the SRO’s 

processes for new members.95 The 

Commission is proposing to provide 

such market participants a one-year 

compliance period from the effective 

date of any final rules. The proposed 

compliance period is designed to 

provide adequate time for persons 

captured by the Proposed Rules at the 

time of adoption, if adopted, to apply 

for dealer registration, and for the 

relevant SROs to conduct their review of 

the new member applications, without 

disrupting the markets or the 

participants’ market activities. The 

proposed compliance period would not 

cover market participants whose 

activities following the effective date of 

any final rules require registration as 

dealers under those rules. 

A. Persons Excluded From the Proposed 

Rules 

Under the Proposed Rules, the term 

‘‘person’’ would have the same meaning 

as prescribed in Section 3(a)(9) of the 

Exchange Act.96 As a threshold matter, 

the Proposed Rules would not apply to: 

(i) ‘‘[a] person that has or controls total 

assets of less than $50 million;’’ 97 or (ii) 

‘‘[an] investment company registered 

under the Investment Company Act.’’ 98

As discussed above, the Proposed 

Rules are intended to capture market 

participants not registered as dealers 

that serve a critical dealer-like role in 

the securities and government securities 

markets through their liquidity 

provision or significant and regular 

trading activity in the market. By 

providing an exception for persons that 

have or control total assets of less than 

$50 million, the Proposed Rules would 

parallel an established standard for 

distinguishing between ‘‘retail’’ and 

‘‘institutional’’ investors in other 


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99Under FINRA rules, a ‘‘retail’’ account is 

distinguished from an ‘‘institutional’’ account by 

defining, in part, an institutional account 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 SecurityBased Swap Participants, Exchange Act Release No. 

77617 (Apr. 14, 2016), 81 FR 29959, 29995 n.462 

(May 13, 2016) (adopting a similar threshold for 

purposes of 17 CFR 240.15Fh–3(f)(4) (Exchange Act 

Rule 15Fh–3(f)(4))). The Proposed Rules do not use 

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 proposed 

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). 

100As discussed in Section III.C, to meet the 

quantitative standard set forth in proposed Rule 

3a44–2(a)(2) a person must, in each of four out of 

the last six calendar months, engage in buying and 

selling more than $25 billion of trading volume in 

government securities as defined in Section 

3(a)(42)(A) of the Exchange Act. The Commission 

believes that there will not be any instances where 

a person who has or controls less than $50 million 

in total assets will meet this quantitative standard. 

101 Depending on the scope and nature of its 

activities, such a person could come within the 

definition of ‘‘pattern day trader’’ under FINRA 

rules. See FINRA Rule 4210. Notably, among other 

requirements, a pattern day trader must maintain a 

minimum amount of equity in its margin account 

on any day that the customer day trades and this 

minimum equity must be in the account prior to 

engaging in any day-trading activities. Id. If the 

account falls below the minimum requirement, the 

pattern day trader will not be permitted to day trade 

until the account is restored to the minimum equity 

level. Id. 

102As discussed above, dealer status involves 

engaging in ‘‘more than a few isolated’’ securities 

transactions. See supra note 47 and accompanying 

text. 

103A registered investment company includes 

any issuer which is or holds itself out as being 

primarily, or proposes to engage primarily, in the 

business of investing, reinvesting, or trading in 

securities. 15 U.S.C. 80a–3(a)(1)(A). The Investment 

Company Act generally prohibits a domestic 

registered investment company from offering or 

selling any security unless the company is 

registered under Section 8 of the Investment 

Company Act. 15 U.S.C. 80a–7(a). 

104See 15 U.S.C. 80a–18. 

105See 15 U.S.C. 80a–17(f); 17 CFR 270.17f–1 

through 270.17f–7. 

106See, e.g., 15 U.S.C. 80a–12(d)(1), 12(d)(3). 

107See 15 U.S.C. 80a–17(a), (d), (e); 17 CFR 

270.17d–1, 270.17e–1. 

108See, e.g., 15 U.S.C. 80a–2(a)(41), 15, 17(f), 17 

CFR 270.17(j), 270.31(a); 17 CFR 270.2a–4, 270.2a– 

5, 270.10f–3, 270.12b–1, 270.17a–7, 270.17e–1, 

270.22c–1, 270.38a–1. 

109See 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 percent asset coverage, and open-end 

funds from issuing or selling a senior security other 

than borrowing from a bank, also subject to 300 

percent 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 (generally requiring investment 

companies that use derivatives to adopt a 

derivatives risk management program that includes 

a limitation on leverage risk based on Value-at-Risk 

(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). 

110 17 CFR 270.38a–1. The fund’s policies and 

procedures also must provide for the oversight of 

compliance by the fund’s advisers, principal 

underwriters, administrators, and transfer agents. 

See also 15 U.S.C. 80a–47(a) (‘‘It shall be unlawful 

for any person, directly or indirectly, to cause to be 

done any act or thing through or by means of any 

other person which it would be unlawful for such 

person to do under the provisions of this 

subchapter or any rule, regulation, or order 

thereunder.’’). 

111 17 CFR 270.38a–1. 

112 Depending on the organizational form, 

investment companies register under the 

Investment Company Act and offer their shares 

under the Securities Act on Forms N–1A (open-end 

management investment companies), N–2 (closedend management investment companies), N–3 

(separate accounts organized as management 

companies), N–4 (separate accounts organized as 

unit investment trusts), N–5 (small business 

investment companies), and N–6 (separate accounts 

organized as unit investment trusts that offer 

variable life insurance products). 

113Registered 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 position 

level risk measures to better understand fund 

exposure to changes in market conditions. 

114 15 U.S.C. 80a–30. 

115As discussed in Section III.D, for purposes of 

the definition of ‘‘own account,’’ an account held 

in the name of a person that is a registered 

investment company would not be attributed to a 

controlling person or another person under 

common control. 

contexts.99 The Commission believes 

that this threshold is appropriate in the 

context of the Proposed Rules because, 

even though a person that has or 

controls less than $50 million in assets 

may be engaged in the activities 

identified in the Proposed Rules’ 

qualitative standards,100 the frequency 

and nature of its 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-like activity engaged in by certain 

PTFs and other institutional market 

participants, that the Proposed Rules are 

designed to address.101 This is not an 

exclusion from the dealer definition for 

all purposes. Rather, as with other 

persons not within the ambit of the 

Proposed Rules, the question of whether 

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, and to the extent 

consistent with the Proposed Rules, 

existing applicable interpretations and 

precedent will continue to apply.102

The Commission is proposing to 

exclude registered investment 

companies from the application of the 

Proposed Rules.103 Registered 

investment companies are subject to a 

regulatory framework under the 

Investment Company Act and rules 

thereunder, which imposes 

requirements regarding capital 

structure,104 custody of assets,105

investment activities,106 transactions 

with affiliates and other conflicts of 

interest,107 and the duties and 

independence of boards of directors, 

among other things.108 Moreover, 

registered investment companies are 

subject to statutory limits on 

indebtedness and rules that limit 

leverage risk.109 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.110 These policies and 

procedures must be approved by the 

fund’s board of directors, including a 

majority of independent directors, and 

are administered by a designated chief 

compliance officer.111 Registered 

investment companies are required to 

register under the Investment Company 

Act and offer their shares under the 

Securities Act of 1933 (‘‘Securities 

Act’’).112 They also must report to the 

Commission on many aspects of their 

operations and their portfolio 

holdings.113 Registered investment 

companies must maintain certain books 

and records and make them available for 

examination by the Commission.114 As 

a result, the Commission has extensive 

oversight of registered investment 

companies and broad insight into their 

operations and activities. In light of the 

regulatory structure that governs 

registered investment companies, which 

addresses, among other things, the types 

of concerns that we seek to address in 

the Proposed Rules, the Commission is 

proposing to exclude registered 

investment companies from the 

application of the Proposed Rules.115

The Proposed Rules would not 

exclude private funds because we are 

taking a similar approach to regulating 

dealer activity across market 

participants and, unlike registered 

investment companies, private funds are 

not subject to the extensive regulatory 

framework of the Investment Company 

Act. The Commission is mindful that 

registered private fund advisers are 

regulated under the Advisers Act and 

that information on private fund 

activities is reported by registered 


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23064 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

116The Commission recently has issued a 

proposal to amend Form PF, which would provide 

the SEC and the Financial Stability Oversight 

Counsel (‘‘FSOC’’) with additional confidential 

information about private funds. Information 

reported on Form PF has helped establish a baseline 

picture of the private fund industry for use in 

assessing systemic risk. These proposed 

amendments would apply to large hedge fund 

advisers, private equity advisers, and large liquidity 

fund advisers and are designed to enhance FSOC’s 

and the Commission’s ability to monitor systemic 

risk, bolster the Commission’s regulatory oversight 

of private fund advisers, and enhance investor 

protection efforts. See Form PF Proposing Release, 

supra note 34. 

117See proposed Rule 3a5–2(b)(2) and proposed 

Rule 3a44–2(b)(2). 

118See infra note 185 and accompanying text. 

private fund advisers on Form PF.116

The information the Commission 

obtains on private funds through its 

regulation of registered investment 

advisers, however, differs from that the 

Commission collects for the purposes of 

dealer regulation. In addition, dealer 

registration enhances regulatory 

oversight of market participants’ trading 

activities and interactions with the 

market overall and dealer regulatory 

requirements focus broadly on market 

functionality (along with protecting 

investors under principles of fair 

dealing between parties). 

Similarly, the Proposed Rules would 

not apply a blanket exclusion for 

registered investment advisers. A 

registered investment adviser trading for 

its ‘‘own account’’ as defined in the 

Proposed Rules could implicate dealer 

registration requirements.117 The 

Commission is mindful, however, that 

with some clients, a registered 

investment adviser only exercises 

investment discretion over the client’s 

account, while with some other clients, 

the adviser also may control the client 

through an ownership interest. The 

Proposed Rules take into account a 

registered investment adviser’s role in 

determining what client trading activity 

should be attributed to the adviser for 

purpose of the rules.118

Request for Comments 

The Commission generally requests 

comment on this aspect of the Proposed 

Rules. In addition, the Commission 

requests comment on the following 

specific issues: 

1. Should the Proposed Rules exclude 

persons that have or control less than 

$50 million in total assets? Are there 

instances in which persons that have or 

control less than $50 million in total 

assets that are buying and selling 

securities or government securities for 

their own accounts provide liquidity to 

the markets or have a significant impact 

on the markets that would warrant 

regulation as dealers or government 

securities dealers? Please explain. 

2. Does the proposed $50 million in 

total assets threshold sufficiently 

distinguish persons whose activity 

should not be captured for purposes of 

the Proposed Rules? If not, is there 

another amount or measurement that 

would better distinguish these smaller 

market participants and achieve the 

purposes of the Proposed Rules? Please 

explain. 

3. Would persons that would be 

captured by the Proposed Rules (i.e., 

have or control more than $50 million 

in total assets) restructure their 

activities or change their corporate 

structures for the purpose of avoiding 

registration, including withdrawing or 

reducing their trading activities or 

ceasing investment strategies that trigger 

the application of the Proposed Rules? 

What would be the effects of such 

restructuring, withdrawal, or cessation? 

Please explain. 

4. Should the Commission exclude 

registered investment companies from 

the scope of the Proposed Rules? Why 

or why not? If they are not excluded, do 

registered investment companies engage 

in activities that would be captured by 

the Proposed Rules? Could a registered 

investment company comply with the 

requirements applicable to dealers? 

What would be the potential costs and/ 

or benefits of requiring registered 

investment companies to register as 

dealers or government securities 

dealers? Could the registered investment 

companies restructure their activities to 

avoid dealer registration? What would 

be the effects of such restructuring? 

Please explain. 

5. The Proposed Rules do not exclude 

private funds, that is, pooled investment 

vehicles that are exempted from the 

definition of ‘‘investment company’’ 

under Section 3(c)(1) or 3(c)(7) of the 

Investment Company Act. Should the 

Commission except or exclude private 

funds from the scope of the Proposed 

Rules? Why or why not? Should the 

Commission except or exclude private 

funds advised by registered investment 

advisers from the scope of the Proposed 

Rules? Do some private funds engage in 

activities that would be captured by the 

Proposed Rules? Could a private fund 

comply with the requirements 

applicable to dealers? What would be 

the potential costs and/or benefits of 

requiring private funds to register as 

dealers or government securities 

dealers? Would private funds 

restructure their activities to avoid 

registration as a dealer? What would be 

the effects of such restructuring? Would 

private funds cease or reduce 

investment strategies captured by the 

Proposed Rules to avoid registration as 

a dealer? If so, what would be the effects 

of removing or reducing these 

investment strategies from the markets? 

Please explain. 

6. Should registered investment 

advisers trading for their own accounts 

be excluded partially or entirely from 

the Proposed Rules? Why or why not? 

Could some registered investment 

advisers engage in activities that meet 

the proposed qualitative standards and 

trigger the application of the Proposed 

Rules? Could some registered 

investment advisers engage in trading 

volume in government securities that 

could exceed the quantitative threshold 

in proposed Rule 3a44–2? If registered 

investment advisers were captured by 

the Proposed Rules, how would they 

comply with the requirements 

applicable to dealers? Would the 

registered investment advisers 

restructure their activities to avoid 

registration as a dealer, including 

withdrawing or reducing their trading 

activities or ceasing or reducing 

investment strategies that trigger the 

application of the Proposed Rules? What 

would be the effects of such 

restructuring, withdrawal, or cessation? 

Please explain. 

7. Instead of addressing investment 

adviser and private fund dealer 

concerns under the framework of 

existing dealer regulation, should the 

Commission consider a proposed 

rulemaking under the Advisers Act to 

address these concerns? What elements 

should be included in such a 

rulemaking? For example, should it 

include transaction reporting and/or 

capital requirements? 

8. Should the Commission except or 

exclude any other categories of persons 

from the scope of the Proposed Rules? 

If so, what persons, and why? If not, 

why not? 

B. Qualitative Standards 

The qualitative standards in the 

Proposed Rules would build on existing 

statements by the Commission and the 

courts regarding ‘‘dealer’’ activity to 

further define certain standards for 

determining when a person that is 

engaged in buying and selling securities 

for its own account is engaged in that 

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

as that phrase is used in Sections 3(a)(5) 

and 3(a)(44)(B) of the Exchange Act. 

Specifically, 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 a dealer or a 

government securities dealer, if that 

person engages in a routine pattern of 

buying and selling securities (or 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23065 

119See proposed Rule 3a5–4(a)(1) and proposed 

Rule 3a44–2(a)(1). 

120See, e.g., 2002 Release at 67499. 

121See proposed Rule 3a5–4(c) and proposed 

Rule 3a44–2(c), discussed in Section III.E. 

122 2002 Release at 67498–500. In addition, the 

staff has stated that, while ‘‘the practical distinction 

between a ‘trader’ and a ‘dealer’ is often difficult to 

make and depends substantially upon the facts, 

. . . [a]s a general matter, a trader does not[, among 

other things,] . . . furnish the services which are 

usually provided by dealers, such as quoting the 

market in one or more securities.’’ National Council 

of Savings Inst., SEC No-Action Letter, 1986 WL 

67129 (July 27, 1986) (the staff declined to take a 

no-action position with respect to national trade 

association’s members as ‘‘a determination of a 

Member’s status under the [Exchange] Act would 

depend upon an analysis of all of that Member’s 

securities activities, and not just’’ the activities 

described in the request). 

123See, e.g., Exchange Act Section 3(a)(38), 15 

U.S.C. 78c(a)(38) (‘‘The term ‘market maker’ means 

any specialist permitted to act as a dealer, any 

dealer acting in the capacity of block positioner, 

and any dealer who, with respect to a security, 

holds himself out (by entering quotations in an 

inter-dealer communications system or otherwise) 

as being willing to buy and sell such security for 

his own account on a regular or continuous basis.’’) 

(emphasis added). See also Stock Exchange 

Regulation: Hearing on H.R. 7852 and H.R. 8720 

Before the Committee on Interstate and Foreign 

Commerce, 73rd Congr. 117 (1934) (statement of 

Thomas Corcoran) (‘‘The term ‘dealer’ is broad 

enough to include . . . the floor trader . . . [whose] 

profits depend upon his running along and playing 

with the trends and not getting caught taking 

positions.’’); 2002 Release at 67499 (‘‘A person 

generally may satisfy the definition, and therefore, 

be acting as a dealer in the securities markets by 

. . . acting as a market maker or specialist on an 

organized exchange or trading system [or] acting as 

a de facto market maker whereby market 

professionals or the public look to the firm for 

liquidity . . . .’’). 

124See Stock Exchange Regulation: Hearing on 

H.R. 7852 and H.R. 8720 Before the Committee on 

Interstate and Foreign Commerce, 73rd Congr. 117 

(1934) (statement of Thomas Corcoran). See also 

U.S. Securities and Exchange Commission, Report 

on the Feasibility and Advisability of the Complete 

Segregation of the Functions of Dealer and Broker 

21, 25, 85, 109 (1936). 

125See 2002 Release at 67499. 

126 Id. 

127See Algorithmic Trading Staff Report at 39 

(‘‘Passive market-making involves submitting nonmarketable orders on both sides (buy or ‘bid,’ and 

sell or ‘offer’) of the marketplace.’’). 

128See id. at 39–41 (citing 2010 Equity Market 

Structure Concept Release and SEC Staff of the 

Division of Trading and Markets, Equities Market 

Structure Literature Review Part II: High Frequency 

Trading (Mar. 18, 2014)) (describing broad types of 

short-term high frequency trading strategies). 

Market participants of the kind that this release 

addresses, including PTFs, may carry out passive 

market making strategies. They may also engage in 

a range of trading strategies that involve submitting 

aggressive orders, or a combination of passive and 

aggressive orders, ‘‘sometimes rapidly demanding 

liquidity, in order to quickly liquidate positions 

accumulated through providing liquidity.’’ See 

Algorithmic Trading Staff Report at 39–40; see also 

‘‘Making,’’ ‘‘taking’’ and the material political 

economy of algorithmic trading, Donald MacKenzie, 

Economy and Society, 47:4, 501–23 (2018); HighFrequency Trading Strategies Michael Goldstein, 

Babson College, Amy Kwan, University of Sydney, 

Richard Philip, University of Sydney (Dec. 8, 2016); 

Exploring Market Making Strategy for High 

Frequency Trading: An Agent-Based Approach, 

Yibing Xiong, Takashi Yamada, Takao Terano 

(2015); SEC Staff of the Division of Trading and 

Markets, Equities Market Structure Literature 

Continued 

government securities) that has the 

effect of providing liquidity to other 

market participants. 

The Proposed Rules further identify 

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 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. The following 

discussion of the proposed qualitative 

standards is applicable to both rules, 

and references to ‘‘dealer’’ activity apply 

equally to both ‘‘dealers’’ and 

‘‘government securities dealers’’ under 

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

Exchange Act, respectively, unless 

otherwise indicated. 

Under the Proposed Rules, a person’s 

securities trading activity would form a 

‘‘part of a regular business’’ when 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.’’ 119 Under this 

qualitative standard, when the 

frequency and nature of a person’s 

securities trading is such that the person 

assumes a role—described as either 

market-making, de facto market-making, 

or liquidity-providing—similar to the 

role that historically has been performed 

by a set of registered dealers, that person 

would be deemed to be acting as a 

dealer or government securities 

dealer.120 As elaborated below, the 

Proposed Rules identify three patterns 

of buying and selling that the 

Commission views as having the effect 

of providing liquidity—any one of 

which is sufficient to require a person 

to register as a dealer. As discussed 

below, no presumption shall arise that 

a person is not a dealer solely because 

that person does not engage in the 

activities described in the Proposed 

Rules.121 Other patterns of buying and 

selling may have the effect of providing 

liquidity to other market participants or 

otherwise require a person to register 

under the Proposed Rules in accordance 

with applicable precedent. 

The Commission has long identified 

activities related to liquidity provision 

as factors that would indicate a person 

is ‘‘ ‘engaged in the business’ of buying 

and selling securities.’’ 122 Historically, 

persons who provide liquidity in 

securities markets in exchange for 

compensation, earning revenue from the 

act of buying and selling itself, have 

registered as dealers.123 And, from the 

enactment of the Exchange Act, the term 

‘‘dealer’’ has included a class of 

liquidity providers that includes but is 

broader than market makers, 

encompassing, for example, professional 

floor traders who trade ‘‘in and out,’’ 

effect ‘‘about half of the transactions on 

the floor of the stock exchange,’’ and 

whose ‘‘profits depend upon . . . 

running along and playing with the 

trends and not getting caught taking 

positions.’’ 124 As securities markets 

have evolved, and new market 

participants have increasingly taken on 

market-making and liquidity-providing 

roles, the Commission has stated that 

dealer activity includes not only ‘‘acting 

as a market maker’’ but also ‘‘acting as 

a de facto market maker whereby market 

professionals or the public look to the 

firm for liquidity.’’ 125 Traders, by 

contrast, the Commission indicated, do 

‘‘not mak[e] a market in securities.’’ 126

In the context of the Proposed Rules, 

and as discussed further below, a 

‘‘pattern’’ of trading means buying and 

selling repetitively. For a pattern to 

come within the Proposed Rules, both 

purchases and sales would have to be 

‘‘routine’’ and have ‘‘the effect of 

providing liquidity’’ to other market 

participants. Further, as discussed 

below, the Proposed Rules would set 

forth three standards that the 

Commission believes would 

appropriately distinguish and identify 

such liquidity provision as a ‘‘regular 

business’’ as opposed to non-dealer, or 

trader, activity. 

In this respect, the Proposed Rules 

focus on activity rather than label or 

status. The Proposed Rules by their 

terms would cover any person (as 

defined above) who ‘‘engages in a 

routine pattern of buying and selling 

securities [or government securities] 

that has the effect of providing liquidity 

to other market participants,’’ regardless 

of whether the person labels itself, or is 

commonly known as, a PTF. 

The liquidity-providing activity 

captured by the Proposed Rules would 

include not only passive liquidityproviding activity 127 but also aggressive 

trading strategies, including structural 

or directional trading 128 that similarly 


khammond on DSKJM1Z7X2PROD with PROPOSALS2
23066 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

Review Part II: High Frequency Trading (Mar. 18, 

2014). These passive and aggressive strategies are 

often referred to as ‘‘liquidity providing’’ and 

‘‘liquidity demanding’’ or ‘‘liquidity taking’’ 

strategies respectively. See, e.g., Algorithmic 

Trading Staff Report. Under the Proposed Rules, 

both passive and aggressive trading strategies would 

be considered forms of liquidity provision. 

129See supra note 39. 

130Stock Exchange Regulation: Hearing on H.R. 

7852 and H.R. 8720 Before the Committee on 

Interstate and Foreign Commerce, 73rd Congr. 117 

(1934) (statement of Thomas Corcoran). For a 

discussion of ‘‘liquidity providing’’ versus 

‘‘liquidity demanding’’ trading strategies, see supra 

note 128. 

131See, e.g., Amendments to Regulation SHO, 

Exchange Act Release No. 58775, 73 FR 61690, 

61699 (Oct. 17, 2008) (‘‘Regulation SHO 

Amendments’’), in which the Commission stated 

that ‘‘[a] pattern of trading that includes both 

purchases and sales in roughly comparable amounts 

to provide liquidity to customers or other brokerdealers’’ would be one indicia of bona-fide marketmaking activity for purposes of the exceptions in 17 

CFR 242.200 through 242.204 (Regulation SHO) to 

the locate and close-out requirements. The 

determination of eligibility for the bona-fide 

market-making exceptions is distinct from the 

determination of whether a person’s trading activity 

indicates that such person is acting as a dealer 

under the Proposed Rule. Under the Regulation 

SHO exception, for instance, the broker-dealer must 

also be providing widely disseminated quotations 

near or at the market and put itself at market risk. 

As the Commission has stated on numerous 

occasions, the determination of whether a particular 

short sale qualifies for the bona-fide market-making 

exception depends on the particular facts and 

circumstances surrounding the transaction(s). See 

infra note 157. Importantly, under the Proposed 

Rules, a person’s intent is irrelevant; the Proposed 

Rules focus on the ‘‘effect’’ of a person’s activity, 

and where a person’s activity ‘‘has the effect of 

providing liquidity,’’ whether or not that effect is 

intended, the person would fall within the scope of 

the Proposed Rules. 

132As discussed below in Section III.A.ii, the 

Commission believes it is appropriate to use 

‘‘routine,’’ rather than ‘‘regular’’ or ‘‘continuous,’’ as 

these standards may fail to capture a number of 

significant firms, due to the unique characteristics 

of certain liquidity providers in today’s markets. 

Unlike many traditional types of liquidity 

providers, there are liquidity providers in today’s 

markets, such as PTFs, that despite routine 

participation in the market, may at times interrupt 

their market activity so that it is not always 

‘‘continuous.’’ The Commission adopted a similar 

approach in connection with its joint rulemaking 

with the Commodity Futures Trading Commission 

regarding, among other things, the definitions of 

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

See Entities Adopting Release at 30609 (‘‘making a 

market in swaps is appropriately described as 

routinely standing ready to enter into swaps at the 

request or demand of a counterparty. In this regard, 

‘routinely’ means that the person must do so more 

frequently than occasionally, but there is no 

requirement that the person do so continuously.’’). 

133See Section II.A. 

134See SEC v. Justin W. Keener d/b/a JMJ 

Financial, No. 1:20–CV–21254 (S.D. Fla. Jan. 21, 

2022) (‘‘Case law has established that the primary 

indicia in determining that a person has ‘engaged 

in the business’ within the meaning of the term 

‘dealer’ is that the level of participation in 

purchasing and selling securities involves more 

than a few isolated transactions.’’ (emphasis added) 

(quoting Sodorff, 1992 WL 224082, at *4)). 

135See, e.g., 2002 Release (focusing, among other 

things, on a ‘‘regular turnover of inventory’’ rather 

than requiring completely neutral positions). 

136The Proposed Rules do not provide a brightline test to determine ‘‘roughly comparable’’ 

purchases and sales. However, for purposes of the 

Economic Analysis of the Proposed Rules, the 

Commission assumes a daily buy-sell imbalance 

between two identical or substantially similar 

securities, in terms of dollar volume, below 10 

percent or, alternatively, 20 percent may be 

indicative of purchases and sales that are ‘‘roughly 

comparable,’’ as described below in Section V.B.2.c. 

The Commission has requested comment on 

whether this approach is appropriate and whether 

this standard should include a trading threshold. 

137See 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). 

138See 2010 Equity Market Structure Concept 

Release at 3607–09. See also 2015 Joint Staff Report. 

permit a person to earn revenue from 

the act of buying and selling itself. In 

this regard, the Proposed Rules would 

cover persons who trade, as part of a 

regular business,129 ‘‘in and out’’ and 

whose ‘‘profits depend upon . . . 

running along and playing with the 

trends and not getting caught taking 

positions’’—activity understood from 

the enactment of the Exchange Act to be 

a form of dealer activity—as well as 

more traditional forms of liquidity 

provision, such as market making.130

The Proposed Rules further define 

three patterns of buying and selling that 

the Commission views as having the 

effect of providing liquidity, which are 

discussed in turn below. 

i. Routinely Making Roughly 

Comparable Purchases and Sales of the 

Same or Substantially Similar Securities 

in a Day 

Under the first enumerated pattern, in 

proposed Rules 3a44–2(a)(1)(i) and 3a5– 

4(a)(1)(i) respectively, 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 be a 

dealer or government securities 

dealer.131

‘‘Routinely’’ as used in this standard 

relates to the frequency with which a 

person engages in making roughly 

comparable purchases and sales of the 

same or substantially similar securities 

in a day. Here, ‘‘routinely’’ means more 

frequent than occasional but not 

necessarily continuous,132 such that a 

person’s transactions in roughly 

comparable positions, throughout the 

day and routinely over time, constitute 

‘‘[engaging] in a routine pattern of 

buying and selling securities that has 

the effect of providing liquidity for 

market participants’’ under the 

Proposed Rules. The Commission 

believes that this interpretation of 

‘‘routinely’’ will 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. 

As discussed above, the frequency 

with which a person buys and sells 

securities for its own account is a 

common component of the dealer 

analysis: More frequent buying and 

selling is indicative of dealer activity.133

The first qualitative standard of the 

Proposed Rules describes a regularity of 

participation far beyond the isolated 

transactions of non-dealers,134 and 

focuses on a pattern of trading because 

the consistency and regularity of their 

participation indicates that their 

liquidity provision forms a part of a 

regular business. 

Under the Proposed Rules, ‘‘roughly 

comparable’’ would generally capture 

purchases and sales similar enough, in 

terms of dollar volume, number of 

shares, or risk profile, to permit 

liquidity providers to maintain near 

market-neutral positions by netting one 

transaction against another transaction. 

To be ‘‘roughly comparable,’’ the dollar 

volume or number of shares of, or risk 

offset by, the purchases and sales need 

not be exactly the same, as requiring a 

full netting of positions may fail to 

capture a number of significant firms, 

due to the unique characteristics of 

certain liquidity providers in today’s 

markets.135 Instead, ‘‘roughly 

comparable’’ purchases and sales would 

fall within a reasonable range that 

generally would have the effect of 

offsetting one transaction against the 

other. Generally speaking, although the 

Proposed Rules do not provide a brightline test in connection with the 

qualitative factors, the Commission 

believes that a person that closes or 

offsets, in the same day, the 

overwhelming majority of the positions 

it has opened, has likely made ‘‘roughly 

comparable purchases and sales.’’ 136

This proposed standard would capture 

a fundamental aspect of both the 

traditional dealer—who ‘‘buys securities 

. . . with a view to disposing them 

elsewhere’’ and ‘‘receives no brokerage 

commission but relies for his 

compensation upon a favorable 

difference or spread between the price 

at which he buys and the amount for 

which he sells’’ 137—and the liquidity 

provider whose trading strategies 

generally involve frequent turnover of 

positions on a short-term basis, with 

overnight holdings of unhedged 

positions that are a fraction of their 

overall intraday positions.138


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139See 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). 

140See Section II.A. 

141See Section I. 

142See, e.g., Stock Exchange Regulation: Hearing 

on H.R. 7852 and H.R. 8720 Before the Committee 

on Interstate and Foreign Commerce, 73rd Congr. 

117 (1934) (statement of Thomas Corcoran) 

(discussing floor traders, which have long been 

viewed as dealers). As the markets have evolved, 

the role of floor traders has largely been replaced 

by PTFs, which play a role—albeit, electronically 

and through the use of algorithmic trading 

strategies—similar to that of the floor traders that 

traditionally have been regulated as dealers. See 

2010 Equity Market Structure Concept Release at 

3607–08. 

143See Section II.A. 

144See 17 CFR 227.300(b)(2) (Rule 300(b)(2) of 

Regulation Crowdfunding) (permitting an 

intermediary to have a financial interest in an issuer 

if, among other things, the financial interest 

consists of securities of the same class and having 

the same terms, conditions and rights as the 

securities being offered and sold on the 

intermediary’s platform.). 

145See Federal Reserve Bank of New York, 

‘‘FAQs: Treasury Purchases,’’ https://www.newyork

fed.org/markets/treasury-reinvestments-purchasesfaq. 146See 2021 IAWG Joint Staff Report at 5. 

The Proposed Rules reflect the 

statutory distinction between ‘‘dealers’’ 

and ‘‘traders.’’ 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’’ 139—as well as the frequency 

with which a person buys and sells.140

By targeting persons who routinely 

make roughly comparable purchases 

and sales of the same or substantially 

similar securities, the Proposed Rules 

identify persons whose trading has the 

effect of providing liquidity that 

requires dealer registration, and so 

distinguish those persons who are 

acting as traders.141

The Proposed Rules take into account 

the speed at which technology permits 

liquidity providers today to turn over 

their positions and the fact that highspeed, anonymous trading platforms 

allow liquidity providers to act as 

intermediaries without customers and 

without holding an inventory of 

securities.142 In addition, the Proposed 

Rules take into consideration the 

frequency with which a person buys 

and sells securities, which is a factor 

historically considered as part of the 

dealer analysis.143 Because they are 

based on activity, the Proposed Rules 

would cover not only PTFs, but also any 

other persons engaging in the identified 

activities. 

Paragraph (a)(1)(i) of the Proposed 

Rules would also provide that the 

securities bought and sold must be ‘‘the 

same or substantially similar’’ in order 

to further distinguish liquidity 

providing dealer activity from nondealer trader activity. As discussed 

above, routinely making roughly 

comparable purchases and sales of 

securities keeps a liquidity provider’s 

market positions near neutral only to 

the extent that a sale or another trade 

offsets the risk taken on through a 

purchase. For purposes of the rule, ‘‘the 

same’’ securities means that the 

securities bought and sold are securities 

of the same class and having the same 

terms, conditions, and rights.144

Securities bearing the same Committee 

on Uniform Securities Identification 

Procedures (‘‘CUSIP’’) number, for 

example, would be considered ‘‘the 

same.’’ In addition, the determination of 

what would constitute ‘‘substantially 

similar’’ securities for purposes of the 

rule would be based on the facts and 

circumstances analysis that would take 

into account factors such as, for 

example, whether: (1) The fair market 

value of each security primarily reflects 

the performance of a single firm or 

enterprise or the same economic factor 

or factors, such as interest rates; and (2) 

changes in the fair market value of one 

security are reasonably expected to 

approximate, directly or inversely, 

changes in, or a fraction or a multiple 

of, the fair market value of the second 

security. A person routinely making 

roughly comparable purchases and sales 

of the same or substantially similar 

securities, such that the sale or purchase 

of one security offsets the risk 

associated with the sale or purchase of 

the other, permitting that person to 

maintain a near market-neutral position, 

would meet this aspect of this standard. 

Applying these principles, the 

Commission believes that the following 

are nonexclusive examples of purchases 

and sales of ‘‘substantially similar’’ 

securities: 

• Selling a Treasury security and 

buying another Treasury security in the 

same maturity range, as used by the 

Federal Reserve Bank of New York’s 

Open Market Operations.145 For 

example, selling a 4.5-year Treasury 

security and buying a 5-year Treasury 

security, or a 9.5 year Treasury security 

versus a 10-year Treasury security. 

• Buying an exchange traded fund 

and selling the underlying securities 

that make up the basket of securities 

held by the exchange traded fund that 

was purchased. 

• Buying a European call option on a 

stock and selling a European put option 

on the same stock with the same strike 

and maturity. 

• Buying an OTC call option on a 

stock and selling a listed option on the 

same stock with the same strike and 

maturity. 

Conversely, the Commission believes 

that the following are examples of 

purchases and sales of securities that are 

not ‘‘substantially similar’’: 

• Buying stock in one company (e.g., 

Ford) and selling stock in another 

company in the same industry (e.g., 

Chrysler). 

• Buying stock and selling bonds 

issued by the same company. 

• Buying cash Treasury securities and 

selling Treasury futures. 

Finally, the standard under paragraph 

(a)(1)(i) of the Proposed Rules would 

apply with respect to purchases and 

sales made ‘‘in a day.’’ As discussed 

above, dealer liquidity providers are 

distinguishable, in part, from traders 

and other market participants by the 

frequent turnover of their positions. 

Traditional dealers often hold an 

inventory to enable them to buy from 

one market participant and sell to 

another. Technological advancements 

have increased the speed at which this 

process happens, eliminating in some 

cases the need to carry a traditional 

inventory at all, as liquidity providers 

are able to source and unload securities 

extremely rapidly. The Commission 

believes that a temporal component is 

necessary in paragraph (a)(1)(i) to 

distinguish dealer liquidity providers 

from other market participants who may 

contribute liquidity to the market 

periodically but not in the repeated, 

routine—and often relied upon— 

manner of liquidity providers. The 

Commission believes that ‘‘in a day’’ is 

a period of sufficient duration to capture 

the trading activity typical of dealer 

liquidity providers that are the focus of 

the Proposed Rules, and still brief 

enough to exclude non-dealers pursuing 

longer-term investment strategies. In 

addition, because PTFs tend to turn over 

their positions over the course of a day, 

‘‘end[ing] the day with little net 

directional exposure,’’ 146 market 

practices support drawing the temporal 

line at the end of the day. 

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 

Proposed Rules 3a44–2(a)(1)(ii) and 

3a5–4(a)(1)(ii) set forth the second 


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147The term ‘‘market maker’’ includes, among 

other things, ‘‘any dealer who, with respect to a 

security, holds itself out (by entering quotations in 

an inter-dealer quotation system or otherwise) as 

being willing to buy and sell such security for its 

own account on a regular or continuous basis.’’ See 

15 U.S.C. 78c(a)(38). Moreover, 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). 

148See, e.g., Entities Adopting Release at 30609 

(‘‘In this regard, ‘routinely’ means that the person 

must do so more frequently than occasionally, but 

there is no requirement that the person do so 

continuously.’’). 

149 2021 IAWG Joint Staff Report at 5, 13. 

150See, e.g., Algorithmic Trading Staff Report; 

2010 Equity Market Structure Concept Release. 

151 17 CFR 242.300(e) defines an ‘‘order’’ to mean 

‘‘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.’’ 

152See 2022 ATS Proposing Release, proposed 

Rule 300(q). In proposing this new term, the 

Commission noted the incidence of ‘‘non-firm 

trading interest that includes the symbol and one 

of the following: quantity, direction, or price. . . . 

The Commission believes that . . . the use of a 

message that identifies the security and either the 

quantity, direction, or price would provide 

sufficient information to bring together buyers and 

sellers of securities because it allows a market 

participant to communicate its intent to trade and 

a reasonable person receiving the information to 

decide whether to trade or engage in further 

communications with the sender.’’ Id. at 15505. 

153See 2022 ATS Proposing Release at 15500– 

15502. 

154See, e.g., Regulation SHO Amendments, in 

which the Commission stated that quotations near 

or at the market for a short sale in a security may 

provide an indication of bona-fide market making 

for purposes of Regulation SHO, depending on the 

facts and circumstances surrounding the activity. 

See also supra note 131. 

155See, e.g., Prohibitions and Restrictions on 

Proprietary Trading, Release No. BHCA–1; File No. 

S7–41–11 (Dec. 10, 2013), 79 FR 5535, 5585–86 

(Jan. 31, 2014), available at https://www.sec.gov/ 

rules/final/2013/bhca-1.pdf (setting forth, among 

other things, the circumstances in which a banking 

entity may engage market making-related activities) 

(‘‘Volcker Rule Adopting Release’’) at 177. 

156See, e.g., 15 U.S.C. 78c(a)(5) (‘‘The term 

‘dealer’ means any person engaged in the business 

of buying and selling securities’’ (emphasis added)); 

see also 15 U.S.C. 78c(a)(44). 

157See, e.g., Regulation SHO Amendments 

(‘‘Continuous quotations that are at or near the 

market on both sides and that are communicated 

and represented in a way that makes them widely 

accessible to investors and other broker-dealers are 

also an indication that a market maker is engaged 

in bona-fide market making activity.’’). But see 

supra note 131 (explaining that the determination 

of eligibility for Regulation SHO’s bona-fide marketmaking exceptions is distinct from the 

determination of whether a person’s trading activity 

indicates that such person is acting as a dealer 

under the Proposed Rule). The Commission further 

notes that the bona-fide market-making exceptions 

under Regulation SHO are only available to 

registered broker-dealers that publish continuous 

quotations for a specific security in a manner that 

puts the broker-dealer at economic risk. Brokerdealers that do not publish continuous quotations, 

or publish quotations that do not subject the brokerdealer to such risk (e.g., quotations that are not 

publicly accessible, are not near or at the market, 

pattern of trading activity that ‘‘has the 

effect of providing liquidity to other 

market participants.’’ Specifically, 

under paragraph (a)(1)(ii), a person 

buying and selling for its own account 

that ‘‘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 

accessible to other market participants’’ 

would be engaged in a pattern of trading 

in securities or government securities 

that ‘‘has the effect of providing 

liquidity to other market participants,’’ 

and therefore would be a dealer or 

government securities dealer under the 

Proposed Rules. As discussed below, 

the Proposed Rules 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,147

to reflect technological changes to the 

ways in which buyers and sellers of 

securities are brought together. 

The Proposed Rules would apply 

when a person ‘‘routinely’’ expresses 

trading interests. Here, as well as in 

paragraph (a)(1)(i), ‘‘routinely’’ means 

that the person must express trading 

interests more frequently than 

occasionally, but not necessarily 

continuously.148 As discussed above in 

connection with paragraph (a)(1)(i), 

‘‘routinely’’ relates to the frequency of 

the activity both intraday and across 

time, and means both repeatedly within 

a day and on a regular basis over time. 

The Commission believes it is 

appropriate to use ‘‘routinely,’’ rather 

than ‘‘regular’’ or ‘‘continuous,’’ as the 

latter standards may fail to capture a 

number of significant firms, due to the 

unique characteristics of certain 

liquidity providers in today’s markets. 

Specifically, by using ‘‘routinely,’’ the 

Proposed Rules are intended to reflect 

market evolution 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. At the same time, 

they 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 149

and the equity markets.150

Paragraph (a)(1)(ii) would also use the 

term ‘‘trading interest’’ rather than 

‘‘quotations.’’ The Commission has 

recently proposed to define ‘‘trading 

interest’’ to mean ‘‘an order, as defined 

in paragraph (e) of [Rule 300 of 

Regulation ATS],151 or any non-firm 

indication of a willingness to buy or sell 

a security that identifies at least the 

security and either quantity, direction 

(buy or sell), or price.’’ 152 Technological 

advancements have proliferated 

methods by which market participants 

hold themselves out as willing to buy or 

sell securities, or otherwise 

communicate their willingness to trade. 

The broader term ‘‘trading interest’’ 

would reflect the prevalence of non-firm 

trading interest offered by market places 

today,153 and account for the varied 

ways in which developing technologies 

permit market participants to effectively 

make markets. The broader term 

appropriately captures 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 that 

the Commission intends the Proposed 

Rules to address. Using ‘‘trading 

interest,’’ as defined above, rather than 

‘‘quotation’’ will allow for clear and 

consistent application of the definition 

of dealer and government securities 

dealer. 

Further, the Commission is proposing 

that the rules encompass trading 

interests expressed ‘‘at or near the best 

available prices on both sides of the 

market.’’ 154 The 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. Among other market benefits, 

by competing to both buy and sell at the 

best available prices, liquidity providers 

help to narrow bid-ask spreads.155 The 

Commission further believes that the 

proposed formulation helps emphasize 

that a liquidity provider, to come within 

the rule, must both buy and sell 

securities.156

Finally, the Proposed Rules would 

apply only when these 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.’’ Under the 

Proposed Rules, a market participant 

that routinely makes these trading 

interests available to other market 

participants would be considered to 

have engaged in a routine pattern of 

trading that has the effect of providing 

liquidity to other market participants.157


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or are skewed directionally towards one side of the 

market), would not be eligible for the bona-fide 

market-maker exceptions under Regulation SHO. In 

addition, broker-dealers that publish quotations but 

fill orders at different prices than those quoted 

would not be engaged in bona-fide market making 

for purposes of Regulation SHO. 

158See, e.g., 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) (‘‘The 

dealer . . . receives no brokerage commission but 

relies for his compensation upon a favorable 

difference or spread between the price at which he 

buys and the amount for which he sells.’’). See also 

Entities Adopting Release at 30609 (‘‘seeking to 

profit by providing liquidity to the market is an 

indication of dealer [as opposed to trader] 

activity’’). 

159See Entities Adopting Release at 30617 

(identifying as an indication of dealer activity 

which is consistent with the definition’s ‘‘regular 

business’’ requirement, ‘‘seeking compensation in 

connection with providing liquidity . . . by seeking 

a spread, fees or other compensation not 

attributable to changes in the value of the [security 

itself]’’). With respect to bid-ask spreads, the 

connection between liquidity provision and bid-ask 

spreads is evident in the relationship among high 

volume, liquidity, and bid-ask spreads: Because 

high volume can reduce a dealer’s overhead, high 

volume tends to make liquidity provision more 

profitable; as liquidity provision becomes more 

profitable, more persons compete to provide 

liquidity, and this increased competition tightens 

bid-ask spreads, as the more competitive liquidity 

providers are willing to be compensated less for the 

liquidity they provide in order to compete. See 

Section V.C.3.c. See also Volcker Rule Adopting 

Release at 177 (‘‘[L]iquidity provides important 

benefits to the financial system, as more liquid 

markets are characterized by competitive market 

makers, narrow bid-ask spreads, and frequent 

trading.’’). Notably, a person may be acting as a 

dealer by profiting from a spread even if they are 

not profiting from ‘‘bid-ask spreads’’ under the 

Proposed Rules. See, e.g., River North, 415 F. Supp. 

at 859 (discussing Sodorff, 1992 WL 224082, at *5). 

160See 2010 Equity Market Structure Concept 

Release at 3599. 

161See 2010 Equity Market Structure Concept 

Release at 3599. Highly automated exchange 

systems and liquidity rebates have contributed to 

the rise of PTFs that focus on liquidity provision. 

Id. 

162 2022 ATS Proposing Release at 15540. 

iii. 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 LiquiditySupplying Trading Interests 

Proposed Rules 3a44–2(a)(1)(iii) and 

3a5–4(a)(1)(iii) set forth the final 

enumerated pattern of activity that ‘‘has 

the effect of providing liquidity to other 

market participants.’’ Under paragraph 

(a)(1)(iii) of each rule, a person that, 

trading for its own account, ‘‘earn[s] 

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,’’ 

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. 

As with other aspects of the Proposed 

Rules, this standard focuses on activity 

rather than label or status. The Proposed 

Rules would apply to any person 

regardless of whether the person labels 

itself, or is commonly known as, a PTF. 

As discussed above, 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 spreads or 

liquidity incentives, rather than with a 

view toward appreciation in value.158

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.159 Dealer liquidity providers 

frequently are distinguishable from 

other market participants whose trades 

arguably ‘‘provide liquidity’’ inasmuch 

as dealers seek to be compensated for 

the service of contributing to a market’s 

liquidity, whether by bid-ask spreads or 

liquidity incentives. They are ‘‘in the 

business’’ of providing liquidity because 

they routinely supply it and the revenue 

they earn as a result through bid-ask 

spreads or liquidity incentives is their 

primary source of revenue. 

Both forms of revenue are accounted 

for in the Proposed Rules. The first— 

capturing bid-ask spreads—is done by 

buying at the bid and selling at the offer, 

which would include buying at a lower 

price than, and selling at a higher price 

than, the midpoint of the bid-ask 

spread. The spread between these prices 

compensates them for providing the 

service of liquidity—that is, of generally 

standing ready to buy or sell and 

enabling other market participants to 

reliably make purchases and sales. 

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 will be 

considered to be engaged in a routine 

pattern of providing liquidity as a 

service and will fall within the scope of 

the rules. 

The second major source of revenue 

for market makers and other liquidity 

providers is explicit liquiditycompensation arrangements. For 

example, many exchanges in the 

equities markets have adopted a 

‘‘maker-taker’’ pricing model to 

compensate (and thereby attract) 

liquidity providers.160 Under this 

model, non-marketable, resting orders 

that offer (make) liquidity at a particular 

price receive a liquidity rebate if they 

are executed, while incoming orders 

that execute against (take) the liquidity 

of resting orders are charged an access 

fee.161 When a liquidity provider, as a 

result of its routine purchases and sales 

of securities, captures ‘‘incentives 

offered by trading venues to liquiditysupplying trading interests’’ with such 

frequency and consistency that its 

revenue is made up primarily of this 

form of compensation, it will be 

considered to be engaged in a routine 

pattern of providing liquidity as a 

service and generally standing ready to 

buy or sell securities, so would fall 

within the scope of the Proposed Rules. 

To come within this paragraph of the 

Proposed Rules, a liquidity provider 

would have to earn its revenue 

primarily from bid-ask spreads or 

trading incentives. The Proposed Rules 

use 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 

because a market participant can 

provide liquidity without being 

profitable. Furthermore, under the 

Proposed Rules, a person whose 

revenue is derived ‘‘primarily’’ from 

capturing bid-ask spreads or liquidity 

incentives, or a combination of the two, 

would be a liquidity provider that is 

engaged in the regular business of 

buying and selling securities for its own 

account and, as a result, a dealer or 

government securities dealer. Generally 

speaking, although the Proposed Rules 

do not provide a bright-line test in 

connection with the qualitative factors, 

the Commission believes 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. 

Finally, the paragraph would apply 

with respect to activity on ‘‘trading 

venues.’’ The Commission has recently 

proposed to define the term ‘‘trading 

venue’’ 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 brokeror dealer-operated platform for 

executing trading interest internally by 

trading as principal or crossing orders as 

agent.’’ 162

Market evolution has given rise to a 

variety of venues in which liquidity 

providers can express trading interests, 


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163See 2022 ATS Proposing Release at 15496 n.5 

and 15501. This is particularly true for government 

securities and other fixed income securities. Id. 

and the definition is designed to capture 

the breadth of these different venues. 

For example, Communication Protocol 

Systems, which are electronic systems 

that offer the use of non-firm trading 

interest and make available 

communication protocols to bring 

together buyers and sellers of securities 

but do not fall within the current 

definition of an ‘‘exchange’’ under 

Federal securities laws, have come to 

perform the function of a market place 

and become a preferred method for 

market participants to discover prices, 

find counterparties, and execute 

trades.163 The Proposed Rules are 

designed to capture dealer activity 

wherever that activity occurs, whether 

on a national securities exchange, an 

ATS, a Communication Protocol 

System, or another form of trading 

venue. For purposes of the Proposed 

Rules, the particular trading venue 

matters less than the fact that a market 

participant provides liquidity on it. 

Using the broad term ‘‘trading venue,’’ 

as defined above, will allow for clear 

and consistent application of the 

definitions of dealer and government 

securities dealer. 

Request for Comment 

The Commission generally requests 

comment on these provisions of the 

Proposed Rules. In addition, the 

Commission requests comments on the 

following specific issues: 

9. Is there sufficient specificity 

provided for the terms used in the 

qualitative standards? Are there any 

terms that should be defined in rule text 

or addressed in the release? 

• Is there sufficient specificity 

provided for the term ‘‘pattern’’? If not, 

what additional specificity should the 

Commission provide and please provide 

specific examples on the types of 

specificity. Should the rule text define 

what is meant by ‘‘pattern’’? Why or 

why not? Is the Proposed Rules’ use of 

‘‘pattern’’ appropriate? Would 

‘‘manner’’ or another word be more 

appropriate? Why or why not? 

• Is there sufficient specificity 

provided for the term ‘‘effect of 

providing liquidity’’? If not, what 

additional specificity should the 

Commission provide and please provide 

specific examples on the types of 

specificity. Should the rule text define 

what is meant by ‘‘effect of providing 

liquidity’’? Why or why not? Is the 

Proposed Rules’ use of ‘‘effect of 

providing liquidity’’ appropriate? 

Would replacing ‘‘effect of providing 

liquidity’’ with ‘‘market making’’ be 

more appropriate? Are there other 

words that would more appropriate? 

Why or why not? 

• Is there sufficient specificity 

provided for the term ‘‘primarily’’? 

Should the rule text define what is 

meant by ‘‘primarily’’? Why or why not? 

Is the Proposed Rules’ use of 

‘‘primarily’’ appropriate? Would 

‘‘mostly’’ or another word be more 

appropriate? Why or why not? 

• Is there sufficient specificity 

provided for the term ‘‘trading venue’’? 

If not, what additional specificity 

should the Commission provide and 

please provide specific examples on the 

types of specificity. Should the rule text 

define what is meant by ‘‘trading 

venue’’? Why or why not? Is the 

Proposed Rules’ use of ‘‘trading venue’’ 

appropriate? Are there other words that 

would be more appropriate? Why or 

why not? 

10. Is liquidity provision an 

appropriate factor to use in defining 

which buying and selling activity for 

one’s own account qualifies as ‘‘regular 

business’’? Are there other factors the 

Commission should include? If so, 

which factors and why? Are there 

trading activities or investment 

strategies that should not be considered 

providing liquidity? If so, please 

describe why. 

11. Are the three qualitative factors 

identified in the Proposed Rules as 

having the ‘‘effect of providing liquidity 

to other market participants’’ that would 

qualify as ‘‘regular business’’ 

appropriate? Are there any other forms 

of liquidity provision, or any other 

factors, that the Commission should 

include or exclude instead or in 

addition to those proposed? Are the 

factors over or under-inclusive? If so, 

please provide specific examples of any 

alternative suggestions. 

• For example, should the 

Commission include as an example of a 

‘‘liquid market,’’ ‘‘a market in which 

participants have the ability to readily 

trade at a predictable price and in a 

desired size without materially moving 

the market’’? Why or why not? 

• In addition to passive ‘‘liquidity 

providing’’ trading strategies, the 

Proposed Rules would capture certain 

aggressive ‘‘liquidity demanding’’ 

strategies as having the ‘‘effect of 

providing liquidity to other market 

participants’’? Is this appropriate? Why 

or why not? 

12. Under the Proposed Rules, a 

person routinely making roughly 

comparable purchases and sales of the 

same or substantially similar securities 

in a day would have the effect of 

providing liquidity to other market 

participants, and therefore would be a 

dealer. Is this an appropriate measure or 

illustration of liquidity provision? Why 

or why not? Would the provision 

capture persons that should not be 

dealers? If so, who and why? 

• For example, would the Proposed 

Rules capture private funds and other 

persons pursing investment strategies 

such as relative value fixed income 

arbitrage or share class arbitrage? If so, 

should such strategies be included or 

excluded? Why or why not? 

• Is there sufficient specificity to 

determine which securities would be 

considered ‘‘same’’ or ‘‘substantially 

similar’’? Why or why not? If not, what 

additional specificity should the 

Commission provide and please provide 

specific examples on the types of 

specificity. Should additional or 

different factors be considered? Are 

there other words that would be more 

appropriate? Why or why not? 

• Should the rule text define what is 

meant by ‘‘same’’ or ‘‘substantially 

similar’’? Why or why not? 

• Are there other types of purchase 

and sale transactions that would be 

examples of purchases and sales of 

securities that are ‘‘substantially 

similar’’ (i.e., other types of roughly 

comparable purchases and sales of 

substantially similar securities, such 

that the sale or purchase of one security 

offsets the risk associated with the sale 

or purchase of the other, permitting a 

person to maintain a near marketneutral position)? Are there examples of 

types of purchase and sale transactions 

involving derivatives, or other products 

that represent the economic equivalent 

of another security, that would be 

purchases and sales of securities that are 

‘‘substantially similar’’? Please explain. 

13. Although the Proposed Rules do 

not provide a bright-line test to 

determine ‘‘roughly comparable’’ 

purchases and sales, depending on the 

facts and circumstances, the 

Commission believes a daily buy-sell 

imbalance, as described below in 

Section V.B.2.c., between two identical 

or substantially similar securities, in 

terms of dollar volume below 20 percent 

may be indicative of purchases and 

sales that are ‘‘roughly comparable.’’ Is 

this an appropriate measurement of 

‘‘roughly comparable’’? Why or why 

not? Would another measurement be 

more appropriate? Should there be a 

minimum trading volume or dollar 

amount threshold as part of the 

qualitative standard under paragraph 

(a)(1)(i), daily buy-sell imbalance, or 

other measurement? 

• Is there sufficient specificity 

provided for the term ‘‘roughly 

comparable’’? Why or why not? If not, 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23071 

164 In light of the statutory definition of ‘‘person,’’ 

in conjunction with the proposed definitions of 

‘‘own account’’ and ‘‘control,’’ as discussed in 

Section III.D, trading volume would be determined 

by aggregating volume at the firm or legal-entity 

level (rather than market participant identifier 

(‘‘MPID’’) or global firm level). See 15 U.S.C. 

78c(a)(9). 

165Proposed Rule 3a44–2(a)(2) only applies to 

government securities as defined in Section 

3(a)(42)(A) of the Exchange Act. Accordingly, the 

trading volume threshold set forth in the proposed 

rule does not apply to all government securities as 

defined by Section 3(a)(42); but rather, it is limited 

to ‘‘securities which are direct obligations of, or 

obligations guaranteed as to principal or interest by, 

the United States’’ (‘‘U.S. Treasury Securities’’). See 

15 U.S.C. 78c(a)(42)(A). For purposes of 

determining whether the trading volume threshold 

is met, a person would include transactions in U.S. 

Treasury Securities—that is, Treasury bills, notes, 

floating rate notes, bonds, inflation-protected 

securities (‘‘TIPS’’), and Separate Trading of 

Registered Interest and Principal Securities 

(‘‘STRIPS’’)—and would exclude auction awards 

and repurchase or reverse repurchase transactions 

in U.S. Treasury Securities. See 2022 ATS 

Proposing Release at 15542 nn. 512–517 (describing 

U.S. Treasury Securities). Additionally, for 

purposes of determining whether the trading 

volume threshold is met, Treasury when-issued 

transactions would be included. 

166This Commission has adopted regulations that 

use the four out of the last six calendar months 

metric in Regulation ATS, Rules 301(b)(5) and (6), 

and Regulation SCI Rule 1000. See 17 CFR 

242.301(b)(5)–(6) (definition of an SCI alternative 

trading system or SCI ATS); see also Regulation 

Systems Compliance and Integrity, Exchange Act 

No. 73639 (Nov. 19, 2014), 79 FR 72251 (Dec. 5, 

2014) (noting that time measurement period of four 

of the preceding six months is consistent with the 

current standard under Regulation ATS). 

what additional specificity should the 

Commission provide and please provide 

specific examples on the types of 

specificity. Is the Proposed Rules’ use of 

‘‘roughly comparable’’ appropriate? Are 

there other words that would be more 

appropriate? Why or why not? 

• Should the rule text define, as 

opposed to the release addressing, what 

is meant by ‘‘roughly comparable’’? 

Why or why not? 

• Does there need to be more 

specificity provided as to how many 

transactions must be executed (or 

positions opened and/or closed) in a 

day to be ‘‘roughly comparable’’? 

• Is ‘‘in a day’’ an appropriate period 

of time during which to measure 

whether a person has made roughly 

comparable purchases and sales of the 

same or substantially similar securities? 

If not, what is an appropriate time 

period? 

• If an institutional investor seeks to 

rebalance its portfolio, would the 

institutional investor typically 

‘‘routinely make roughly comparable 

purchases and sales of the same or 

substantially similar securities in a 

day,’’ or otherwise trigger the Proposed 

Rules? 

14. Under the Proposed Rules, a 

person that ‘‘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 

accessible to other market participants’’ 

would have the effect of providing 

liquidity to other market participants, 

and thus would be a dealer. Is this an 

appropriate measure or illustration of 

liquidity provision? Why or why not? 

Would the provision capture persons 

that should not be dealers? If so, who 

and why? 

• Is the Proposed Rules’ use of 

‘‘routinely’’ appropriate? Would 

‘‘regularly’’ or ‘‘continuously’’ or 

another word be more appropriate? Why 

or why not? 

• Is there sufficient specificity 

provided for the term ‘‘routinely’’? If 

not, what additional specificity should 

the Commission provide and please 

provide specific examples on the types 

of specificity. Should the rule text 

define what is meant by ‘‘routinely’’? 

Why or why not? 

• Is the Proposed Rules’ use of 

‘‘trading interest’’ appropriate? Would 

‘‘quotations’’ or another term be more 

appropriate? Why or why not? 

• Is there sufficient specificity 

provided for the term ‘‘trading interest’’? 

Should the rule text define what is 

meant by ‘‘trading interest’’? Why or 

why not? If not, what additional 

specificity should the Commission 

provide and please provide specific 

examples on the types of specificity. 

• The Proposed Rules would require 

that trading interests be communicated 

and represented in a way that makes 

them accessible to other market 

participants in order to come within the 

rule. Should the Commission require 

that the trading interests be 

communicated ‘‘widely’’? Why or why 

not? 

15. Under the Proposed Rules, a 

person that ‘‘earn[s] 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,’’ would have the effect 

of providing liquidity to other market 

participants. Is this an appropriate 

measure or illustration of liquidity 

provision? Why or why not? Would the 

provision capture persons that should 

not be dealers? If so, who and why? 

• Is there sufficient specificity 

provided for the term ‘‘earn revenue’’? 

If not, what additional specificity 

should the Commission provide and 

please provide specific examples on the 

types of specificity. Is the Proposed 

Rules’ use of ‘‘earn revenue’’ 

appropriate? Are there other words that 

would be more appropriate? Why or 

why not? Should the rule text define 

what is meant by ‘‘earn revenue’’? Why 

or why not? 

• Should the Proposed Rules include 

additional or other forms of revenue? 

• Should the Proposed Rules include 

other measures of liquidity provision? If 

so, what measures and why? 

• As explained above, buying at the 

bid and selling at the offer would 

include buying at lower than, and 

selling at higher than, the midpoint of 

the bid-ask spread. Should the rule text 

define ‘‘capturing bid-ask spread’’ to 

expressly include buying at lower than, 

and selling at higher than, the midpoint 

of the bid-ask spread? 

16. Do the Proposed Rules provide 

sufficient specificity to permit market 

participants to distinguish between 

revenue derived from capturing bid-ask 

spreads and revenue derived from 

realization of appreciation of the 

underlying asset? 

C. Quantitative Standard 

In addition to the qualitative 

standards described above, proposed 

Rule 3a44–2 would also include 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 securities ‘‘as a part of a 

regular business,’’ regardless of whether 

they meet any of the qualitative 

standards. Specifically, proposed Rule 

3a44–2(a)(2) would provide that a 

person 164 that is engaged buying and 

selling government securities for its own 

account is 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 securities as 

defined in Section 3(a)(42)(A) of the 

Exchange Act.165

The Commission believes that four 

out of the last six calendar months is an 

appropriate range of time to evaluate the 

trading volume of a market participant 

and should help to ensure the proposed 

quantitative standard does not capture 

market participants with relatively low 

trading volume that may have had an 

anomalous increase in trading. The 

proposed time measurement period 

would smooth monthly variations by 

reducing the effect of trading 

fluctuations in a particular month that 

could misrepresent or distort a market 

participant’s overall trading pattern.166

A shorter period of time could 

potentially cause a market participant to 

fall within the scope of the quantitative 

standard solely as a result of an atypical, 

short-term increase in trading, which 


khammond on DSKJM1Z7X2PROD with PROPOSALS2
23072 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

167See Section V.B.2. Specifically, the analysis 

identified 174 market participants who were active 

in the U.S. Treasury market in July 2021 and that 

were not members of FINRA. Although FINRA 

membership is not synonymous with dealer 

registration status, the Commission believes that 

many of the market participants who are not FINRA 

members are also likely not registered as 

government securities dealers. These 174 identified 

non-FINRA member market participants accounted 

for approximately 19 percent of aggregate Treasury 

trading volume in July 2021. PTFs had the highest 

volumes among these identified non-FINRA 

member U.S. Treasury market participants. See 

Section V.B.2. 

168See supra note 2. 

169For example, regulators do not have the same 

insight into the trading activities of unregistered 

PTFs because, unlike registered dealers, they do not 

report their U.S. Treasury Securities transactions to 

FINRA’s Trading Reporting and Compliance Engine 

(‘‘TRACE’’), do not file annual reports with the 

Commission, and are not subject to Commission 

examinations. See Section V.B.3. Market 

participants that are private funds are generally 

managed by registered investment advisers that file 

regular financial reports with the Commission on 

Form PF, and are subject to examination concerning 

their private fund clients, but private funds do not 

report securities transactions such as those required 

by the rules governing registered dealers. See id. 

Transactions in fixed income securities, such as 

U.S. Treasury Securities, are not currently reported 

to the Consolidated Audit Trail (‘‘CAT’’). See 

Section V.B.2 (explaining the type of transactions 

reported to CAT). 

170TRACE reporting requirements apply to all 

marketable U.S. Treasury Securities, including 

Treasury bills, notes, floating rate notes, bonds, 

TIPS, and STRIPS. See FINRA Rule 6700 series. 

Under FINRA Rules, ‘‘Bona fide repurchase and 

reverse repurchase transactions involving TRACEEligible Securities’’ and ‘‘Auction Transactions’’ are 

not reported to TRACE. See FINRA Rule 6730(e). 

171As described in Section V.B.2, the analysis 

found 46 non-FINRA member firms with trading 

volumes of at least $25 billion in July 2021. Based 

on classifications (further explained infra note 218), 

of these 46 non-FINRA member firms, 22 are 

classified as PTFs and 20 are classified as dealers. 

See Section V.B.2, Table 1. To the extent a nonFINRA member firm is a financial institution, 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. See Section II; 17 CFR 400.1. 

Additionally, a non-FINRA member firm may be 

operating in reliance on an exception or exemption. 

See supra note 29 and accompanying text. 

172See supra notes 165, 170. 

173See Section II. 

174 2010 Equity Market Structure Concept Release 

at 3607. 

175The Commission believes that due to the 

varying characteristics of the other securities 

markets, setting a quantitative standard would be 

more complicated and each market would need to 

be separately assessed before a quantitative 

threshold is set. Accordingly, the Proposed Rules 

do not set forth a comparable quantitative standard 

for proposed Rule 3a5–4. The Commission is 

seeking comment, however, on whether proposed 

Rule 3a5–4 should include a quantitative standard, 

and if so, how it should be established. See 

Question 26. 

potentially could discourage 

participation in the U.S. Treasury 

market by a new market participant that 

has not had as long of a time period to 

develop its business prior to having to 

incur compliance costs associated with 

being subject to dealer registration. In 

addition, the Commission does not 

believe that a longer period of time is 

necessary to identify those market 

participants that play a significant role, 

and regularly transact, in U.S. Treasury 

Securities. The Commission believes 

that the proposed time measurement 

period provides sufficient trading 

history data so as to indicate a market 

participant’s significance to the market, 

and that the structure of the 

measurement (i.e., requiring a market 

participant to meet the threshold for 

four out of the last six calendar months) 

identifies regularity of such significant 

trading levels. 

As discussed below, the 

Commission’s analysis of market 

participants that are not members of 

FINRA in the U.S. Treasury market 

found that these participants accounted 

for approximately 19 percent of the 

aggregate Treasury trading volume in 

July 2021, with PTFs representing the 

highest volumes of trading among these 

participants.167 In addition, PTFs 

dominate the interdealer U.S. Treasury 

market, representing 61 percent of the 

trading activity on the electronic IDB 

platforms and 48 percent of the total 

interdealer market.168

Although, as noted previously, the 

Proposed Rules alone will not 

necessarily prevent future market 

disruptions, the operation of proposed 

Rule 3a44–2 will support transparency; 

market integrity and resiliency; and 

investor protection across the U.S. 

Treasury market by helping to close the 

regulatory gap that currently exists and 

by ensuring consistent regulatory 

oversight.169 The lack of consistent 

visibility across the market today 

constrains the ability of regulators to 

understand and respond to significant 

market events. The proposed 

quantitative standard is intended to 

capture the most significant market 

participants that are regularly buying 

and selling U.S. Treasury Securities, 

and subject these participants that are 

not already registered as dealers or 

government securities dealers to a 

regulatory regime designed to minimize 

the risks they may pose to the U.S. 

Treasury market and provide regulators 

with appropriate oversight of their 

activities. 

As described below in Section V, the 

proposed trading volume threshold was 

derived from analysis of historical U.S. 

Treasury Securities transactions 

reported to TRACE.170 Based on this 

analysis, the Commission is proposing a 

trading volume amount of $25 billion; 

this quantitative standard would likely 

capture mostly unregistered PTFs, but 

also may capture certain other 

significant market participants not 

currently registered as government 

securities dealers.171 In determining 

whether the trading volume threshold is 

met, a market participant would include 

transactions in U.S. Treasury Securities 

that are currently reported to TRACE— 

that is, Treasury bills, notes, floating 

rate notes, bonds, TIPS, and STRIPS— 

and would exclude auction awards and 

repurchase or reverse repurchase 

transactions in U.S. Treasury 

Securities.172 The proposed quantitative 

standard is intended to be a 

straightforward threshold identifying 

those market participants that, as a 

result of their regularly high trading 

volume in government securities, serve 

dealer-like roles significantly impacting 

the U.S. Treasury market. In this regard, 

the Commission believes that setting 

forth a trading volume threshold would 

provide an easily measurable and 

observable standard. 

As discussed above, the market 

structure for U.S. Treasury securities 

has evolved, with PTFs accounting for 

a large percent of trading volume.173 In 

some ways, PTFs have displaced the 

role of traditional dealers in the 

interdealer U.S. Treasury market, and 

the Commission believes that PTFs, and 

other market participants that similarly 

have a significantly large, and regular, 

amount of trading volume and have a 

significant impact on the U.S. Treasury 

market, should register as government 

securities dealers.174 Proposed Rule 

3a44–2(a)(2) is designed to make clear 

the Commission’s view that a person 

engaging in this regular volume of 

buying and selling activity is engaged in 

the buying and selling of government 

securities for its own account as a part 

of a regular business, and therefore, 

should be subject to the same regulatory 

requirements as other dealers. 

The Commission believes the need for 

a quantitative rule is most acute in the 

U.S. Treasury market. Thus, while 

proposed Rules 3a5–4 and 3a44–2 share 

common qualitative standards, the 

Commission is proposing a quantitative 

standard only with respect to the U.S. 

Treasury market at this time. As 

explained more fully in Section V, the 

quantitative standard is derived from 

trading data related to the U.S. Treasury 

market, and is intended to identify 

significant market participants not 

registered as dealers that are performing 

dealer-like activities in the U.S. 

Treasury market.175

The recent disruptions in the U.S. 

Treasury market referenced above, 

together with the significant role played 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23073 

176See 15 U.S.C. 78f(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.’’). 

177See TreasuryDirect, General Auction Timing, 

available at https://www.treasurydirect.gov/instit/ 

auctfund/work/auctime/auctime.htm. 

by market participants not registered as 

dealers, distinguishes that market from 

other markets where these types of 

participants are more typically 

registered as dealers. Indeed, 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 brokerdealers, there is incentive for many 

PTFs to register as broker-dealers to gain 

these advantages.176 In the U.S. 

Treasury market, however, where 

trading occurs on ATSs and other nonexchange venues, PTFs lack this 

incentive to register. 

Request for Comments 

The Commission generally requests 

comment on this aspect of proposed 

Rule 3a44–2. In addition, the 

Commission requests comment on the 

following specific issues: 

17. Is there sufficient specificity 

provided for the terms used in the 

quantitative standard? Are there any 

terms that should be defined in rule text 

or addressed in the release? 

18. Is the threshold of more than $25 

billion of trading volume in each of four 

out of the last six calendar months an 

appropriate proxy for determining 

whether a person is engaged in buying 

and selling U.S. Treasury Securities for 

its own account is engaged in such 

activity as a part of a regular business? 

Why or why not? If not, what thresholds 

would be appropriate? For example, 

should the quantitative standard 

include a separate trading volume 

threshold for: (1) Buying; (2) selling; and 

(3) both buying and selling U.S. 

Treasury Securities, all three of which 

would be required to be satisfied in 

order to meet the quantitative standard? 

Commenters should provide data to 

support their views. 

19. Should the Commission apply a 

different look-back period for applying 

the quantitative threshold from four out 

of the preceding six months to 

something different? Is the time period 

measurement of four out of the last six 

calendar months an appropriate metric 

to evaluate a market participant’s 

trading volume? Should the time period 

be a weekly measurement or is there 

another measurement that would better 

determine whether a person is engaged 

in buying and selling U.S. Treasury 

Securities for its own account is 

engaged in such activity as a part of a 

regular business? 

20. Should the look-back period for 

the quantitative standard take into 

consideration the general auction 

schedule for U.S. Treasury securities? 

Should the look-back period correspond 

with the schedule of any particular U.S. 

Treasury security? Why or why not? For 

example, the 10-year U.S. Treasury note 

auctions are usually announced in the 

first half of February, May, August, and 

November and generally auctioned 

during the second week of these months 

and are issued on the 15th of the same 

month.177 Should the look-back period 

take into consideration these particular 

months for purposes of the quantitative 

standard? Why or why not? How could 

the look-back period incorporate the 

auction schedule? Please explain. 

21. Are there persons that would meet 

the quantitative standard under the 

proposed rule but that should not be 

classified as government securities 

dealers (i.e., is the quantitative standard 

over-inclusive?). If so, who are they and 

why should the Commission not classify 

them as government securities dealers? 

22. Are there persons that would not 

meet the quantitative standard under 

the proposed rule—and would not be 

otherwise captured by the qualitative 

factors—but that should be classified as 

government securities dealers based on 

their trading volume (i.e., is the 

quantitative standard under-inclusive)? 

If so, who are they and why should they 

be classified as government securities 

dealers? 

23. Should the quantitative standard 

include an additional standard related 

to routinely expressing trading 

interests? For example, activity related 

to resting orders on a central-limit order 

book, or expressing trading interest on 

Communication Protocol Systems? If so, 

what measure of activity, including 

sources of data and calculation 

methodology, would appropriately 

identify market participants as 

government securities dealers? 

24. Are there other ways of 

calculating a quantitative standard, such 

as using a measurement based on 

turnover (e.g., a turnover ratio) rather 

than volume, or other measurements of 

significance (e.g., a trading volume ratio, 

net/gross ratio) that would appropriately 

identify market participants as 

government securities dealers? If so, 

what are they, and why are they 

relevant in the context of analyzing 

dealer status? Commenters should 

provide any data or information to 

support their views. 

25. Should the quantitative standard 

be a dynamic trading volume threshold 

that changes with the market over time, 

such as percentage of transactions 

reported to TRACE, a percentage of U.S. 

Treasury Securities outstanding or 

issued, or other inflation-adjusted 

threshold? Why or why not? 

26. Should a quantitative standard be 

included in proposed Rule 3a5–4? To 

the extent a quantitative standard 

should be included, are there ways of 

calculating the standard for other 

securities markets? Is a trading volume 

threshold suitable for other types of 

securities markets? 

27. In determining whether the 

trading volume threshold is met, the 

Commission has indicated that market 

participants should exclude auction 

awards and repurchase or reverse 

repurchase transactions. Is this 

exclusion appropriate? Should some or 

all of these transactions be included? 

Are there other transactions that should 

be excluded (e.g., Treasury when-issued 

transactions)? Please explain. Should 

any excluded transactions be 

specifically addressed in rule text? 

Should there be a similar exclusion of 

these types of transactions for purposes 

of evaluating whether a market 

participant has met the qualitative 

standards? Are there any types of 

transactions that should be included in 

calculating the trading volume amount? 

28. Are there market participants that 

would fluctuate between meeting or not 

meeting the quantitative standard (or 

qualitative standard) (e.g., initially meet 

the standard, a few months later no 

longer meet the standard, and later meet 

the standard again)? Would this pattern 

be associated with a particular type of 

trading such that there may be periods 

in which the participant meets neither 

the quantitative standard nor any 

qualitative standard? 

29. Are there circumstances in which 

a person triggering the quantitative 

threshold would not also trigger the 

proposed qualitative standards? Please 

describe those circumstances in detail. 

In such case, would firms implement 

compliance systems to monitor trading 

volumes? Do firms have systems in 

place that already or could easily be 

programmed to monitor for the 

proposed quantitative threshold? What 

are the costs of implementing such 

systems or updating existing systems? 

Would firms be incentivized to trade 

below the proposed quantitative 

standard to avoid registration? 


khammond on DSKJM1Z7X2PROD with PROPOSALS2
23074 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

178 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). 

179See proposed Rule 3a5–4(b)(2) and proposed 

Rule 3a44–2(b)(2). 

180See proposed Rule 3a5–4(b)(2)(ii)(A)–(C) and 

proposed Rule 3a44–2(b)(2)(ii)(A)–(C). 181Exchange Act Rule 13h–l(a)(3) provides that 

control (including the terms controlling, controlled 

by and under common control with) means the 

possession, direct or indirect, of the power to direct 

or cause the direction of the management and 

policies of a person, whether through the 

ownership of securities, by contract, or otherwise. 

For purposes of Rule 13h–l only, any person that 

directly or indirectly has the right to vote or direct 

the vote of 25 percent or more of a class of voting 

securities of an entity or has the power to sell or 

direct the sale of 25 percent or more of a class of 

voting securities of such entity, or in the case of a 

partnership, has the right to receive, upon 

dissolution, or has contributed, 25 percent or more 

of the capital, is presumed to control that entity. 17 

CFR 240.13h–l(a)(3). The definition of ‘‘control’’ in 

Rule 13h–l is based on the definition of ‘‘control’’ 

in Form 1 (Application for the Registration or 

Exemption from Registration as a National 

Securities Exchange) and Form BD (Uniform 

Application for Broker-Dealer Registration). 

182As noted above, the Commission has applied 

this standard in other contexts. See Large Trader 

Reporting, Exchange Act Release No. 61908 (Apr. 

14, 2010), 75 FR 21456, 21461 (Apr. 23, 2010) (‘‘The 

Commission preliminarily believes that the 

proposed definition of control is sufficiently limited 

to capture only those persons with a significant 

enough controlling interest to warrant identification 

as a large trader.’’). The definition of ‘‘control’’ in 

Rules 13h–l and on Forms 1 and BD is less 

expansive than the definition of control as used in 

17 CFR 240.19h–1 (Rule 19h–1), for example. In 

Rule 19h–1(f)(2), the definition of ‘‘control’’ features 

a 10 percent threshold with respect to the right to 

vote 10 percent or more of the voting securities or 

receive 10 percent or more of the net profits. 

183The Commission is not incorporating the 

provision contained in the Form 1 and Form BD 

relating to directors, general partners, or officers 

that exercise executive responsibility. Instead, the 

proposed definition of ‘‘control’’ focuses on the 

existence of a corporate control relationship over 

significant market participants. 

184As discussed in Section II.A, the Proposed 

Rules would exclude registered investment 

companies in light of the regulatory framework that 

applies under the Investment Company Act and 

rules thereunder. 

185Registered investment advisers typically have 

investment discretion over the assets of the 

accounts of their clients, including private funds 

and other client accounts that are managed 

separately (‘‘separately managed accounts’’). Each 

of these clients has its own independent investment 

objectives and strategies, which the registered 

investment adviser implements as agent for the 

client. Moreover, investors in different private 

funds typically differ in their investment objectives 

and strategies, as do owners of the assets in 

separately managed accounts. A registered 

investment adviser has a duty to provide 

investment advice in the best interest of its client, 

based on the client’s investment objectives, see 

Investment Advisers Act Release No. 5248 (June 5, 

2019), 84 FR 33669, 33671 (July 12, 2019), and so 

the Proposed Rules would not require aggregation 

solely because a registered investment adviser 

exercises discretion. 

186For purposes of the Proposed Rules ‘‘control’’ 

is defined to include ‘‘the possession, direct or 

indirect, of the power to direct or cause the 

direction of the management and policies whether 

D. Definitions of ‘‘Own Account’’ and 

‘‘Control’’ 

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.’’ 178 The Proposed Rules 

define a person’s ‘‘own account’’ in a 

way that recognizes that corporate 

families and entities may be organized 

in various structures. The proposed 

definitions of ‘‘own account’’ and 

‘‘control’’ are designed to focus on the 

trading activity occurring at the firm or 

legal-entity level or the trading activity 

that is being employed on behalf of, or 

for the benefit of, the entity, and limit 

the registration burden to those entities 

engaged in dealer activity. In addition, 

the proposed definitions are intended to 

avoid incentivizing market participants 

to change their corporate structures for 

the purpose of avoiding registration. 

Under paragraph (b)(2) of the 

Proposed Rules, a person’s ‘‘own 

account’’ means 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, provided that this 

paragraph (b)(2)(ii) does not include [the 

accounts described in paragraphs 

(b)(2)(ii)(A)–(C)]’’; or ‘‘held for the 

benefit of those persons identified in 

paragraphs (b)(2)(i) and (ii).’’ 179

Paragraphs (b)(2)(ii)(A)–(C) excludes 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; 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 controls 

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; 

and with respect to any person, an 

account in the name of another person 

that is under common control with that 

person solely because both persons are 

clients of an investment adviser 

registered under the Investment 

Advisers Act of 1940 unless those 

accounts constitute a parallel account 

structure.180

With respect to which accounts 

should be aggregated for purposes of 

paragraph (b)(2)(ii), the Proposed Rules 

would incorporate the definition of 

‘‘control’’ under Exchange Act Rule 

13h–l.181 The Commission believes that 

incorporating the established definition 

of ‘‘control’’ under Exchange Act Rule 

13h–l into the Proposed Rules would 

promote consistency and assist persons 

in applying the definition. The 

Commission further believes that the 

proposed definition of ‘‘control’’ is 

sufficiently limited to capture only 

those market participants with a 

significant enough controlling interest 

to warrant registration as a dealer.182

The proposed definition of ‘‘control’’ 

used in Rule 13h–l is appropriate 

because it is less burdensome than other 

Commission rules defining control, but 

still achieves the goal of identifying 

persons who exert direct or indirect 

control over significant market 

participants.183 In addition, the 

Commission believes that this definition 

of control would appropriately deter the 

structuring of corporate relationships or 

establishment of multiple legal entities 

to avoid the Proposed Rules. 

The Proposed Rules exclude three 

types of accounts from being aggregated 

with another account for purposes of the 

definition of ‘‘own account.’’ First, 

under paragraph (b)(2)(ii)(A), where an 

account is held in the name of a person 

who is a registered broker, dealer, 

government securities dealer, or 

registered investment company 

(collectively, ‘‘registered person’’), the 

Commission believes that it would be 

inappropriate to attribute the registered 

person’s accounts to controlling persons 

or persons under common control, 

because the registered person is already 

subject to the broker-dealer regulatory 

regime or the investment company 

regulatory regime.184 Thus, the 

definition of ‘‘own account’’ would not 

include those types of accounts. 

Second under paragraph (b)(2)(ii)(B), 

the Proposed Rules would not attribute 

to a registered investment adviser an 

account held in the name of a client of 

the adviser, unless the adviser controls 

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.185

Under the aggregation provisions of 

the Proposed Rules, a registered 

investment adviser that has an 

investment advisory relationship and is 

determined to control the client would 

be required to aggregate its trading 

activities with those of the client.186 The 


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through the ownership of securities, by contract or 

otherwise.’’ See supra note 181; 17 CFR 240.13h– 

l(a)(3). 

187See text in 3a5–4(b)(2)(ii)(B) and 3a44– 

2(b)(2)(ii)(B) of the Proposed Rules. 

188 Id. Paragraph (b)(2)(ii)(B) reflects the 

definition of control under Exchange Act Rule 13h– 

l. See 17 CFR 240.13h–l(a)(3). 

189See proposed Rule 3a5–4(b)(4) and proposed 

Rule 3a44–2(b)(4). The proposed definition of 

‘‘parallel account structure’’ corresponds to 

definitions of ‘‘parallel fund structure’’ and 

‘‘parallel managed account’’ under Form PF. See 

Form PF Glossary of Terms, available at https://

www.sec.gov/files/formpf.pdf. 

190See proposed Rule 3a5–4(b)(2)(ii)(C) and 

proposed Rule 3a44–2(b)(2)(ii)(C). 

191 Id. 

192See Section III.A; proposed Rule 3a5–4(a)(2)(i) 

and proposed Rule 3a44–2(a)(3)(i). 

Proposed Rules’ aggregation provisions 

are designed to account for trading 

activity within a corporate family in 

which trading activity at a firm or legalentity level is employed on behalf of or 

for the benefit of another legal entity. In 

the case of registered investment 

advisers that have no controlling 

ownership interest in an entity for 

which they are solely managing client 

assets, the trading activities of the 

adviser and each client are independent 

of each other and are not for the benefit 

of the adviser or any other client. 

Nevertheless, the Commission 

recognizes, in the absence of the 

proposed exclusion for such accounts, 

questions could arise whether the 

Proposed Rules could require the 

aggregation of client trading activities 

with those of the registered investment 

adviser. Because some clients may have 

similar trading strategies, their trading 

activities in the aggregate could meet 

the proposed qualitative or quantitative 

standards. This would result in the 

application of the Proposed Rules to the 

activities of a registered investment 

adviser and those of its clients even 

when none of the entities is engaged in 

dealer activity for the economic benefit 

of another. To reduce the potential for 

capturing registered investment advisers 

and their clients in these circumstances, 

we are proposing to exclude registered 

investment advisers from aggregating 

their trading activities with those of 

their clients when the adviser and client 

only have a discretionary investment 

management relationship (i.e., where 

the registered investment adviser does 

not control 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).187

The Proposed Rules, however, are 

designed to address situations in which 

a registered investment adviser might 

use the proposed exclusion to avoid the 

application of the Proposed Rules. For 

example, a registered investment 

adviser that has a controlling ownership 

interest in a client could attempt to 

divide trading activities among several 

clients it controls to avoid dealer 

registration by any individual client 

whose trading activities would meet 

either of the Proposed Rules. In those 

circumstances, the aggregate trading 

activities of each client could be 

designed to economically benefit the 

registered investment adviser and, if 

aggregated, the activities would fall 

within the intended scope of the 

Proposed Rules. To prevent such 

potentially evasive structures, the 

proposed exclusion from aggregation 

does not apply to any registered 

investment adviser that controls the 

client as a result of the registered 

investment adviser’s right to vote or 

direct the vote of voting securities of the 

client, the registered investment 

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.188

Third, under paragraph (b)(2)(ii)(C), a 

person under common control with 

another person solely because both 

persons are clients of a registered 

investment adviser would not aggregate 

their trading activities and volume to 

determine if each meet the Proposed 

Rules, unless those accounts constitute 

a parallel account structure. The 

Proposed Rules would define parallel 

account structure to mean ‘‘a structure 

in which one or more private funds 

(each 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.’’ 189 The aggregation 

provisions would require clients of a 

registered investment adviser that are 

determined to be under ‘‘common 

control’’ of the registered investment 

adviser to aggregate their trading 

activities under certain circumstances. 

As noted above, in many instances, a 

registered investment adviser’s clients 

are engaged in independent investment 

objectives and strategies and no 

individual client is engaged in trading 

activities for the benefit of any other 

client. As a result, in the absence of the 

proposed exclusion, questions could 

arise whether clients who would not 

otherwise be scoped into the Proposed 

Rules either because of their individual 

trading activities or their trading 

activities for the economic benefit of 

any other client, could nevertheless be 

captured by the Proposed Rules as a 

result of having to aggregate their 

trading activities with those of other 

clients. To reduce the potential for 

capturing these registered investment 

adviser clients in these circumstances, 

we are proposing to exclude from the 

proposed requirement to aggregate 

trading activities of clients of a 

registered investment adviser that are 

under common control solely because 

both are clients of the same registered 

investment adviser.190

At the same time, however, the 

Proposed Rules are designed to prevent 

a registered investment adviser from 

dividing trading activities among 

multiple clients to avoid the application 

of the Proposed Rules. A registered 

investment adviser could, for example, 

create a parallel fund structure in which 

one or more private funds pursue 

substantially the same investment 

objective and strategy and invest side by 

side in substantially the same positions 

as another private fund. The registered 

investment adviser could limit the 

trading activity of each ‘‘parallel fund’’ 

so that individually it does not meet the 

qualitative or quantitative standards, 

even though the funds’ trading activities 

in the aggregate are part of a single 

trading strategy. To prevent such 

potential structuring of funds to avoid 

dealer registration, the proposed 

exclusion would not apply to client 

accounts that constitute a parallel 

account structure.191

Finally, it is important to note that, as 

discussed above, while a person that 

meets the qualitative or quantitative 

standards in paragraph (a) is not subject 

to the Proposed Rules if that person has 

or controls total assets less than $50 

million,192 the accounts of such under- 

$50-million persons must be considered 

for purposes of determining whether 

another person’s trading activities or 

volume falls within the qualitative or 

quantitative standards set forth in 

paragraph (a). In particular, a person 

must consider for aggregation purposes 

any accounts (including those under 

$50 million) that are controlled by, or 

under common control with, that 

person. The Commission believes that 

requiring aggregation of accounts of 

those persons that have or control less 

than $50 million in total assets would 

prevent the organizing of corporate 


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23076 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

structures for the purpose of avoiding 

dealer registration. 

The following examples illustrate the 

application of the Proposed Rules’ 

definition of ‘‘own account’’ as 

discussed above. In these examples, 

whether any of the firms’ relationship 

and activities meet the definition of 

‘‘control’’ would remain a facts and 

circumstances determination. 

Additionally, as discussed in Section 

III.E, although a firm may not meet the 

Proposed Rule’s definition of dealer or 

government securities dealer in the 

examples, the firm may be a dealer or 

government securities dealer pursuant 

to existing Commission interpretations 

and precedent to the extent consistent 

with the Proposed Rules. 

Example 1 

• A, B, and C are under common 

control; all are controlled by D. A, B, C, 

and D are all limited liability 

companies. None of the firms are 

registered brokers, dealers, government 

securities dealers, or registered 

investment companies. 

Aggregation by Parent D 

Æ D would aggregate the trading 

activities and volume of A, B, C, and D 

to determine if D would be captured by 

paragraph (a) of the Proposed Rules. If 

as a result of this aggregation, D meets 

the quantitative or qualitative standards 

of paragraph (a), and it has or controls 

more than $50 million in total assets, it 

would be captured by the Proposed 

Rules. 

Aggregation by D’s Subsidiaries 

Æ A, B, and C would also need to 

aggregate each other’s trading activities 

and volume to determine if they would 

individually be captured by the 

qualitative or quantitative standards of 

paragraph (a) of the Proposed Rules. If, 

as a result of aggregation A, B, and C 

each meet the qualitative or quantitative 

standards of paragraph (a), but A has or 

owns less than $50 million in total 

assets, A would be excluded from the 

Proposed Rules under paragraph (a). A’s 

activities and volume, however, would 

still be considered for purposes of B, C, 

and D. 

Æ If B registers as a dealer, its trading 

activities and volume would no longer 

be considered by A, C, or D. 

Example 2 

• A is a registered investment adviser 

with clients B, C, D, E, F, and G. A has 

an investment advisory contract with 

each of B and C under which A 

exercises investment discretion with 

respect to B’s and C’s assets each in an 

account separately managed by A. D and 

E are hedge funds. A is the general 

partner of both D and E, and controls D 

and E as a result of its capital 

contributions to and rights to amounts 

upon dissolution of each fund. F and G 

are also hedge funds. A has an 

investment advisory contract with each 

of F and G under which A exercises 

investment discretion with respect to 

F’s and G’s assets. F and G pursue 

substantially the same investment 

objective and strategy and invest side by 

side in substantially the same positions. 

Neither A nor any of its clients is a 

registered broker, dealer, government 

securities dealer, or registered 

investment company. 

Aggregation by A 

Æ A would not need to aggregate its 

trading activities with the trading 

activities of B, C, F, or G unless A 

controls B, C, F, or G as a result of the 

right to vote or direct the vote of the 

voting securities issued by these clients, 

the right to sell or direct the sale of the 

voting securities issued by these clients, 

or the amount of capital contributions to 

or rights to amounts upon these clients’ 

dissolution. 

Æ A would need to aggregate its 

trading activities with the trading 

activities of both D and E because A has 

control over each fund as a result of its 

capital contributions to and rights to 

amounts upon dissolution of each fund. 

Aggregation by A’s Clients 

Æ B and C would not need to 

aggregate their trading activities even if 

B and C were determined to be under 

common control (which would be a 

facts and circumstances determination), 

because common control would be 

solely because both are clients of A. 

Æ D and E would need to aggregate 

their trading activities because they are 

under common control of A, which has 

the right to direct the vote of the voting 

securities of each fund and the right to 

capital contributions upon dissolution 

of the fund and not solely because each 

fund is a client of A. 

Æ Each of F and G would need to 

aggregate the trading activities of the 

other fund. F and G’s activities would 

constitute a parallel account structure 

(even if they are under common control 

solely because both F and G are clients 

of A) because F and G are 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. 

The Commission believes that the 

definitions of own account and control 

are appropriate and will help to ensure 

that there is no circumvention of the 

Proposed Rules through, for example, 

the establishment of multiple legal 

entities whose activities may not 

separately rise to a level of engagement 

that qualifies for dealer or government 

dealer status, but, when aggregated, 

does demonstrate that the entities are 

selling and buying securities or 

government securities as a part of a 

regular business. 

Request for Comments 

The Commission generally requests 

comment on this aspect of the Proposed 

Rules. In addition, the Commission 

requests comment on the following 

specific issues: 

30. Does the proposed definition of 

‘‘own account’’ appropriately reflect 

complexities and differences in 

corporate structures and business 

models of proprietary trading firms, 

investment advisers, private funds, and 

other market participants, and the 

ownership structures of their trading 

accounts? Why or why not? 

Commenters should provide 

descriptions to support their responses. 

31. Except as described in paragraph 

(b)(2)(ii), are there instances when an 

account of a controlled person, or 

person under common control, should 

not be considered a person’s ‘‘own 

account’’ for purposes of the Proposed 

Rules? For example, should an account 

held in the name of a bank be excluded 

from the definition of ‘‘own account’’? 

Commenters should provide 

descriptions of any such instances. 

32. Is the proposed definition of 

‘‘control’’ appropriate? What is the 

effect of using the Exchange Act 

definition of ‘‘control’’, as opposed to 

the Investment Company Act definition? 

Please describe potential alternative 

definitions and why they are more 

appropriate. 

33. Are there instances where two 

entities may meet the proposed 

definition of ‘‘control’’ and where these 

entities are in different lines of business 

and/or unaware of the other’s trading 

strategies? Are there any situations 

where two entities may meet the 

proposed definition of ‘‘control’’ but 

communications between two entities 

would be prohibited? 

34. Under the Proposed Rules, a 

registered investment adviser would 

aggregate its account with its client 

accounts (private funds and separately 

managed accounts), except as described 

in paragraph (b)(2)(ii). 

• Should registered investment 

advisers be included only with respect 

to their own proprietary trading 

activities (i.e., not with respect to 

activities that could be attributed to 


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193As discussed above, each qualitative standard 

in proposed Rules 3a5–4 and 3a44–2 is a separate 

definition that further defines when a person is 

acting as a dealer or government securities dealer. 

See Section III.B. Accordingly, a person would 

register with the Commission if it satisfied any one 

of the three qualitative standards. Id. Similarly, the 

quantitative standard in proposed Rule 3a44–2(a)(2) 

is a discrete definition and a person would register 

as a government securities dealer upon meeting this 

standard even if it did not satisfy any of the 

qualitative standards in proposed Rule 3a44–2(a)(1). 

See Section III.C. 

194See supra note 87; see, e.g., 2002 Release at 

67499 (stating that ‘‘[a]s developed over the years, 

the dealer/trader distinction recognizes that dealers 

normally . . . hold themselves our as buying and 

selling securities at a regular place of business’’). 

195See 2002 Release at 67499. 

196See proposed Rule 3a5–4(c) and proposed 

Rule 3a44–2(c). 

them by the aggregation contemplated 

by the definitions of ‘‘own account’’ and 

‘‘control’’)? Why or why not? 

• How would such aggregated 

accounts comply with the requirements 

for dealer registration? 

• In these cases, would the 

investment adviser registering itself 

avoid registering a private fund or 

separately managed account client? If 

not, are there other actions these 

accounts would seek to take to avoid all 

such accounts either registering as 

dealers or ceasing investment strategies 

that trigger the Proposed Rules 

application? Would any of such 

accounts avoid certain investment 

strategies to prevent application of the 

Proposed Rules? If so, which investment 

strategies and at which types of 

accounts? 

• Would the registered investment 

adviser restructure its activities or those 

of its private fund or separately 

managed account clients to avoid 

registering a private fund or separately 

managed account client as a dealer? For 

example, would a registered investment 

adviser create an affiliated broker-dealer 

to avoid registering itself and/or any 

clients as dealers? What would be the 

effects of any restructuring? Please 

explain. 

35. Should the Proposed Rules require 

registered investment advisers to 

aggregate client accounts when the 

adviser controls a person other than 

through an ownership interest? Why or 

why not? We understand that, for tax 

and other purposes, hedge fund offshore 

companies are often controlled by 

boards of directors or legal entities that 

are separate from the hedge fund’s 

adviser. Should the aggregation 

provisions of the Proposed Rules cover 

those arrangements? Will the exclusion 

in paragraph (b)(2)(ii)(B) have different 

impacts on registered investment 

adviser client funds that are organized 

domestically as general partnerships 

and funds that are organized offshore as 

companies with independent directors? 

If so, could registered investment 

advisers restructure certain funds to 

avoid application of the Proposed 

Rules? What would be the effects of any 

restructuring? Would a registered 

investment adviser’s use of an omnibus 

account to trade client securities on an 

aggregate basis present particular 

interpretative questions or raise 

operational issues for these purposes? 

36. Should registered investment 

adviser clients that are under common 

control solely because they are clients of 

the same registered investment adviser 

be required to aggregate accounts? Why 

or why not? Does the definition of 

‘‘parallel control structure’’ adequately 

capture ways in which a registered 

investment adviser could seek to 

separate trading activities among 

accounts to avoid registration by their 

clients? Would the aggregation 

provisions of the Proposed Rules 

appropriately capture activity that 

would raise the concerns that the 

Proposed Rules are designed to address? 

Would the aggregation provisions of the 

Proposed Rules capture activity that it 

should not? If so, please explain. 

37. Are there any incentives created 

by the aggregation provisions that may 

cause market participants to reevaluate 

or restructure their corporate structures? 

What costs and benefits are there 

associated with restructuring? 

38. Would market participants exit 

certain strategies or exit the market to 

avoid registration? If so, what would be 

the effects? 

E. No Presumption 

The Proposed Rules would further 

define the phrase ‘‘as a part of a regular 

business’’ by identifying certain 

activities that would cause persons 

engaging in such activities to be 

‘‘dealers’’ or ‘‘government securities 

dealers’’ within the meaning of Sections 

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

Act.193 They would not seek to address 

all persons that may be acting as dealers 

or government securities dealers under 

otherwise applicable interpretations and 

precedent.194 A person that does not 

meet the conditions set forth in the 

Proposed Rules may nonetheless be a 

dealer if it is otherwise engaged in a 

regular business of buying and selling 

securities for its own account by, for 

example, acting as an underwriter.195

To emphasize this point, the Proposed 

Rules would state that 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 

paragraph (a) of the Proposed Rules. 

Proposed Rules 3a5–4(c) and 3a44–2(c) 

thus would provide that a person may 

still meet the statutory definition of 

dealer and government securities dealer 

even absent the activity identified in 

paragraph (a) of the Proposed Rules if 

the person is otherwise engaged in 

buying and selling securities or 

government securities for its own 

account as a part of a regular 

business.196

IV. General Request for Comments 

The Commission generally requests 

comment on all aspects of the Proposed 

Rules. In addition, the Commission 

requests comment on the following 

specific issues: 

39. Are there standards of activity 

other than the standards under the 

Proposed Rules that the Commission 

should apply in the context of analyzing 

dealer status? If so, which standards and 

why? 

40. Would the Proposed Rules capture 

persons that should not be regulated as 

dealers? If so, who? Why would they be 

captured under the Proposed Rules, and 

why is that not appropriate? 

41. Are there any categories of 

persons that would not meet the 

Proposed Rules, yet should be registered 

as dealers? Commenters should identify 

any such categories of persons and 

describe why they should be registered 

despite not meeting the proposed 

thresholds. 

42. Would the Proposed Rules cause 

market participants to reevaluate or 

restructure their activities to avoid 

registration as a dealer or cease 

investment strategies that trigger the 

application of the Proposed Rules? What 

would be the effects of such 

restructuring, withdrawal, or cessation? 

Please explain. 

43. For purposes of determining 

whether a person is a dealer, are there 

significant differences between equity 

securities, government securities, or 

other securities that should be 

addressed by the Proposed Rules? 

Commenters should identify and 

discuss any such differences. 

44. Would the Proposed Rules 

appropriately apply the requirements 

applicable to dealers (e.g., capital, 

margin, and business conduct 

requirements) to the entities that would 

be subject to those requirements? Is the 

scope of the Proposed Rules appropriate 

in light of the costs and benefits 

associated with those substantive rules? 

45. How are each of PTFs, hedge 

funds, and investment advisers typically 

capitalized? Would the requirement of 

the Net Capital Rule (Exchange Act Rule 

15c3–1) deter any of these entities from 


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23078 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

197 15 U.S.C. 78c(f). 

198 15 U.S.C. 78w(a)(2). 

199 Id. 

200See supra note 185 and associated text. 

201As of August 2, 2021, 3,559 firms were 

registered with the Commission as broker-dealers. 

See Data: Company Information About Active 

Broker-Dealers, SEC (updated Feb. 1, 2022), 

available at https://www.sec.gov/help/foiadoc

sbdfoiahtm.html. 

registering? Would the Net Capital Rule 

cause these entities to alter trading 

activity that would trigger the rules’ 

application? 

46. Would a pension plan or other 

institutional investor that rebalances its 

portfolio be captured by the Proposed 

Rules? Please explain how. If so, should 

the rule specifically exclude periodic 

portfolio rebalancing (e.g., on a monthly 

or quarterly basis) from the concept of 

‘‘as a part of a regular business?’’ Why 

or why not? 

47. Should the Commission view 

rebalancing differently if it occurs only 

at a certain frequency or by certain 

institutional investors? Why or why 

not? 

48. Are there any other terms used in 

the Proposed Rules that the Commission 

should define? Why or why not? Please 

identify what term(s) and how the 

term(s) should be defined. 

49. Should the Proposed Rules 

include an anti-evasion provision 

similar to Rule 13h–l(c)(2), and why? 

50. Will the Proposed Rules 

appropriately account for trading 

activity occurring through sponsored 

access arrangements? Is there anything 

more that the Commission should 

address regarding how such Proposed 

Rules will interrelate with such 

arrangements? 

51. If the Proposed Rules are adopted, 

which staff letters, if any, should or 

should not be withdrawn, and why? 

52. Are there additional standards, 

consistent with the Commission’s 

objectives, that should be incorporated 

into the Proposed Rules? Commenters 

should identify and discuss any such 

standards. 

53. Are there any additional factors 

that the Commission should address in 

relation to the Proposed Rules? 

54. Are there any alternative 

approaches to the Proposed Rules that 

the Commission should propose? 

Commenters should identify any such 

alternative approach and describe the 

advantages and disadvantages of the 

alternative approach. 

55. Other than what is discussed 

herein, are there any costs of 

compliance with the Proposed Rules 

that the Commission has not addressed? 

Commenters should describe any 

additional costs of compliance with the 

proposed rule and include any 

empirical data, to the extent available. 

56. The Commission is proposing a 

one-year compliance period from the 

effective date of any final rules if 

adopted. Would the proposed 

compliance period provide sufficient 

time for market participants to comply 

with the Proposed Rules? Why or why 

not? 

V. 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.197

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.198

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.199

The Commission believes the 

Proposed Rules will support orderly 

markets and protect investors by 

addressing negative externalities that 

may arise in relation to market 

participants’ financial and operational 

risks. The Proposed Rules would also 

improve transparency in markets. 

Specifically, the Commission believes 

the Proposed Rules would promote the 

financial and operational resilience of 

individual liquidity providers in 

securities markets and would improve 

the Commission’s ability to monitor 

market activity, conduct research, and 

detect manipulation and fraud. The 

Proposed Rules would have uncertain 

impacts on efficiency, competition, and 

capital formation, due to the likelihood 

of offsetting effects. As discussed further 

below, the Proposed Rules may create a 

more level competitive landscape by 

applying similar rules to all activities 

that meet the proposed standards, and 

they may also promote market efficiency 

and capital formation by strengthening 

market stability and investor protection. 

However, offsetting effects could arise 

due to costs that the Proposed Rules 

would impose on activities that provide 

liquidity. 

Any person whose activities satisfy 

the qualitative or quantitative standards 

would be affected by the Proposed 

Rules. The list of affected parties would 

primarily include PTFs, but private 

funds may also be affected. Registered 

investment advisers may be affected if 

their own proprietary trading activity 

triggers the application of the Proposed 

Rules or if they have certain control 

over client accounts (including private 

funds and separately managed accounts) 

that, individually or collectively, engage 

in activities that satisfy the Proposed 

Rules. However, the Proposed Rules’ 

aggregation provisions exclude an 

account held in the name of a client of 

the registered investment adviser unless 

the adviser controls 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.200 Registered investment 

companies would be excluded from the 

Proposed Rules, along with all persons 

that have or control assets of less than 

$50 million, as described below. Other 

parties who may be indirectly affected 

include the competitors, customers or 

clients (if any), and creditors (if any) of 

the above-mentioned affected parties. 

B. Baseline 

Dealers perform an important market 

function, 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. However, market 

participants that do not register as 

dealers—and so are not required to 

comply with the dealer regulatory 

regime—increasingly perform similar 

economic functions as dealers. This 

difference in regulatory treatment 

creates the potential for negative 

externalities, as described below. 

Furthermore, the unevenness of 

regulation potentially places a greater 

burden on registered dealers than on 

other market participants that engage in 

similar activities, which may allow 

market participants not registered as 

dealers to gain market share from 

registered dealers. 

1. Regulatory Baseline 

Dealers, unless excepted or exempted, 

are required to register with the 

Commission,201 join an SRO, and 

adhere to a comprehensive regulatory 

regime. As discussed above in Section 

II, this regime includes provisions that 

limit risk (e.g., the Net Capital Rule and 

rules promoting operational integrity), 


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202See supra note 79. 

203See supra note 77. 

204See supra note 80. 

205See supra note 76. Rule 15c3–1 requires 

dealers to maintain, at all times, net capital above 

the greater of: A percentage of debt (6.25 percent, 

or 11.1 percent for 12 months after commencing 

business as a broker or dealer), or a fixed minimum 

amount based on the types of business in which the 

dealer engages (the general amount for dealers 

without customers is $100,000). 

206These 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. Also see supra note 78 on 

the Market Access Rule (15c3–5). 

207See supra note 82 and Section II.D. 

208Exchange 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) 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 

(Exchange Act 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. 

209See supra note 81. 

210For example, see FINRA Rule 2010 (Standards 

of Commercial Honor and Principles of Trade); 

FINRA Rule 2020 (Use of Manipulative, Deceptive, 

or Other Fraudulent Devices); and FINRA Rule 4510 

Series (Books and Records Requirements). Other 

SROs have comparable and sometimes equivalent 

rules. See, e.g., NYSE Rules, NYSE, available at 

https://nyseguide.srorules.com/rules, Rulebook— 

The Nasdaq Stock Market, Nasdaq, available at 

https://listingcenter.nasdaq.com/rulebook/nasdaq/ 

rules. 

211For fixed income securities, where TRACE 

data allow us to observe some of the activity of nondealers, we estimate that in July 2021 the combined 

volume of non-FINRA firms accounted for 

approximately 45 percent of the volume of U.S. 

Treasury securities, approximately 44 percent of the 

total corporate bond volume, and approximately 42 

percent of the volume of agency pass-through 

mortgage backed securities (including securities 

traded in specified pool transactions and securities 

traded to be announced). While FINRA membership 

is not synonymous with dealer registration status, 

the Commission believes that many non-FINRA 

entities are also not registered as dealers. 

212Upon the adoption of any final rule, some 

letters and other staff statements, or portions 

thereof, may be moot, superseded, or otherwise 

inconsistent with the final rules and, therefore, 

would be withdrawn or modified. See supra note 

41. 

213Most U.S. investors are households, and most 

household investors have 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 percent 

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 16,127 registered investment companies 

and 14,874 registered investment advisers. 

214See supra note 99. 

215See supra notes 9 and 29. 

books and records requirements,202

various reporting and disclosure 

requirements,203 and dealer-specific 

anti-manipulative and other anti-fraud 

rules.204 The Net Capital Rule (Rule 

15c3–1) requires registered dealers to 

maintain minimum amounts of net 

liquid assets at all times, even intraday, 

thus constraining dealer leverage.205 In 

addition to the financial and regulatory 

risk management controls required by 

the Market Access Rule, broker-dealers 

with market access must comply with a 

number of underlying regulatory 

requirements when conducting their 

business.206 Registered dealers are also 

subject to the Commission’s authority to 

conduct examinations and impose 

sanctions,207 and to the examination 

and enforcement authority of the 

relevant SRO.208 Government securities 

dealers are further subject to rules 

issued by the Treasury that concern 

financial responsibility, capital 

requirements, recordkeeping, reports 

and audits, and large position 

reporting.209 Finally, since registered 

dealers must join an SRO, they are 

bound by additional rules set by the 

SROs.210

Among other things, these rules help 

to ensure that dealers are financially 

responsible, including adequately 

capitalized, that they maintain internal 

controls, and that the Commission and 

the SROs have tools to help them detect 

manipulation or fraud by analyzing 

transaction reports and examining other 

records kept by the dealer. 

2. Other Market Participants 

Market participants who are not 

registered as dealers also conduct 

significant activity in securities 

markets,211 and the Commission 

believes that some of these entities 

nevertheless perform the economic 

function of dealers. Because the 

Proposed Rules would apply to 

activities rather to persons’ legal 

descriptions or other characteristics, 

they could potentially capture a wide 

array of persons.212

The list of affected parties would not 

include persons who have or control 

assets less than $50 million, and we 

estimate that this provision would 

exclude the majority of investors.213

Established FINRA rules distinguish 

retail investors from institutional 

investors, in part, based on a threshold 

of $50 million in assets, and we follow 

that standard to exclude small investors 

who are unlikely to conduct a 

significant degree of dealer-like 

activity.214 Certain financial institutions 

may also be exempt from the Proposed 

Rules.215

The first two subsections below 

explain why we preliminarily believe 

that PTFs and private funds, 

particularly hedge funds, are the most 

likely firms other than registered dealers 

to be engaged in activities that would 

satisfy the Proposed Rules. As discussed 

above, the activities of clients would not 

be attributed to a registered investment 

adviser for purposes of determining 

whether the adviser would fall under 

the Proposed Rules, except in cases 

where (i) the adviser controls the clients 

as a result of voting rights, capital 

contributions, or the rights to amounts 

upon dissolution and (ii) the clients 

over which the registered adviser has 

such control collectively engage in 

activities that satisfy the Proposed 

Rules. Therefore, registered investment 

advisers would not fall under the 

Proposed Rules solely due to client 

activities over which the adviser has 

investment discretion. Advisers may 

still fall under the Proposed Rules on 

the basis of their own proprietary 

trading. The third subsection below 

discusses evidence regarding the 

number of persons whose activities may 

satisfy the Proposed Rules. The final 

subsection covers the Proposed Rules’ 

exclusion for registered investment 

companies. 


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23080 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

216For a survey of the literature, see, Albert J., 

2016, The Economics of High-Frequency Trading: 

Taking Stock, Annual Review of Financial 

Economics (8), 1–24. See also Baron, Matthew, 

Jonathan Brogaard, Bjo ̈rn Hagstro ̈mer, and Andrei 

Kirilenko, 2019, Risk and Return in High-Frequency 

Trading, Journal of Financial and Quantitative 

Analysis 54(3), 993–1024. 

217The analysis is limited to a subsection of 

TRACE data where the identity of trading 

counterparties is known. In July 2021, 

approximately 58 percent of the non-FINRA 

member volume in TRACE belonged to anonymous 

market participants. 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. 

218TRACE identifies counterparties by MPIDs, of 

which an individual firm may have many. The firm 

classification is based on an understanding of the 

individual firms’ businesses (see also the 2015 Joint 

Staff Report at 50). 

219The analysis does not aggregate affiliated 

firms, but counts them separately, even though they 

may be controlled by a common corporate parent. 

For example, if a firm were to have a FINRAmember broker-dealer affiliate and a non-FINRA 

hedge fund affiliate, the analysis would consider 

the broker-dealer and the hedge fund as separate 

firms. 

220See supra note 2. See also FEDS Notes, 

‘‘Unlocking the Treasury Market Through TRACE’’ 

(Sept. 28, 2018). 

a. Proprietary Trading Firms 

PTFs have emerged as consequential 

players in securities markets. While 

some PTFs have registered with the 

Commission, many others have not. 

Some studies of high-frequency 

trading—a primary feature of PTF 

activity, according to the 2015 Joint 

Staff Report—show that this activity 

may have positive effects on transaction 

costs and competition, while other 

studies show that the net effects may be 

negative.216 PTFs that are not registered 

with the Commission are subject to the 

anti-manipulation and anti-fraud 

provisions under Securities Act Section 

17(a) and to Exchange Act Section 10(b), 

but they are not subject to the more 

targeted provisions under Exchange Act 

Section 15(c), to examinations, to net 

capital requirements, or to various 

reporting requirements that apply to 

dealers. 

Because regulatory TRACE data 

pertaining to Treasury securities 

reported by certain ATSs contains the 

identity of non-FINRA member trading 

parties, we are able to analyze PTFs’ 

importance in the U.S. Treasury market 

during July 2021 217 and summarize the 

number and type of market participants 

by monthly trading volume in Table 1 

below.218 The analysis included 626 

firms 219 who were active in the U.S. 

Treasury market in July 2021, of which 

452 were FINRA members and 174 were 

not. While FINRA membership is not 

synonymous with dealer registration 

status, we believe that many of the large 

participants in the U.S. Treasury market 

who are not FINRA members are also 

not registered as dealers. The 174 

identified non-FINRA member firms in 

Table 1 accounted for approximately 19 

percent of aggregate Treasury trading 

volume in July 2021. PTFs had by far 

the highest volumes among identified 

non-FINRA member participants in the 

U.S. Treasury market, and the largest 

PTFs had trading volumes that were 

roughly comparable to the volumes of 

the largest dealers. A Federal Reserve 

staff analysis found that PTFs were 

particularly active in the interdealer 

segment of the U.S. Treasury market in 

2019, accounting for 61 percent of the 

volume on automated interdealer broker 

platforms and 48 percent of the 

interdealer broker volume overall.220

Figure 1 also shows that non-FINRA 

member firms in the U.S. Treasury 

market (most of which we believe are 

not dealers) have a volume distribution 

that is comparable to the volume 

distribution of FINRA-members (most of 

whom are dealers). Based on PTFs’ high 

trading volumes, and on the Federal 

Reserve staff finding that PTFs are 

particularly active in the interdealer 

segment of the U.S. Treasury market, we 

believe that PTFs have emerged as de 

facto liquidity providers in the U.S. 

Treasury market. 


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221See supra note 217. 

222For each transaction, we consider each 

counterparty to be responsible for half of the 

volume. Therefore, for a transactions where we 

observe the identity of only one counterparty, we 

consider that we have only determined the firm 

identity and FINRA membership for half of the 

transaction’s volume. We observe the identity of at 

least one counterparty for all transactions in 

TRACE, since trades between non-FINRA member 

firms are not reported to TRACE. 

223See supra note 30. 

TABLE 1—COUNT OF ACTIVE FIRMS IN THE TREASURY MARKET BY TYPE: JULY 2021 

Firm type 

# Firms with (buy + sell) volume > 

$0 $1 bn $10 bn $25 bn $50 bn $100 bn 

FINRA-member firms ................................................................ 452 126 74 53 38 32 

Dealers ............................................................................... 420 101 51 35 25 21 

Non-FINRA member firms ........................................................ 174 95 46 23 14 9 

Asset Managers ................................................................. (†) (*) (*) (*) (*) (*) 

Dealers ............................................................................... 80 42 20 (*) (*) (*) 

Hedge Funds ..................................................................... 41 17 (*) (*) (*) (*) 

Others ................................................................................ (†) (*) (*) (*) (*) (*) 

PTFs ................................................................................... 38 30 22 18 13 9 

Sum of *s ........................................................................... 15 6 4 5 1 0 

†Suppressed; strictly greater than zero. 

*Suppressed; greater than or equal to zero. 

Since the analysis behind Table 1 is 

limited to the subset of TRACE data 

where we can identify the individual 

firms,221 the numbers of firms with 

trading volume above the various 

thresholds may be greater than shown in 

the table. This is also to say that, were 

the data to include all market 

participants, we would need higher 

thresholds to be able to report numbers 

of firms similar to what are shown in 

the table. We make this adjustment as 

follows. In July 2021, the analysis was 

able to determine the firm identity and 

FINRA membership status of 42 percent 

of the non-FINRA member volume; the 

remaining 58 percent of non-FINRA 

member volume was anonymous.222

Under the assumption that all nonFINRA member market participants are 

equally represented in both the 

anonymous and identified subsets of 

TRACE, the analysis equally 

undercounts the volume of all firms— 

i.e., we assume that our analysis only 

contains 42 percent of identified nonFINRA member firms’ volume. We 

acknowledge considerable uncertainty 

regarding this assumption. The 

assumption of equal representation in 

the observed and non-observed data 

suggests dividing the thresholds shown 

in Table 1 by 0.42 (or multiplying them 

by approximately 2.5). For example, 

Table 1 shows that our analysis counted 

46 non-FINRA member firms with 

trading volumes of at least $10 billion 

in July 2021; the adjustment would 

suggest that those 46 firms actually had 

trading volumes of above $25 billion. 

However, firms in the various categories 

may not be equally represented in the 

identified and anonymous data. If, for 

example, PTFs are overrepresented in 

the identified data, then the actual 

number of PTFs with volumes over $25 

billion will be closer to 18 than to 22. 

We preliminarily estimate that 

approximately 46 non-FINRA member 

firms would surpass the $25 billion 

volume threshold given in the 

quantitative standard of the Proposed 

Rules. Although the analysis behind 

Table 1 only uses data from July 2021, 

we find that the number of firms that 

would have surpassed the $25 billion 

volume threshold in four out of the last 

six calendar months remained relatively 

steady between 39 and 50 from 

September 2019 to July 2021, or the 

entire period for which data was 

available. Non-FINRA member 

counterparties are first identified in 

TRACE beginning in April 2019, so 

September 2019 is the first month in 

which we can count how many nonFINRA member firms would surpass the 

quantitative threshold in four out of the 

last six calendar months. 

b. Private Funds 

Private funds 223 are prominent 

participants in U.S. securities markets. 

As of the second quarter of 2021, the 

Commission observed the following 


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Figure 1. Treasury Trading Volume Distributions ofFINRA Members and non-FINRA 

Members, July 2021 

This figure plots the number and percentage of identifiable firms in TRACE data for July 

2021, by size category. The plots are truncated on the right by grouping together all firms 

with monthly volume of $100 billion or greater. 

400 80 

§ 300 § 60 

U: 200 U::: 40 ..... a 

O 100 ~o 20 :i:t: o'--

0 ...-----.---,.-111111- 0 

0 20 40 60 80 100 0 20 40 60 80 100 

July 2021 Volume ($ bn) July 2021 Volume($ bn) 

I-FINRA Member ~ Non-FINRA Member! 
23082 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

224See Division of Investment Management 

Analytics Office, SEC, Private Fund Statistics: 

Second Calendar Quarter 2021 (Jan. 14, 2022), 

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

investment/private-funds-statistics/private-fundsstatistics-2021-q2.pdf 

225See Investor.gov, Private Equity Funds, 

available at https://www.investor.gov/introductioninvesting/investing-basics/investment-products/ 

private-investment-funds/private-equity. 

226See D. Hiltgen, ‘‘Private Liquidity Funds: 

Characteristics and Risk Indicators,’’ DERA White 

Paper (Jan. 2017). 227See supra note 224, figures 18–19. 

228See supra note 169. Regarding CAT data 

availability, hedge funds are currently not 

identifiable because CAT Firm Designated ID 

(‘‘FDID’’) numbers do not map to broker-dealers’ 

customers. Starting in July 2022, CAT data will 

identify broker-dealers’ customers, including hedge 

funds. 

229 In a long Treasury basis trade, participants 

take a long position in Treasury securities and a 

short position in Treasury futures, and then profit 

from the eventual convergence of cash and futures 

prices toward the delivery date. Hedge funds 

typically post the Treasury securities as collateral 

for repo funding. 

230See Barth, Daniel, and R. Jay Kahn, ‘‘Hedge 

Funds and the Treasury Cash-Futures Disconnect,’’ 

OFR Working Paper 21–01 (Apr. 1, 2021). 

types of private funds reported on Form 

PF:224

TABLE 2—PRIVATE FUND STATISTICS AS OF 2021Q2 

Fund type Count 

Gross asset value Net asset value 

Total 

($B) 

Avg 

($mm) 

Total 

($B) Avg ($mm) 

Hedge Fund ......................................................................... 9,613 9,584 997 5,132 534 

Private Equity Fund ............................................................. 15,861 4,825 304 4,270 269 

Venture Capital Fund ........................................................... 1,424 222 156 214 150 

Liquidity Fund ....................................................................... 76 330 4,342 319 4,197 

Other Private Fund .............................................................. 10,557 3,041 288 2,167 205 

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. 

Of the 9,613 hedge funds reported on 

Form PF, there were 1,968 qualifying 

hedge funds that reported information 

on their positions, and these held $3.2 

trillion in listed equities and $1.7 

trillion in U.S. Government securities. 

Of the 76 liquidity funds, 56 liquidity 

funds reported information on their 

positions, and these held $94.8 billion 

in U.S. Government securities and $21.7 

billion in asset-backed securities. 

Among private funds, hedge funds are 

the most likely to be engaged in 

activities that meet the Proposed Rules. 

As reported on Form PF, hedge funds 

and private equity funds are the largest 

by count and aggregate assets, and 

hedge funds and liquidity funds are the 

largest by average fund assets. However, 

the business models of private equity 

funds 225 and liquidity funds 226 are 

unlikely to fall under the Proposed 

Rules’ qualitative factors, since they are 

generally long-only investors that are 

not likely to routinely make roughly 

comparable purchases and sales of the 

same or substantially similar securities 

in a day or to routinely quote markets 

to capture bid-ask spreads. As described 

above, ‘‘routinely’’ in the Proposed 

Rules means both repeatedly within a 

day (multiple times in a single day) and 

repeatedly over time (on the majority of 

days in a calendar month). Regarding 

the quantitative volume standard, 

liquidity funds may trade large volumes 

of U.S. Treasury securities, but the 

average reporting liquidity fund, as of 

the second quarter of 2021, held only 

$1.7 billion of Treasury securities and 

held the average positions for 40–50 

days.227 Such a fund is unlikely to 

regularly trade $25 billion in U.S. 

Treasury securities in a month. 

An important similarity between 

private funds and PTFs is the incentives 

involved for those making trading and 

investment decisions. PTFs, as the name 

implies, invest money for the principals, 

who then benefit directly from the 

trading gains. This is similar to many 

registered dealers. Similarly, private 

fund advisers, including their affiliates 

that operate as general partners of 

private funds, typically have a 

compensation arrangement by which 

they receive a significant portion of 

gains (often 20 percent). In both cases, 

these compensation arrangements may 

incentivize aggressive trading. 

Certain hedge funds, on the other 

hand, may satisfy either the qualitative 

or the quantitative standards of the 

Proposed Rules, or both. The remainder 

of this section discusses whether 

current hedge fund activity may meet 

the standards, and describes regulations 

that currently apply to registered hedge 

fund advisers. The qualitative standards 

could potentially capture certain hedge 

fund trading strategies, such as those 

that may involve automated or highfrequency buying and selling of 

substantially similar securities in the 

same day. It is also possible that a large 

hedge fund could trade sufficient 

volumes of U.S. Treasury securities to 

satisfy the quantitative standard. The 

extent to which hedge funds may satisfy 

these standards is uncertain. Hedge 

funds do not report their transactions, 

so they are not currently identifiable in 

CAT data or in TRACE data (beyond the 

subset of U.S. Treasury TRACE 

discussed previously).228 Structured 

data are not available that would 

indicate how many hedge funds would 

satisfy the qualitative standards, but 

some hedge fund strategies would likely 

do so. We observe at least one hedge 

fund (number suppressed in Table 1 

above) that surpassed the quantitative 

standard’s threshold of $25 billion in 

U.S. Treasuries in July 2021. Additional 

hedge funds may meet the quantitative 

threshold beyond those we observe—for 

instance, hedge funds who trade outside 

of covered ATSs and so only appear in 

TRACE anonymously, or hedge funds 

that trade with other non-FINRA 

members (such as banks) and so do not 

appear in TRACE at all. 

One hedge fund strategy that stands 

out is the Treasury basis trade,229 as one 

study estimated that approximately 65 

percent of hedge funds’ total Treasury 

exposure was tied to the basis trade 

before March, 2020.230 A hedge fund’s 

basis trade is not likely to satisfy the 

qualitative standards of the Proposed 

Rules, because a futures contract and a 

Treasury of similar maturity would not 

qualify as substantially similar 

securities since the futures contract is 

not a security. Also, since transactions 

associated with repurchase agreements 

would not count toward the Proposed 

Rules’ quantitative standard, most hedge 

funds’ basis trading would likely not 

satisfy that standard. A large-volume 


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231See id. 

232See 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. 

233These reports are submitted through Form PF, 

which was adopted in 2011 as required by the 

Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010. Pub. L. 111–203, 124 Stat. 

1376 (2010). See Reporting by Investment Advisers 

to Private Funds and Certain Commodity Pool 

Operators and Commodity Trading Advisors on 

Form PF, Advisers Act Release No. 3308 (Oct. 31, 

2011), 76 FR 71128 (Nov. 16, 2011) at section I. 

234For SPY volume, we use data from Intraday 

Indicators Aggregate Market Liquidity—WRDS. We 

rely on CBOE statistics for the total dollar volume 

of NMS stocks. See U.S. Equities Market Volume 

Summary, CBOE, available at https://

www.cboe.com/us/equities/market_share/. 

235See supra note 218. 

basis trading hedge fund could 

hypothetically be captured by the 

quantitative standard, but a recent study 

suggests that few, if any, basis trades 

involve enough Treasury trading 

volume to meet the threshold of $25 

billion per month in four out of the past 

six calendar months.231 In 2019, when 

the basis trade was more attractive than 

at present, the study reported that the 

aggregate basis trade of the 44 largest 

participants held a long Treasury 

position of about $400–$500 billion (an 

average of only about $9–$11 billion per 

large basis trader). Furthermore, the 

basic strategy of the basis trade involves 

holding Treasury securities to the earlier 

of: (i) Maturity; or (ii) a time when the 

basis trade is no longer attractive. 

As described above in Section III.A, 

the Commission is mindful that 

registered private fund advisers are 

currently regulated under the Advisers 

Act, and that advisers’ requirements 

under the Advisers Act affect the 

activities of private funds. This 

regulatory regime includes anti-fraud 

measures applicable to all advisers and 

requires that many private fund advisers 

register with the Commission. The 

Advisers Act establishes reporting and 

recordkeeping requirements for 

registered advisers to private funds for 

investment protection and systemic risk 

purposes. Specifically, Section 204(a) of 

the Advisers Act 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), and Section 206 subjects 

registered investment advisers to several 

anti-fraud provisions, including 

antifraud liability with respect to 

current and prospective clients. 

Registered investment advisers also 

have fiduciary duties, which comprise a 

duty of care and a duty of loyalty.232

Certain registered investment advisers 

must also submit annual and, for certain 

large advisers to certain large hedge 

funds, quarterly reports to the 

Commission,233 and they are subject to 

Commission examinations. 

Differences between the regulatory 

regime that applies to registered 

advisers to private funds and the one 

that applies to securities dealers include 

leverage constraints, and reporting. 

Registered dealers’ leverage is limited 

by net capital requirements, which must 

be maintained at all times, even 

intraday, while private funds have no 

formal leverage constraints. Private 

funds also do not report their securities 

transactions. Their fixed-income 

transactions do not appear in TRACE, or 

may appear anonymously as part of the 

reporting obligation of broker-dealers. 

Transactions in fixed-income securities 

other than municipal securities and U.S. 

Treasury securities are reported to 

TRACE and publicly disseminated 

(transactions in U.S. Treasury securities 

are reported to regulatory TRACE but 

not publicly disseminated), so markets 

have more post-trade transparency with 

regards to registered dealers than with 

regards to private funds. Private funds’ 

transactions in national market system 

(‘‘NMS’’) stocks, OTC equities, and 

listed options already appear in CAT, 

but some additional information is only 

available for firms that report directly to 

CAT. For example, currently, when a 

PTF sends orders to a broker-dealer, 

CAT will include the timestamp 

indicating when the order was received 

by the broker-dealer, but not the 

timestamps indicating when the order 

was originated or routed by the PTF. 

Additionally, if the PTF originates a 

larger order and splits it into smaller 

orders for routing to the broker-dealer, 

CAT will only include the smaller 

orders as they are received by the 

broker-dealer, but CAT will not include 

the larger order as originated. Regulators 

may be able to obtain more complete 

data on private funds’ pre- and posttrade securities trading activity through 

examinations, but such information is 

more readily available for registered 

dealers. 

c. Number of Affected Parties 

The precise number of affected parties 

is uncertain, since existing data does not 

provide a clear picture of all market 

participants’ activities. For instance, we 

do not know how many PTFs routinely 

express trading interests that are at or 

near the best available prices on both 

sides of the market. Nevertheless, the 

discussion in this section seeks to 

provide some idea, based on available 

data, of the Proposed Rules’ scope. First, 

we provide data on the number of 

entities that may satisfy the first 

qualitative factor by ‘‘routinely making 

roughly comparable purchases and sales 

of the same or substantially similar 

securities in a day.’’ The analysis 

requires us to assume a particular 

functional form for this qualitative 

standard, but we do not mean to imply 

that the standard would be defined this 

way in practice. For the highest-volume 

U.S. Treasury security in July 2021 (the 

10-year on-the-run note, with 15 percent 

of total U.S. Treasury volume), we 

compute a buy-sell volume imbalance 

for each firm and for each trading day 

as |B–S|/(B+S), where B is the firm’s 

daily buy volume and S is the firm’s 

daily sell volume. A low buy-sell 

imbalance indicates purchases and sales 

in more similar dollar amounts. We then 

repeat the analysis for the highestvolume security in equity markets in 

October 2021 (the SPDR S&P 500 ETF, 

or ‘‘SPY’’, with 6.1 percent of the total 

volume of NMS stocks 234). 

For the U.S. Treasury market, Table 3 

shows the number of non-FINRA 

member firms, by firm type, that had a 

‘‘low’’ buy-sell volume imbalance— 

below 10 percent or, alternatively, 

below 20 percent—for at least 14 of the 

21 trading days in July 2021. Twenty 

non-FINRA member firms had a buy-sell 

volume imbalance of less than 20 

percent in at least 14 of 21 trading days 

and 15 non-FINRA member firms had a 

buy-sell volume imbalance of less than 

10 percent in at least 14 of 21 trading 

days. All of these firms were PTFs.235


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236As discussed above, we believe that the $10 

billion threshold in our analysis, which is limited 

to the subsection of TRACE where we can verify 

traders’ identities, corresponds to the Proposed 

Rules’ quantitative threshold of $25 billion. 

237We did not discuss a de minimis threshold in 

the previous analysis for the U.S. Treasury market 

(see supra Table 3), because imposing a volume 

threshold even as high as $1 million did not affect 

the count of firms that had low-imbalance and 

above de minimis trading on each of 14 out of 21 

days. 

TABLE 3—COUNT OF NON-FINRA MEMBER FIRMS BY TYPE FOR THE TREASURY CUSIP WITH THE HIGHEST VOLUME IN

JULY 2021 

Total # firms Firm type 

# Firms with at least 14 of 21 

days of buy-sell volume 

imbalance less than 

10% 20% 

Asset Manager ............................................................................................................................. * 0 0 

Dealer .......................................................................................................................................... 74 0 0 

Hedge Fund ................................................................................................................................. 29 0 0 

Other ............................................................................................................................................ * 0 0 

PTF .............................................................................................................................................. 34 15 20 

Sum of *s ..................................................................................................................................... 6 0 0 

Total ...................................................................................................................................... 143 15 20 

Notes: 1. Buy-sell volume imbalance = |B–S|/B+S, where B is firm’s daily buy volume and S is firm’s daily sell volume. 2. The Treasury CUSIP 

with the highest volume in July 2021 is for 10-year on-the-run Treasury note. In July 2021, the total volume for this CUSIP was about 15 percent 

of the total volume for all Treasury securities. 3. * Suppressed; at least 1 firm of each type exists in the data (all suppressed numbers in the first 

column are greater than zero). 

A comparison of these 15 or 20 firms 

with the list of 46 firms (see Table 1) 

that had total monthly Treasury-trading 

volume of more than $10 billion 236 in 

July 2021 revealed considerable overlap 

between first qualitative standard and 

the qualitative standard: 17 of the 20 

non-FINRA member PTFs with frequent 

buy-sell volume imbalance of less than 

20 percent in Table 3 also had monthly 

volume greater than $10 billion in Table 

1; 14 of the 15 non-FINRA member PTFs 

with frequent buy-sell volume 

imbalance of less than 10 percent in 

Table 3 also had monthly volume 

greater than $10 billion in Table 1. 

The analysis for the equity market 

relied on CAT data. While PTFs and 

private funds do not directly report to 

CAT, their trades in NMS stocks, OTC 

equity securities, and listed options are 

reported to CAT by registered brokerdealers with whom they interact as 

customers (e.g., by trading through a 

registered broker-dealer or with a 

registered broker-dealer, including with 

an ATS). Specifically, for the original 

receipt or origination of an order, 

registered broker-dealers report to CAT 

the Firm Designated ID (‘‘FDID’’), which 

is then assigned to various other CAT 

order events in the order lifecycle. 

These CAT FDIDs uniquely identify 

trading accounts of registered brokerdealers and can represent firm or 

customer accounts. Firm trading 

accounts include market-making 

accounts and other proprietary accounts 

of the registered broker-dealer. 

Customer accounts include mainly 

institutional customer accounts and 

individual customer accounts, but they 

also include customer average-price 

accounts and employee accounts where 

an employee of the registered brokerdealer is exercising discretion over 

multiple customer accounts. 

Because the activity of all market 

participants is captured in CAT FDID 

customer accounts and because the 

Proposed Rules do not cover persons 

with total assets of less than $50 

million, in our analysis of SPY we 

focused on CAT FDID institutional 

customer accounts. Specifically, we 

computed buy-sell dollar volume 

imbalance for each CAT FDID 

institutional customer account and each 

trading day in October 2021. As in our 

analysis of Treasuries, we defined buysell volume imbalance as |B–S|/(B+S), 

where B is the firm’s daily buy volume 

and S is the firm’s daily sell volume. We 

also computed the total (i.e., buy plus 

sell) dollar volume in SPY for each CAT 

FDID institutional customer account 

and each trading day in October 2021. 

Table 4 shows the number of CAT 

FDID institutional customer accounts 

that had both (i) a ‘‘low’’ buy-sell dollar 

volume imbalance in SPY and (ii) total 

buy plus sell dollar volume in SPY 

above a de minimis threshold, in at least 

14 of 21 trading days in October 2021. 

We again define ‘‘low’’ to mean less 

than 10 percent or less than 20 percent. 

We include the de minimis threshold to 

remove small entities that are the most 

likely to be excluded from the Proposed 

Rules for having less than $50 million 

in assets.237 Table 4 shows results for 

two alternate de minimis thresholds: 

$10,000 per day or $100,000 per day. In 

addition to the number of CAT FDID 

institutional customer accounts that 

satisfied these criteria, Table 4 also 

shows the combined dollar volume of 

these accounts as percent of total SPY 

dollar volume in October 2021. 

TABLE 4—NUMBER OF CAT FDID INSTITUTIONAL CUSTOMER ACCOUNTS WITH AT LEAST 14 OF 21 TRADING DAYS IN OCTOBER 2021 WITH THE SPECIFIED BUY-SELL DOLLAR VOLUME IMBALANCE AND BUY PLUS SELL DOLLAR VOLUME IN

SPY 

Buy-sell dollar volume imbalance less than .................................................... 10% 20% 10% 20% 

AND 

Total buy plus sell dollar volume more than ................................................... $10,000 $10,000 $100,000 $100,000

# CAT FDID institutional customer accounts .................................................. 44 61 41 57 


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238Using data from ‘‘Private Fund Statistics’’ (see 

supra note 228), we estimate qualifying hedge 

funds’ net capitalization as highly liquid assets 

minus secured debt. Dollar values of liquid assets 

are from Table 49 (portfolio liquidity for qualifying 

hedge funds as a percent of aggregate net asset 

value) and Table 4 (net asset value), and the value 

of secured debt is from Table 51 (borrowings of 

qualifying hedge funds). 

239See supra notes 76 and 205. 

240See supra note 206 and accompanying text. 

TABLE 4—NUMBER OF CAT FDID INSTITUTIONAL CUSTOMER ACCOUNTS WITH AT LEAST 14 OF 21 TRADING DAYS IN OCTOBER 2021 WITH THE SPECIFIED BUY-SELL DOLLAR VOLUME IMBALANCE AND BUY PLUS SELL DOLLAR VOLUME IN

SPY—Continued 

Combined dollar volume of these accounts as percent of total SPY dollar 

volume in October 2021 ............................................................................... 3.3 6.3 3.3 6.3 

Notes: 1. Buy-sell volume imbalance = |B–S|/B+S, where B is firm’s daily buy volume and S is firm’s daily sell volume. 2. There were a total of 

21,115 CAT FDID institutional customer accounts that traded SPY in October 2021. A CAT FDID ‘‘institutional customer account’’ is an institutional account as defined in FINRA rule 4512I. See supra note [26] for further details. 

The results in Table 4 indicate that 

between 41 and 61 CAT FDID 

institutional customer accounts 

(depending on the thresholds used) had 

both low buy-sell dollar volume 

imbalance in SPY and above de minimis 

total dollar volume in SPY in at least 14 

of 21 trading days in October 2021, and 

the combined dollar volume of these 

accounts represented between 3.3 

percent and 6.3 percent of total SPY 

dollar volume in October 2021. If the 

entities behind these accounts are not 

excluded or otherwise exempted, such 

trading activity could satisfy the 

qualitative standard of ‘‘routinely 

making roughly comparable purchases 

and sales of the same or substantially 

similar securities in a day.’’ 

The precise number of affected parties 

is highly uncertain, due to several 

shortcomings. The U.S. Treasury market 

analysis has the following caveats. First, 

we only analyze the buy-sell imbalance 

within a single CUSIP, though firms 

could potentially satisfy the standard 

based on other CUSIPs or on a 

combination of CUSIPs (the qualitative 

standard includes trading in either the 

‘‘same’’ or ‘‘substantially similar’’ 

securities). Second, we do not observe 

the universe of U.S. Treasury trading. 

Third, this analysis imposes 

quantitative cutoffs in place of the 

qualitative standard, which is ‘‘roughly 

comparable purchases and sales.’’ Due 

to the first two shortcomings, the actual 

number of parties affected by this 

qualitative standard may be higher than 

the 15 or 20 firms we estimate here. The 

third shortcoming introduces additional 

uncertainty, since we do not know 

whether the cutoffs assumed in the 

analysis—buy-sell imbalance less than 

10 percent or 20 percent in at least 14 

of 21 trading days—would align with 

the qualitative standard in all cases. 

There are also caveats to the equity 

market analysis, as follows. First, there 

is currently no one-to-one 

correspondence between CAT FDID 

accounts and firms (although such 

information will be available starting in 

July 2022). Some market participants 

may have several CAT FDID 

institutional customer accounts, and 

some CAT FDID institutional customer 

accounts may represent more than one 

customer. Therefore, the number of CAT 

FDID institutional customer accounts 

that satisfy various thresholds in Table 

4 does not necessarily equal the number 

of market participants that would satisfy 

the qualitative standard of ‘‘routinely 

making roughly comparable purchases 

and sales of the same or substantially 

similar securities in a day.’’ 

Furthermore, some of the CAT FDID 

institutional customer accounts that 

satisfy various thresholds in Table 4 

may represent investments companies 

registered under the Investment Act, 

which are excluded from the Proposed 

Rules. 

Despite these caveats, we believe that 

the results in Tables 3 and 4 provide 

useful indications about the scope of the 

Proposed Rules in the markets for U.S. 

Treasury securities and NMS stocks. 

3. Externalities 

When market participants who 

effectively provide liquidity do not 

comply with existing dealer regulations, 

including rules specifically designed to 

limit risk-taking and to deter 

manipulative or fraudulent behavior, 

the probability of behaviors that are 

financially risky, manipulative, or 

fraudulent increases. As described 

below, such behavior on the part of one 

firm may create negatively externalities 

on other firms. Although all liquidity 

providers are subject to Exchange Act 

Section 17(a), Section 10(b), and 17 CFR 

240.10b–10 (Rule 10b–10 thereunder), 

liquidity providers that are not 

registered as dealers currently have 

more regulatory allowance to accept 

operational or financial risk. For 

example, net capital requirements limit 

the leverage that dealers are allowed to 

take on, while PTFs and private funds 

have no regulatory leverage constraints. 

We estimate that qualifying hedge funds 

are more leveraged than registered 

dealers. As of the second quarter of 

2021, registered investment advisers 

reported that qualifying hedge funds 

had $1.4 trillion in assets that could be 

liquidated within a day, $3.4 trillion in 

assets that could be liquidated within a 

year, and $3.6 trillion in secured debts, 

so that qualifying hedge funds’ aggregate 

secured debt obligations appear much 

higher than their aggregate liquid 

assets.238 In contrast, the Net Capital 

Rule requires dealers to have highly 

liquid assets in excess of 

unsubordinated debt.239 We are unable 

to estimate PTFs’ leverage due to data 

limitations. PTFs and private funds also 

may not have the same obligations as 

dealers to implement operational risk 

controls.240 In addition, PTFs are not 

subject to any examination or reporting 

requirements, and neither PTFs nor 

private funds are required to report 

securities transactions. 

Even though all market participants 

face incentives to remain solvent and 

profitable, certain market participants 

may not bear all the costs of their 

failure. Therefore, they may not have 

sufficient incentive to ensure their 

ability to weather adverse shocks. When 

entities have leverage, for example, 

creditors may bear some of the costs of 

failure. As another example, entities 

that perform a significant share of 

liquidity provision may disrupt market 

trading if they fail, thus imposing costs 

on other entities. 

These incentives, or lack of 

incentives, create externalities that 

market forces alone cannot resolve. A 

market participant who is unable to 

meet its obligations may harm its 

creditors, other financial institutions 

related to its creditors, its trading 

counterparties, and other participants in 

securities markets including investors. 

Although creditors can seek to estimate 

a borrower’s probability of failure and 

price the credit extension accordingly, 

large losses can potentially propagate 

through the financial system— 

especially when indirect exposures are 

not well understood and financial firms 

misread their total exposure. Instability 

in securities markets may appear when 

a failed liquidity provider exits the 

market or when a stressed liquidity 

provider temporarily reduces its 


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241See 2021 IAWG Joint Staff Report at 13. 

Initially, PTFs increased trading activity, but they 

pulled back from market making several days later 

when volatility reached very high levels. (‘‘In the 

first week of March, a large share of the increased 

trading volume came from PTFs, and on March 9, 

PTFs’ share of trading on electronic IDB platforms 

was just over 60 percent, 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 percent on 

March 16. Dealers’ total volumes on electronic IDB 

platforms also declined, but less sharply than PTFs’ 

volumes.’’) 

242See 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. 

243 In 2012, an algorithm error at a single trader 

temporarily affected the prices of 150 stock tickers, 

causing some to increase or decrease more than 30 

percent versus the day’s opening. See Knight 

Capital Americas LLC, Exchange Act Release No. 

70694 (Oct. 16, 2013) (settled matter). Another firm, 

after a change in code and in routing logic, 

erroneously allowed millions of orders with a 

notional value of approximately $116 billion to be 

sent between 2010 and 2014. Latour Trading LLC, 

Exchange Act Release No. 76029 (Sept. 30, 2015) 

(settled matter). 

244Registered dealers report their transactions in 

fixed-income securities (other than municipal 

bonds) to TRACE. Unregistered traders’ fixedincome transactions only appear in TRACE in two 

cases: (i) When they trade with a FINRA member, 

the FINRA member reports the transaction to 

TRACE but keeps the counterparty anonymous; or 

(ii) when they trade government securities on an 

ATS that is a FINRA member, the ATS reports the 

transaction to TRACE along with the identity of the 

counterparties. 

245As discussed above, CAT also includes the 

transactions of firms that are not registered as 

dealers, but certain other information is only 

available for firms that report directly to CAT. 246See supra note 233 and accompanying text. 

activity, thereby reducing market 

liquidity for all traders until other 

liquidity providers can fill the gap. 

During the U.S. Treasury market 

volatility in March 2020, PTFs (most of 

whom are not registered as dealers) 

appeared to especially pull back from 

market-making activity, possibly 

because ‘‘their lower capitalization 

relative to dealers may [have left] them 

with less capacity to absorb adverse 

shocks.’’ 241 Other research also shows 

that, in equity markets, the presence of 

high-frequency traders can further 

reduce market liquidity during periods 

of extreme volatility (high frequency is 

one of the primary features of PTF 

activity, according to the 2015 Joint 

Staff Report).242 Instability may also 

appear when a struggling market 

participant rapidly exits a large position 

in one or more securities, leading to 

volume and price spikes that can 

quickly push market prices away from 

fundamental values and can overwhelm 

exchanges and clearing houses. The 

associated volatility may heighten the 

inventory and operational risks of 

market participants throughout the 

securities markets. The failure of a large 

market participant can potentially 

propagate instability across securities 

markets if the failed entity actively 

trades many different asset classes 

simultaneously. 

As discussed above, the Commission 

and the SROs have established rules 

designed to address the externalities 

related to financial stress, by promoting 

registered dealers’ financially 

responsibility and operational 

capability. Specifically, the rules seek to 

minimize the disruptions that can occur 

from losses related to operational risk. 

One risk is that a firm may not be able 

to find offsetting trades, and so 

accumulates an unexpectedly large 

position that must be rapidly liquidated 

at a loss. Another risk is that errors in 

trading algorithms or other systems 

(including human errors) lead to an 

unexpectedly large position that must 

be rapidly liquidated at a loss.243 Since, 

as discussed above, losses on the part of 

one market participant can harm others, 

dealer regulations are designed to 

mitigate the magnitude of these 

externalities and to reduce the 

probability that they occur at all. 

However, these regulations do not 

currently apply to market participants 

that are not registered as dealers. We do 

not have sufficient oversight to 

understand what risk-management 

controls PTFs may have in place, how 

much leverage they use, or how liquid 

their assets are. Private funds’ risktaking may be constrained by their 

advisers’ fiduciary duties, but, as 

described above, we believe that the 

average hedge fund is more leveraged 

than the Net Capital Rule would allow 

(although we acknowledge the 

uncertainty around our estimate). 

The potential for market manipulation 

or fraud constitutes other negative 

externalities, since such behavior may 

distort market prices or give the 

perpetrator unfair advantages over other 

market participants. Several elements of 

the dealer regulatory regime address 

these risks, but some important 

elements do not currently apply to 

market participants that are not 

registered as dealers, including financial 

reporting, examinations, and other 

regulations that facilitate examinations. 

Financial statement reporting, 

transaction reporting (to TRACE 244 or 

CAT 245), and examinations help the 

Commission detect manipulation or 

fraud and determine whether firms are 

in compliance with applicable 

regulations. Books and records 

requirements facilitate examinations by 

ensuring that data entries are defined, 

recorded, and preserved in a consistent 

manger across all dealers. PTFs do not 

submit financial reports to regulators or 

report their transactions, are not subject 

to examinations, and have no regulatory 

books and records guidelines. Private 

funds also do not report transactions to 

TRACE or directly to CAT, but 

registered private fund advisers are 

subject to regular reporting 

requirements 246 and to books and 

records rules. In addition, the 

Commission has examination authority 

with respect to registered private fund 

advisers. 

Private information that market 

participants who are not registered as 

dealers do not report to regulators also 

creates an impediment to regulators’ 

ability to study markets in a structured 

way, to detect and respond to market 

events, or to inform investors. For 

regulators, the gap between what 

information registered dealers report 

and what information other market 

participants report varies by type of 

participant, but may include annual or 

quarterly reporting, and transactions 

reports. For investors, the gap consists 

of transactions reports for fixed-income 

securities other than U.S. Treasury and 

municipal securities, which reports are 

made publicly available. As discussed 

previously, large private fund advisers 

file regular reports to the Commission 

on Form PF, and the Commission also 

has authority to examine private fund 

advisers. However, private funds do not 

report their securities transactions to 

TRACE. Private funds’ fixed-income 

transactions may appear in TRACE with 

the private fund identified, if the trade 

occurs on certain ATSs; the transactions 

may appear in TRACE with the private 

fund anonymous, if the trade occurs 

outside certain ATSs but with another 

FINRA member firm; or the transactions 

may not appear in TRACE at all if the 

private fund trades with a non-FINRA 

member firm. PTFs do submit financial 

reports to regulators, do not report 

transactions, and are not subject to 

examinations, so regulators have very 

little insight into their activities. Private 

funds also do not report their securities 

transactions directly to CAT. As 

discussed previously, their trades in 

NMS stocks, OTC equities, and listed 

options are indirectly reported to CAT 

by other counterparties, but CAT does 

not contain certain other information on 

firms who do not report directly. 

Information limitations in the market 

for U.S. Treasury securities became 

especially apparent during the 

instability of March 2020. The IAWG 

noted in its 2021 IAWG Joint Staff 

Report on November 8, 2021, that ‘‘In 

March 2020 . . . there was a [particular] 


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247See supra note 5. 248See supra notes 217, 218, and 219, and 

accompanying text. 249A Federal Reserve analysis from 2020 finds 

that activity on electronic interdealer platforms is 

slightly more concentrated, with an HHI of 0.082. 

See supra note 2. 

250Firms are classified based on an 

understanding of the individual firms’ businesses. 

See supra note 218. 

251O’Hara, Maureen, and Alex Zhou, Anatomy of 

a Liquidity Crisis: Corporate Bonds in the Covid-19 

Liquidity Crisis, May 2020, working paper. 

252Transaction Fee Pilot for NMS Stocks, 

Exchange Act Release No. 82873 (Mar. 14, 2018), 83 

FR 13008 (Mar. 26, 2018). 

253See supra note 2. 

need for timely information on the 

positions and transactions of 

institutions other than dealers.’’ 247

Wider TRACE reporting would have 

provided more of such information. 

Similar information limitations exist in 

the markets for other fixed-income 

securities. Unregistered market 

participants’ transactions in NMS 

stocks, OTC equities, and listed options 

are reported to CAT by other (registered) 

parties, but their identities in the data 

remain anonymous and some pre-trade 

data are not reported at all—e.g., time 

stamps and indications that a large 

order has been broken into several 

smaller orders. Investors who rely on 

publicly disseminated TRACE also are 

impacted by the unreported or the 

anonymity of important market 

participants’ trading activities. 

4. Competition Among Liquidity 

Providers 

An analysis of the cash U.S. Treasury 

market for July 2021 248 finds that 

liquidity provision in the market is 

reasonably competitive.249 Table 5 

below categorizes firms as potential 

liquidity providers in three ways and 

displays two measures of market 

concentration. In column 1, potential 

liquidity providers include only dealers. 

In column 2, the list of liquidity 

providers also includes PTFs. In column 

3, the list of liquidity providers further 

includes hedge funds.250 The first 

measure of concentration displayed in 

each column is the volume share of the 

5 highest-volume firms. The second 

concentration measure is the 

Herfindahl-Hirschman index (HHI), 

which is equal to the sum of squared 

market shares. An index of 1 would 

indicate a completely concentrated 

market with a single liquidity provider. 

The inverse of the HHI provides some 

intuition by giving the number of 

equally sized competitors that would 

lead to such a HHI. For example, a 

market with 5 equally sized competitors 

would have a HHI of 1⁄5 or 0.2. The first 

column of Table 5 shows that 500 

dealers were active in the U.S. Treasury 

market in July, 2021, and that the 5 

highest-volume of these accounted for 

43 percent of the group’s total volume. 

The HHI of liquidity provision in this 

column is 0.054, or comparable to the 

competitive environment that would 

exist if there were 18 equally sized 

liquidity providers. If we also consider 

PTFs (limited to the PTFs that we can 

identify in TRACE) to be liquidity 

providers (column 2), then 545 liquidity 

providers were active in July 2021 and 

the 5 highest-volume firms accounted 

for 34 percent of the group’s total. The 

HHI in this case is 0.04, which is 

comparable to the competitive 

environment that would exist among 25 

equally sized firms. If we further 

consider hedge funds (again, limited to 

the hedge funds that we can identify in 

TRACE) to be liquidity providers 

(column 3), then 586 liquidity providers 

were active in the U.S. Treasury market 

in July, 2021, and the 5 highest-volume 

firms accounted for one-third of the 

group’s total volume. In this third 

column, the HHI is 0.039, which is 

comparable to the competitive 

environment that would exist among 26 

equally sized firms. The minimal 

difference between the numbers in row 

2, columns 2–3, does not suggest that 

hedge funds do not provide significant 

liquidity in the U.S. Treasury market. 

The minimal difference only means that 

the hedge funds that we can identify in 

TRACE do not appear to provide 

significant liquidity in the U.S. Treasury 

market. 

TABLE 5—COMPETITION AMONG LIQUIDITY PROVIDERS IN THE TREASURY MARKET, JULY 2021 

[The largest 5 firms in this table overall are dealers] 

Liquidity 

providers: 

dealers 

Liquidity 

providers: 

dealers + 

PTFs 

Liquidity 

providers: 

dealers + 

PTFs + hedge 

funds 

No. of liquidity providers .............................................................................................................. 500 545 586 

Share of entire TRACE Sample .................................................................................................. 52.1% 68.7% 69.4% 

Top-5 volume share (within group) ............................................................................................. 42.6% 33.6% 33.3% 

HHI ............................................................................................................................................... 0.054 0.040 0.039 

comparable to N equal-size competitors ..................................................................................... 18 25 26 

The Commission also understands 

that a large number of firms provide 

liquidity provision in the markets for 

corporate bonds and for equities (not 

necessarily the same firms), and that 

intermediation activity is reasonably 

competitive in both markets. 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 

dealers controlled approximately 70 

percent of the volume.251 Another 

analysis by the Commission 252 found 

that of the 3,972 broker-dealers that 

filed Form X–17a–5 (FOCUS report) in 

2016, 430 of them were also members of 

U.S. equities exchanges, and that the 

largest 20 broker-dealers controlled 

approximately 75 percent of the total 

assets of all broker-dealers. 

The current competitive landscape 

among liquidity providers is also 

shaped by the difference in regulatory 

treatment between registered dealers 

and unregistered market participants 

that the Commission believes perform 

dealer-like roles in the markets. The 

additional requirements to which 

registered dealers are subject may result 

in higher compliance for registered 

dealers, which could incentivize lessregulated firms such as PTFs to gain 

market share, or to continue to gain 

market share, from more-regulated 

dealers. 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).253


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23088 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

254See supra notes 205 and 206 and 

accompanying text. 

255See supra note 76. 

256See also Capital, Margin, and Segregation 

Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants and Capital 

and Segregation Requirements for Broker-Dealers, 

Exchange Act Release No. 86175 (June 21, 2019), 84 

FR 43872 (Aug. 22, 2019). 

257Registered private fund advisers are currently 

regulated in their capacity as advisers, and the 

current adviser regulation contains provisions 

related to financial risk-taking. However, the 

Proposed Rules could also apply to advisers that 

trade with their own proprietary capital. The 

adviser’s proprietary trading is not currently 

regulated, so the benefits of registering such an 

adviser would be comparable to the full benefit of 

registering a PTF. 

258See supra note 77. 

259Unregistered market participants’ transactions 

in NMS stocks, OTC equities, and listed options are 

reported to CAT by other (registered) parties, but, 

as described above, certain information is only 

available for entities that report directly to CAT. 

260Unregistered market participants’ transactions 

in U.S. Treasury securities may appear in TRACE 

under certain conditions, but they usually appear 

with the unregistered counterparty’s identity kept 

anonymous. See supra note 217. 

261See Bessembinder, Hendrik, William Maxwell, 

and Kumar Venkataraman, 2006, ‘‘Market 

Transparency, Liquidity Externalities, and 

Institutional Trading Costs in Corporate Bonds,’’ 

Journal of Financial Economics 82(2), 251–288; and 

Edwards, Amy K., Lawrence E. Harris, and Michael 

S. Piwowar, 2007, ‘‘Corporate Bond Market 

Transaction Costs and Transparency,’’ The Journal 

of Finance 62(3), 1421–1451. 

262See Consolidated Audit Trail, Exchange Act 

Release No. 62174 (May 26, 2010), 75 FR 32556 

(June 8, 2010). 

263 Id. 

C. Economic Effects, Including Impact 

on Efficiency, Competition, and Capital 

Formation 

As described above in Section II, the 

Commission believes that the Proposed 

Rules would support 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 the type of 

activities described in the Proposed 

Rules. As described in Section II, the 

Commission believes that the Proposed 

Rules would support 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 the type of 

activities described in the Proposed 

Rules. Specifically, the rules would 

result in increasing the share of 

liquidity provision undertaken by 

persons who are subject to dealer rules 

related to financial risk-taking, 

reporting, deceptive practices, and 

examinations. As discussed above, these 

benefits would all be associated with 

PTFs registering as dealers, but private 

funds’ potential dealer registration 

would also bring benefits related to net 

capital requirements and transaction 

reporting. If registered private fund 

advisers were to register as dealers, the 

benefits of transaction reporting would 

apply, but the marginal benefits of other 

reporting requirements, net capital 

requirements, books and records rules, 

and examinations might be very small, 

since the regulatory regime that applies 

to registered private fund advisers 

already contains similar provisions to 

the rules that apply to dealers. 

Costs of the Proposed Rules include 

registration and membership fees, costs 

of record-keeping and reporting, and 

costs associated with net capital 

requirements. Additionally, the 

Proposed Rules may influence patterns 

of market participation, which may in 

turn affect competition among liquidity 

providers, market efficiency, and capital 

formation. 

1. Benefits 

The Proposed Rules seek to mitigate 

the externalities, discussed in the 

baseline, that may arise when market 

participants who effectively provide 

liquidity experience financial stress, 

engage in manipulative or fraudulent 

behavior, or whose operations are not 

subject to regulatory oversight. To the 

extent that unregistered market 

participants engage in activities that 

satisfy the qualitative or quantitative 

standards of the Proposed Rules, 

requiring them to register as dealers 

would promote stability in U.S. 

securities markets and would help 

protect investors. Specifically, the 

Proposed Rules would bring liquidity 

providers that are not registered as 

dealers into compliance with dealer 

regulations related to financial risktaking, reporting, and examinations. As 

previously discussed, we believe that 

PTFs would be the most affected parties, 

though potentially some private funds 

may be affected. Registered private fund 

advisers may also be affected under 

limited circumstances. 

Regulations on Financial Risk-Taking: 

Registered dealers are subject to net 

capital requirements (Exchange Act 

Rule 15c3–1) and to various risk 

management rules that promote 

operational integrity.254 Unregistered 

PTFs and private funds do not have net 

capital requirements, and they may not 

have the same risk-management 

requirements. The Net Capital Rule 

requires dealers to maintain sufficient 

liquid resources to meet all liabilities at 

all times,255 thus limiting their 

probability of financial failure by 

constraining leverage and creating 

incentives against excessive risktaking,256 and also helping protect 

creditors. These provisions help reduce 

the externalities related to defaults and 

disorderly trading, which may arise due 

to firms’ financial stress. As discussed 

in Section III, the Proposed Rules would 

require registration of persons whose 

trading activity contributes significantly 

to market liquidity or to price discovery. 

Such persons have the ability to 

significantly impact the markets, so 

placing these regulatory safeguards 

around their risk-taking would benefit 

investors and support capital formation 

by promoting stable markets. These 

benefits would be largest for PTFs and 

private funds, who are currently under 

no regulations related to risk-taking, but 

they could also apply to registered 

private fund advisers.257

Regulations on Reporting: Registered 

dealers must file annual reports with the 

Commission that include audited 

financial statements.258 They also report 

their transactions of NMS stocks, OTC 

equities, and listed options directly to 

CAT,259 and registered dealers who 

have selected FINRA as their SRO report 

their transactions in fixed-income 

securities (other than municipal 

securities) to TRACE.260 Unregistered 

PTFs do not report any of this 

information to regulators. 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, each quarter), but they do not 

report transactions. 

Reporting requirements, particularly 

requirements to report transactions 

directly, enable regulators to conduct 

market research that informs their 

efforts to detect or respond to market 

events, to inform investors, to ensure 

that dealers’ activities are in compliance 

with regulation, and research has also 

shown that transaction reporting can 

improve market efficiency and 

liquidity.261 Transaction reporting in 

general enhances the ability of the 

Commission and SROs to more 

efficiently and in a more timely manner 

monitor trading, which should further 

enhance the ability of the Commission 

and SRO staff to effectively enforce SRO 

rules and the Federal securities laws, 

rules, and regulations.262 This enhanced 

ability of the Commission and SROs 

staff to enforce the Federal securities 

laws, rules, and regulations should help 

ensure the efficiency and stability of the 

markets, and promote investor 

confidence in the fairness of the 

securities markets, which may in turn 

promote capital formation.263 TRACE 

for fixed-income securities other than 

municipal securities and U.S. Treasury 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23089 

264See supra note 77. 

265See supra note 80. 

266See supra note 79. 

267Registered dealers would be subject to 

requirements, such as Exchange Act Rule 15c3–1 

and 17 CFR 240.17a–1, 240.17a–3, 240.17a–4, and 

240.17–a5 (Exchange Act Rules 17a–1, 17a–3, 17a– 

4, and 17–a5). 

268Exchange Act Release No. 76324 (Oct. 30, 

2015), 80 FR 71388, 71509 (Nov. 16, 2015) 

(‘‘Regulation Crowdfunding Adopting Release’’) 

estimates the costs of registering as a dealer, 

becoming a member of a national securities 

association, and complying with the associated 

regulation would be approximately $520,000 

initially and $230,000 annually thereafter. Most of 

these costs involve personnel hours and legal 

services (currently, the direct costs of FINRA 

registration range between $7,500 and $60,000). 

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 15.33 percent between 

October 2015 and September 2021, based on the 

Consumer Price Index for All Urban Consumers 

(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. We therefore estimate the costs to be 

approximately $600,000 initially and $265,000 

annually thereafter. We recognize that these costs 

may vary significantly across registrants, depending 

on facts and circumstances. 

269 2022 ATS Proposing Release at 15629. 

270 Id. 

271TRACE 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 

Continued 

securities are made publicly available to 

investors, so this transaction reporting 

to non-regulatory TRACE particularly 

informs investors. The absence of 

reporting requirements for 

consequential market participants thus 

creates negative externalities for 

investors. The Proposed Rules are 

designed to target persons whose 

activities can significantly impact 

markets or who otherwise trade large 

volumes of U.S. Treasuries Securities; 

requiring such persons to further inform 

regulators of their activities further 

promotes market stability, investor 

protection, and capital formation. To the 

extent that registered dealers were to 

select an SRO other than FINRA, the 

benefits related to fixed-income 

transaction reporting would not 

appear.264

Regulations on Deceptive Practices: 

Registered dealers are subject to the 

anti-manipulation and antifraud 

provisions of Sections 10(b) and 17(a) of 

the Exchange Act, but they are also 

subject to the specific anti-manipulative 

and other anti-fraud rules promulgated 

under Section 15(c) of the Exchange 

Act.265 Neither unregistered PTFs nor 

private funds are subject to Section 

15(c)(1) and related rules, but registered 

private fund advisers are subject to 

antifraud provisions under Section 206 

of the Advisers Act. The persons whom 

the Proposed Rules would require to 

register would be those with the ability 

to significantly impact markets, 

including by manipulation or fraud. 

Therefore, subjecting them (particularly 

the PTFs) to the anti-fraud rules that 

apply to registered dealers, would 

contribute to fair and orderly markets 

and to investor protection. 

Regulations related to Examinations: 

Registered 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.266 PTFs that 

are not registered as dealers are not 

subject to examinations or to books and 

records rules, but the Commission has 

examination authority with respect to 

private fund advisers, and registered 

private fund advisers are subject to 

recordkeeping requirements. 

Examinations help regulators detect 

manipulative or fraudulent activities, as 

well as verify more generally that 

persons are in compliance with all 

relevant 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 Proposed 

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. 

Therefore, since examinations help 

ensure compliance with other rules, this 

benefit of the Proposed Rules supports 

all the other benefits discussed above. 

Some entities who would satisfy the 

Proposed Rules’ qualitative or 

quantitative standards might 

nevertheless avoid the registration 

requirement by exiting a liquidityproviding strategy. If unregistered 

entities were to exit and bid-ask spreads 

were to meaningfully widen, other 

(registered) dealers might step in to 

replace the lost activity. This scenario 

would result in an effective transfer of 

dealer activity from unregistered market 

participants to registered dealers, and so 

would preserve the benefits (and costs) 

of the Proposed Rules. 

2. Costs Associated With Becoming a 

Registered Dealer 

The Proposed Rules would impose 

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 self-evaluation as to whether one is 

a dealer or not.267

The initial registration costs would 

include the costs associated with filing 

Form BD and Form ID, SRO 

membership application fees, and any 

related legal or consulting costs that 

may be needed to (e.g., ensure 

compliance with rules), including 

drafting policies and procedures as may 

be required. The ongoing costs would 

include the costs associated with 

amending Form BD, ongoing fees 

associated with SRO membership, and 

any legal work relating to SRO 

membership. 

The Commission estimates 

compliance costs of approximately 

$600,000 initially and $265,000 

annually thereafter to register as a 

broker-dealer with the Commission, 

become a member of an SRO, and 

comply with the associated dealer 

regulations.268 The costs include 

personnel hours, outside legal services, 

building and maintaining books and 

records systems, obtaining or 

maintaining employee licensure, and 

direct costs associated with calculating 

net capital to comply with the Net 

Capital Rule. The compliance costs 

associated with net capital, reporting, 

and recordkeeping requirements would 

depend on the business structure of a 

registered dealer (i.e., the capital 

structure of a dealer and the scope of a 

dealer’s activities).269 For example, 

these costs may be lower for private 

funds, since their advisers are already 

subject to requirements concerning 

books and records, examinations, and 

internal control systems. In general, the 

costs would also vary significantly 

depending on the types of securities a 

broker-dealer holds, the level of net 

capital a broker-dealer maintains, and 

whether a broker-dealer carries 

customer accounts, carries for other 

broker-dealers, is a registered 

investment adviser, is affiliated with an 

investment adviser, or transacts in a 

principal capacity.270

For dealers that select an SRO other 

than FINRA (i.e., an exchange), we 

believe that the initial and ongoing costs 

would be less than $600,000 initially 

and less than $265,000 annually 

thereafter. Dealers that select FINRA as 

their SRO would incur the costs of 

reporting their fixed-income 

transactions (other than municipal 

securities) to TRACE.271 Dealers that 


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23090 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

(Trade Reporting and Compliance Engine), 

available at https://www.finra.org/rules-guidance/ 

rulebooks/finra-rules/7730. 

272See 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’’). See also See 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’’). 

273See CAT Notice, 81 FR 30712–30726 and CAT 

Approval Order, 81 FR 84857–84862. 

274See CAT Notice, 81 FR 30725–30726 and CAT 

Approval Order, 81 FR 84861–84862. The 

Commission also estimated that small firms that 

previously reported to OATS would incur lower 

one-time implementation costs related to CAT 

reporting—$424,000. However, we believe that this 

lower estimate for related implementation costs is 

not applicable to firms that would be covered by the 

Proposed Rules, because firms that would be 

required to register as dealers and start reporting to 

CAT as a result of the Proposed Rules are unlikely 

to have prior experience of reporting to OATS. 

275See id. 

276The estimates are adjusted for an inflation rate 

of 13.66 percent based on the Bureau of Labor 

Statistics data on CPI–U between November 2016 

and September 2021. See supra note 268. 

277 It is also possible that a firm would satisfy the 

quantitative or the qualitative standards of the 

Proposed Rules by transacting in asset other than 

those that are reported to CAT. Such a firm would 

still be required to register as a dealer and report 

any transactions it may have in NMS stocks, OTC 

equities, and listed options. However, such a firm 

could have a relatively low number of CATreportable order events and hence relatively low 

costs of CAT reporting. 

278 In the CAT Approval Order, the Commission 

discussed its belief that the requirement of the CAT 

NMS Plan to report customer information 

represents a significant source of CAT reporting 

costs. See CAT Approval Order, 81 FR 84868– 

84869. Furthermore, in the CAT Notice, the 

Commission estimated CAT reporting costs for 14 

electronic liquidity providers (‘‘ELPs’’), which are 

large registered broker-dealers that do not carry 

customer accounts and are not FINRA members. 

See CAT Notice, 81 FR 30724–30726. The 

Commission estimated that for these ELPs the onetime implementation costs related to CAT reporting 

would be $3,876,000 and the annual ongoing costs 

of CAT reporting would be $3,226,000. When 

adjusted to inflation between November 2016 and 

September 2021 (see supra note 265), these 

estimates become approximately $4,405,000 for the 

one-time implementation costs and approximately 

$3,667,000 for the annual ongoing costs of CAT 

reporting. Because the ELPs do not carry customer 

accounts and operate as liquidity providers in the 

markets for equities and options, their estimated 

costs of CAT reporting may be applicable to some 

of the larger firms that would be required to report 

to CAT as a result of the Proposed Rules. 

279See Schedule of Registration and Exam Fees, 

FINRA, available at https://www.finra.org/ 

registration-exams-ce/classic-crd/feeschedule#examfees, for the schedule of FINRA 

registration fees. 

280FINRA imposes a Gross Income Assessment as 

follows: (1) $1,200 on a Member Firm’s annual 

gross revenue up to $1 million; (2) a charge of 

0.1215 percent on a Member Firm’s annual gross 

revenue between $1 million and $25 million; (3) a 

charge of 0.2599 percent on a Member Firm’s 

annual gross revenue between $25 million and $50 

million; (4) a charge of 0.0518 percent on a Member 

Firm’s annual gross revenue between $50 million 

and $100 million; (5) a charge of 0.0365 percent on 

a Member Firm’s annual gross revenue between 

$100 million and $5 billion; (6) a charge of 0.0397 

percent on a Member Firm’s annual gross revenue 

between $5 and $25 billion; and (7) a charge of 

0.0855 percent on a Member Firm’s annual gross 

revenue greater than $25 billion. When a firm’s 

annual gross revenue exceeds $25 million, the 

maximum of the current year’s revenue and average 

of the last three years’ revenue is used as the basis 

for the income assessment. See also Regulatory 

Notice 09–68: SEC Approves Changes to the 

Personnel Assessment and Gross Income 

Assessment Fees, FINRA (effective Jan. 1, 2010), 

available at https://www.finra.org/rules-guidance/ 

notices/09-68. 

trade NMS stocks, OTC equities, or 

listed options would incur the costs of 

reporting their transactions in these 

securities to CAT.272 As discussed in 

the CAT Notice and in the CAT 

Approval Order, the costs of CAT 

reporting may vary significantly across 

broker-dealer firms depending on the 

size and scope of their activities (e.g., 

the number of CAT-reportable order 

events that the firm has and whether the 

firm needs to report customer 

information).273 In these releases, the 

Commission estimated that the one-time 

implementation costs related to CAT 

reporting could range from $849,000 for 

small firms that did not previously 

report to the Order Audit Trail System 

(OATS) to $7,231,000 for many large 

firms.274 The Commission also 

estimated that the ongoing annual costs 

of CAT reporting could range from 

$443,000 for small firms to $4,756,000 

for many large firms.275 We adopt these 

estimates and adjust them for inflation 

between November 2016 and September 

2021.276 This adjustment yields a perfirm cost estimate of approximately 

$965,000 to $8,218,000 for one-time 

implementation plus ongoing costs of 

approximately $503,000 to $5,405,000 

annually. 

The wide range of these estimates 

indicates significant uncertainty about 

the costs related to CAT reporting that 

individual firms that trade equities or 

options may have to incur if they are 

required to register as dealers as a result 

of the Proposed Rules. We make two 

related observations. First, firms that 

would start reporting to CAT as a result 

of the Proposed Rules are likely to have 

a relatively large number of CATreportable order events, since the 

Proposed Rules are targeting significant 

liquidity-providers. Therefore, for these 

firms, the costs of CAT reporting are 

likely to be higher than the lower 

bounds of $965,000 for implementation 

costs and $503,000 for ongoing annual 

costs.277 Second, firms that would be 

required to report to CAT as a result of 

the Proposed Rules do not carry 

customer accounts and would therefore 

not need to report any customer 

information to CAT. Thus, for these 

firms, the costs of CAT reporting are 

likely to be lower than the upper 

bounds of $8,218,000 for 

implementation costs and $5,405,000 

for ongoing annual costs.278

The Commission recognizes that the 

costs associated with obtaining and 

maintaining SRO membership and 

reporting transactions may vary 

significantly depending on entity 

characteristics, activity characteristics, 

and the degree of the firm’s reliance on 

outside legal or consulting advice. For 

example, the costs of FINRA 

membership 279 depend on, among other 

things, the number of associated persons 

being registered, the scope of brokerage 

activities, revenue,280 the number of 

registered persons, the number of 

branch offices, and trading volume. 

TRACE and CAT reporting costs also 

vary depending on security type, order 

size, and trading venue, among other 

factors. Entities with a smaller number 

of registered persons, fewer brokerage 

activities, smaller trading volume, and 

smaller revenue would face lower direct 

costs. 

In addition to the monitoring costs 

incurred to comply with the Net Capital 

Rule, described above, newly registered 

dealers who previously held less capital 

than what is required would have to 

increase their capitalization either by 

raising equity or by scaling back trading 

activities. However, since higher levels 

of net capital reduce a firm’s probability 

of default, these direct costs of net 

capital requirements may be partially 

offset by reductions in the firm’s cost of 

capital. 

Market participants may also incur 

costs related to self-evaluation regarding 

whether the qualitative standards 

describe their activities. Since the 

quantitative standard is based on 

monthly Treasury-trading volume, 

which is easy to define and measure, we 

do not believe any market participants 

would incur additional costs to assess 

whether this standard would require 

them to register. 

Some currently unregistered market 

participants may be affiliated with other 

firms that are currently registered 

dealers, and in such cases, the 

unregistered firm may seek to avoid the 

direct costs described above by shifting 

trading volume to its affiliated dealer. 

Other entities that are captured by the 

Proposed Rules may restructure their 

legal organization to isolate the activity 

that triggered the rules into a separate 

entity. Such activity shifting and legal 

reorganizations may incur costs, such as 

the costs of changing computer systems 

or paying attorney fees. To the extent 

that the securities-dealing activity ends 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23091 

281See 2010 Equity Market Structure Concept 

Release. 

282See Letter from Berkowitz, Trager & Trager, 

LLC (Apr. 21, 2010). 

283See supra note 241 for further discussion of 

changes in trading activity of PTFs during the U.S. 

Treasury market volatility of March 2020. 

284Although the analysis discussed in the 

baseline showed that registered dealers have much 

greater market share in the U.S. Treasury market 

(see supra Table 1 and note 217), PTFs are the 

largest participants in the automated interdealer 

Treasury market (see supra note 2). 

285As previously described, the qualitative 

standards of the Proposed Rules apply to persons 

whose activities have ‘‘the effect of providing 

liquidity.’’ See Section III.B. 

286See also Capital, Margin, and Segregation 

Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants and Capital 

Requirements for Broker-Dealers, Exchange Act 

Release No. 68071 (Oct. 18, 2012), 77 FR 70213 

(Nov. 23 2012). 

287See supra note 216. 

288See Letter from Alston Trading, LLC, RGM 

Advisors, LLC, Hudson River Trading, LLC, and 

Quantlab Financial, LLC (Apr. 23, 2010). 

289See supra note 280. 

290See supra note 271. 

up being conducted by an entity that 

registers with the Commission, all the 

benefits of Proposed Rules still apply. 

In response to a related initiative in 

2010,281 at least one PTF expressed its 

opinion to the Commission that the 

costs of PTF registration are not justified 

because equity markets worked well 

during the autumn of 2008 (then the 

most-recent financial crisis) and because 

the PTF believed that PTFs in general 

help market integrity by providing 

liquidity during difficult situations.282

However, the 2021 IAWG Joint Staff 

Report showed that, during the U.S. 

Treasury market volatility of March 

2021, PTFs’ share of market 

intermediation fell considerably more 

than did dealers’ share.283 These results 

suggest that PTFs may not, or may no 

longer, promote market stability in all 

securities markets in ways that 

registered dealers do not. Accordingly, 

we believe that the benefits of 

registering PTFs who are also significant 

market participants justify the costs. 

PTFs, since they do not have clients 

or customers, would bear the costs of 

registration themselves. Private funds, 

however, may either bear the costs 

themselves or the costs may be borne by 

their investment adviser. If the funds 

bear the costs, these costs would be 

passed on to the funds’ investors. 

3. Other Effects, Including Impact on 

Efficiency, Competition, and Capital 

Formation 

The Proposed Rules may produce 

several indirect benefits or costs, based 

on the extent to which they encourage 

or discourage participation in securities 

markets. The Proposed Rules could 

either increase or decrease market 

participation due to three possible 

effects. First, fairer and more stable 

markets could encourage greater market 

participation. Second, registration and 

compliance costs could lead some 

currently unregistered liquidity 

providers to decrease their activity or 

even exit the market. If they do so, other 

firms may or may not increase their own 

activity to compensate. Third, largevolume and small-volume market 

participants may choose to differentially 

increase or decrease their market 

participation, so that the Proposed Rules 

may affect market concentration. 

Changes in patterns of market 

participation could affect market 

efficiency, market competition, and 

capital formation. 

a. Effects on Efficiency 

The Proposed Rules could affect 

market efficiency—i.e., price discovery, 

or the speed with which new 

information or developments impact the 

market price of a security—depending 

on whether the net effect on market 

participation is positive or negative. 

Other things equal, markets with greater 

participation are more liquid. The net 

effect on market efficiency is uncertain. 

On the one hand, improved investor 

confidence might lead to greater market 

participation that improves market 

efficiency for two reasons. First, new 

market participants may have additional 

information, in which case the orders 

they submit based on this information 

would aid price discovery. Second, 

higher trading volumes would mean 

that prices would react faster to changes 

in securities’ fundamental values. 

On the other hand, if important and 

informed market participants, such as 

PTFs or hedge funds, permanently 

reduce their market activity or their 

pursuit of certain investment strategies, 

market efficiency may decline in the 

markets for some securities. 

b. Effects on Competition 

The net effect that the Proposed Rules 

may have on competition is uncertain. 

On the one hand, the Proposed Rules 

would promote competition by 

standardizing the regulatory treatment 

of—i.e., leveling the playing field for— 

all firms engaged in the activities that 

meet the proposed standards described 

above.284 For instance, the Proposed 

Rules would require all firms that 

conduct these activities to incur the 

costs of complying with the same rules 

regarding registration, net capital 

requirements, books and records, and 

other requirements; whereas currently, 

only those who are registered bear these 

costs. 

On the other hand, other effects on 

competition among liquidity 

providers 285 depend on the extent to 

which the rules encourage or discourage 

market participation by affected parties. 

The indirect benefits to all market 

participants—particularly the additional 

risk-mitigating provisions and the 

Commission’s increased ability to detect 

manipulation or fraud—may encourage 

some market participants to increase 

their liquidity-providing activities. 

However, the direct costs that the 

Proposed Rules would impose on 

currently unregistered firms who 

currently engage in covered activities 

may cause them to scale back these 

activities.286 For example, if a hedge 

fund strategy were to fall under the 

Proposed Rules, the fund engaged in 

that activity might exit the strategy 

altogether in order to avoid registration. 

Some research on high-frequency 

trading has shown that firms engaged in 

this activity improve competition across 

trading venues, by arbitraging crossvenue differences in security prices,287

which suggests that their withdrawal 

may have a negative impact on 

competition. Furthermore, in response 

to a similar initiative in 2010, 

commenters stated that registering PTFs 

as dealers would negatively impact 

competition among liquidity providers 

by creating barriers to entry.288

Any net effect on competition would 

likely be small because, as discussed in 

the baseline for competition above 

(including Table 5 for the U.S. Treasury 

market), we understand that liquidity 

provision in securities markets is 

reasonably competitive even among 

currently registered dealers. The precise 

magnitude of the effect in competition 

is also uncertain, and would depend on 

whether the benefits would accrue more 

to currently registered dealers with large 

or with small volumes and on whether 

the costs are more burdensome to 

currently unregistered firms with large 

or with small volumes. We believe the 

benefits would apply to all market 

participants alike. The quantitative 

factor in proposed Rule 3a44–2 would 

apply only to firms with Treasurytrading volume above the threshold. 

However, the qualitative factors may 

also apply to small-volume firms, and 

some costs may be greater for these 

firms on two points. First, FINRA’s 

Gross Income Assessment 289 generally 

declines as a percentage of revenue for 

larger firms. Second, fees associated 

with reporting to TRACE 290 are smaller 

per dollar par value for larger trades. 


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23092 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

291See supra notes 9 and 29. 

292See Larry Harris, ‘‘Trading and Exchanges: 

Market Microstructure for Practitioners,’’ Oxford 

University Press, 2003. 

293See supra note 217 and accompanying text. 

294The analysis also back-tested the thresholds to 

July 2019 and found that the results based on July 

2021 data are qualitatively representative. 

295We assume that all entities in identified 

TRACE are proportionally represented in the 

anonymous TRACE data. If firms engaging in dealer 

activities are overrepresented in identified TRACE, 

then the Proposed Rules’ quantitative threshold of 

$25 billion would correspond to a threshold in 

Figure 2 of higher than $10 billion. 

c. Effects on Capital Formation 

The Proposed Rules’ effect on capital 

formation may depend on any net 

change in market participation 

(aggregate trading volume) that results 

from the rules, and on any decrease or 

increase in competition among liquidity 

providers. Other things equal, higher 

volumes and more competition improve 

liquidity. In turn, greater liquidity 

increases asset prices, reduces 

borrowing costs, and promotes capital 

formation. 

The likely effect on aggregate market 

participation is uncertain. On the one 

hand, we believe the increased 

regulatory burdens would fall on 

relatively few firms while the benefits of 

fairer and more stable markets would 

extend broadly to all market 

participants—since the baseline risk of 

an institution’s failure would also 

propagate broadly by reducing market 

liquidity, increasing price volatility, or 

imposing losses on creditors. In the U.S. 

Treasury market, for example, we 

estimate that no more than 46 firms 

have dollar trading volumes that surpass 

the $25 billion threshold in the 

quantitative standard of proposed Rule 

3a44–2, as discussed in the baseline. 

The actual number of affected firms may 

be lower, since some of these 46 may be 

exempt financial institutions,291 and 

still others may be affiliated with other 

firms that are dealers, in which case the 

corporate parent could potentially avoid 

the costs of the rule by shifting certain 

activities to the registered dealer 

affiliate. 

On the other hand, the Proposed 

Rules may cause some market 

participants to scale back or exit certain 

liquidity-providing strategies in order to 

avoid registration; or, even if they do 

not, compliance costs including net 

capital requirements might lead them to 

scale back some activities. If such 

reductions in liquidity provision occur, 

we cannot be certain that other market 

participants would arise to replace the 

lost liquidity. Even if other participants 

do eventually arise, lost liquidity can 

lead to mispricing in the short run. 

Changes in aggregate trading volume 

may also affect market liquidity in other 

ways. If the Proposed Rules increase 

investors’ confidence in the stability 

and fairness of markets, they may 

increase their participation. Increased 

trading volume theoretically enhances 

market liquidity because of the 

following two ways in which high 

volume benefits dealers.292 First, dealers 

who trade a lot can spread their fixed 

costs over more trades. Second, dealers’ 

risk is smaller when high volume makes 

it easier to adjust or lay off net 

positions. These benefits make liquidity 

provision more profitable, which results 

in narrower bid-ask spreads if dealers 

compete with one another for orders. 

Effects on market competition can 

also influence market liquidity. If the 

Proposed Rules enhance competition, 

bid-ask spreads may decrease; if the 

Proposed Rules weaken competition, 

bid-ask spreads may increase. As 

discussed above, the net effect that the 

Proposed Rules would have on 

competition is uncertain. 

D. Reasonable Alternatives 

The Commission considered several 

alternatives to the Proposed Rules: (1) 

Raise or lower the quantitative factor; 

(2) replace qualitative standards with 

quantitative standards; (3) remove the 

exclusion for registered investment 

companies; (4) remove the exclusion 

from aggregation for registered 

investment adviser client accounts 

where the advisers only have 

investment discretion; (5) exclude 

registered investment advisers; (6) 

exclude private funds; and (7) require 

private funds and private fund advisers 

to report transactions. 

1. Alternative Thresholds for the 

Quantitative Factor 

The quantitative factor would require 

registration of all entities with monthly 

trading volume above $25 billion during 

four out of the past six calendar months. 

A threshold lower than $25 billion 

would increase the costs of the 

Proposed Rules (by requiring many 

more entities to register as dealers), but 

would only somewhat increase the 

benefits (since additional registrants 

would not represent very much 

aggregate trading volume). A threshold 

higher than $25 billion would decrease 

both the benefits and the costs of the 

Proposed Rules (by requiring 

registration of fewer firms but failing to 

capture a significant portion of aggregate 

trading volume). 

Figure 2 shows the wide range of 

alternative thresholds that the 

Commission considered in an 

analysis 293 of U.S. Treasury-market 

transactions reported to TRACE during 

July 2021.294 As described in the 

baseline, since the subset of TRACE data 

where we can verify the identity of the 

traders (‘‘identified TRACE’’) is 

approximately 42 percent of all nonFINRA members’ transactions in TRACE 

(many non-FINRA members only appear 

anonymously, also as described above), 

we believe that the thresholds in Figure 

2 (based on identified TRACE) are 

approximately 42 percent of the 

equivalent threshold in the overall U.S. 

Treasury market. Therefore, the 

threshold of $10 billion in Figure 2 

corresponds with the Proposed Rules’ 

quantitative threshold of $25 billion.295

Within identified TRACE, this figure 

shows the percentage of firms (dashed 

line) and the percentage of volume that 

would be captured by various 

quantitative thresholds. A threshold of 

$10 billion would capture 26 percent of 

the firms and 96 percent of the volume 

in the identified TRACE data. Larger 

thresholds include many fewer firms 

but also considerably less trading 

volume—e.g., moving from a threshold 

of $10 billion to $50 billion would 

capture 32 fewer firms (18 percent of the 

174 firms in the analysis) but also 15 

percent less of the aggregate non-FINRA 

member trading volume in TRACE. 

Smaller thresholds include more firms 

but not very much additional volume— 

moving from a threshold of $10 billion 

to $5 billion would capture 8 more firms 

(5 percent of the 174 firms in the 

analysis) but only 1 percent more of the 

aggregate non-FINRA member trading 

volume in TRACE. The threshold that 

maximizes the Proposed Rule’s benefits 

(by including firms responsible for a 

large percentage of trading volume) 

while minimizing costs (by limiting the 

number of firms that will be required to 

register) appears to be somewhere 

around $10 billion. 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23093 

2. Provide Only Quantitative Factors 

The Proposed Rules list several 

factors that will guide the Commission 

in determining whether securities 

market participants are dealers. With 

the exception of paragraph (a)(4) in 

proposed Rule 3a44–2—dollar volume 

of cash Treasury trading—all factors are 

qualitative. Alternatively, the 

Commission could replace the 

qualitative factors with quantitative 

‘‘bright-line’’ thresholds, above or below 

which firms would be required to 

register as dealers. Particularly, the first 

qualitative factor (‘‘routinely mak[es] 

roughly comparable purchases and sales 

of the same or substantially similar 

securities in a day’’) could express a 

range of buy-sell balance, and firms 

could be required to register if their 

securities-trading activity features a 

buy-sell balance within that range. 

The alternative rule could define buysell balance as the absolute value of 

(buy¥sell)/(buy + sell), so that the 

measure would always fall between 0 

(as when buy = sell) and 1 (as when a 

firm only buys or only sells). The buysell balance could then be calculated 

each day for each individual security 

(CUSIP), for each market participant. 

Any market participant with a buy-sell 

balance for a security that is below a 

quantitative threshold for a certain 

number of days per month could be 

required to register as a government 

securities dealer or as a dealer. For 

example, a firm whose buy-sell balance 

for CUSIP 78462F103 (SPDR S&P 500 

ETF) that is below 0.2 for 13 days in a 

month could be required to register as 

a dealer, regardless of its buy-sell 

balance in other securities. The 

Proposed Rules could also have a de 

minimis cutoff, so that no market 

participant that trades less than, say, $1 

million per month could be required to 

register. The de minimis could help 

ensure that small, individual investors 

would not be required to register. 

Table 6 below shows the number of 

market participants who would be 

required to register under a few 

iterations of this alternative rule, based 

on the buy-sell balance of the highestvolume securities in the U.S. Treasury 

market (10-yr on-the-run note) and the 

equity market (SPDR S&P 00 ETF). The 

first row of data show that, if the rule 

were based on having a buy-sell balance 

of less than 0.2 (a 60–40 split or more 

even) for at least 14 days in a month, 

with a daily de minimis threshold of 

$10,000, then the firms behind 61 CAT 

FDID institutional customer accounts 

would have to register as dealers based 

on their trading of SPY, and 20 firms 

(not necessarily the same ones) would 

have to register as government securities 

dealers based on their trading of the 10- 

yr on-the-run Treasury note. It is 

possible that additional firms would 

meet the proposed dealer definition 

based on their trading of other 

securities, but the securities in Table 6 

are by far the largest in their respective 

classes (equities and Treasuries). 

TABLE 6—NUMBER OF MARKET PARTICIPANTS SATISFYING QUANTITATIVE BUY-SELL BALANCE

De minimis volume 

(applied daily) (buy¥sell)/(buy + sell) SPY 10-yr note (on-the-run) 

$10,000 ................................................................................................ <0.2 61 20 

<0.1 44 15 

$100,000 .............................................................................................. <0.2 57 20 


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Figure 2. Percent ofNon-FINRA Member Volume and Non-FINRA Member Firms 

Captured by Various Volume Thresholds, July 2021 

For several potential monthly volume thresholds, this figure shows what percentage of 

identified non-FINRA member TRACE volume and what percentage of identified non-FINRA 

member firms would have crossed the threshold and so would have been required to register as 

dealers. "Identified" refers to the subset of TRACE data where regulators can observe the 

identities of non-FINRA member counterparties. This figure excludes all trading volumes and 

any firms that only appear in TRACE anonymously. 

100 

75 

50 

25 

5 10 25 50 100 150 

Threshold ($ bns) 
23094 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

296See supra notes 104–114 and accompanying 

text. 

297See text in proposed Rules 3a5–4(b)(2)(ii)(B) 

and 3a44–2(b)(2)(ii)(B). 

TABLE 6—NUMBER OF MARKET PARTICIPANTS SATISFYING QUANTITATIVE BUY-SELL BALANCE—Continued 

De minimis volume 

(applied daily) (buy¥sell)/(buy + sell) SPY 10-yr note (on-the-run) 

<0.1 41 15 

This table shows the number of firms that would be required to register based on the buy-sell balance of their trades of SPY (SPDR S&P 500 

ETF, the highest-volume equity security) or the 10-yr on-the-run Treasury note (the highest-volume Treasury security). Specifically, the rule 

would require registration of firms with a buy-sell balance below a certain threshold for either of these securities, for 14 days in a month. The 

firms that satisfy the buy-sell balance factor based on SPY (column 1) are not necessarily the same as those that satisfy the factor based on the 

10-yr note (column 2). Equity data is for October 2021, and market participants are identified by CAT FDID institutional customer accounts. CAT 

FDID institutional customer account is not synonymous with firm; a firm may have multiple CAT FDIDs, and multiple firms may also share a single CAT FDID. Furthermore, some of the CAT FDID customer accounts may represent investment companies registered under the Investment 

Company Act, which are not covered by the Proposed Rules. Treasury data is for July 2021. 

We considered including ‘‘similar 

securities’’ in rule text and interpreting 

‘‘similar securities’’ as including 

different CUSIPs that share similar 

characteristics—e.g., same issuer or 

same maturity. However, such an 

approach may be too broad, and may 

include a wide variety of arbitrage 

strategies or relative value strategies. For 

example, firms may trade securities 

with the same issuer and similar 

maturity when they arbitrage between 

on-the-run Treasuries against off-the-run 

Treasuries, or they may trade securities 

of similar issuers and similar 

characteristics when they take a long 

position in one company’s equity offset 

by a short position in a close 

competitor. Since we do not view such 

strategies as descriptive of being a 

dealer, this alternative to the Proposed 

Rules defines the buy-sell balance 

within CUSIP only. 

Using quantitative factors instead of 

qualitative factors could provide firms 

with additional certainty as to whether 

they should register as dealers. 

However, we believe that a rule that 

relies solely on quantitative factors 

would be less capable of distinguishing 

firms that are liquidity providers from 

those that are not because at present we 

do not have a reliable quantitative 

framework for defining liquidity 

provision. Therefore, this alternative 

would likely require registration of 

some firms that are not liquidity 

providers or market-makers, thus 

burdening these firms with all of the 

registration costs described above 

without doing much to enhance market 

stability or improve regulators’ insight 

into market activity (since such firms do 

not play central market roles); and the 

alternative may also miss some firms 

that do provide liquidity, thus allowing 

them to continue operating without 

registering, as in the baseline. 

3. Remove Exclusion for Registered 

Investment Companies 

The Proposed Rules explicitly 

exclude registered investment 

companies. An alternative would be to 

remove this exclusion, as it is possible 

that these entities might satisfy the 

criteria and, collectively or individually, 

might be important liquidity providers 

in securities markets. Requiring them to 

register as dealers might further 

standardize the books and records 

practices of market liquidity providers 

and, to the extent that registered 

investment companies were to choose 

FINRA as their SRO, their registration 

might contribute toward the 

completeness of fixed-income 

transaction reporting in TRACE. For 

non-municipal securities, additional 

TRACE reporting would enhance market 

stability by supporting regulators’ 

ability to research, understand, and 

respond to market events; for nongovernment and non-municipal 

securities, additional TRACE reporting 

would also better inform investors. If, 

instead of registering as dealer, 

registered investment companies were 

to cease the activities that satisfy the 

Proposed Rules’ standards, these 

benefits would not materialize. 

This alternative would also lead to 

significant costs and uncertainty. 

Registered investment companies have 

different business models and serve 

different market purposes than PTFs or 

hedge funds, and the regulatory regime 

that has evolved around liquidity 

providers might be inadequate or 

inappropriate for registered investment 

companies. As one example, it is 

unclear how registered investment 

companies would comply with net 

capital requirements, or how they 

would define net capital. Moreover, the 

benefits of the proposals as applied to 

registered investment companies would 

be significantly lower than for PTFs 

because registered investment 

companies are subject to an extensive 

regulatory framework based on the 

Investment Company Act and associated 

rules.296

We believe that affected parties will 

not have sufficient incentives to evade 

the proposal by registering as a 

registered investment company, because 

the requirements to be a registered 

investment company are sufficiently 

similar to the proposal. For example, 

registered investment companies must 

be securities issuers, they are 

significantly constrained in their ability 

to borrow, and they are subject to 

limitations on their derivatives 

positions. We understand that leverage 

and derivatives are integral parts of the 

types of trading strategies that would 

satisfy the Proposed Rules’ standards. 

Moreover, registered investment 

companies are required to disclose 

details regarding their portfolio 

holdings. We acknowledge that the costs 

and benefits of applying the Proposed 

Rules to registered investment 

companies may differ from applying 

them to other market participants, and 

we request comment on the costs and 

benefits of excluding registered 

investment companies. 

4. Remove the Exclusion From 

Aggregation for Registered Investment 

Adviser Client Accounts Where the 

Advisers Only Have Investment 

Discretion 

A registered investment adviser may 

have client accounts (including private 

funds and separately managed accounts) 

that are not registered as dealers but 

whose activity individually or 

collectively satisfies the Proposed Rules’ 

activity standards. The Proposed Rules 

would not attribute the activities of 

those accounts to the registered 

investment adviser if the adviser’s 

control over the accounts simply 

involves investment discretion. The 

Proposed Rules would require the 

registered investment adviser to 

aggregate client accounts if it exercises 

certain control rights over the accounts 

(voting rights, capital contributions, or 

rights to amounts upon dissolution).297

Alternatively, the rule could require 

registered investment advisers to 


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Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 23095 

298See text in proposed Rules 3a5–4(b)(2)(ii)(B) 

and 3a44–2(b)(2)(ii)(B). 

aggregate client accounts over which the 

adviser only has investment discretion, 

so that all advisers would need to 

aggregate all of their (non-dealer) 

discretionary accounts in order to 

determine whether their activities fall 

under the Proposed Rules. 

This alternative would strengthen the 

benefits described above by applying 

more broadly the leverage constraints 

and transaction reporting requirements 

of the dealer regulations. If advisers or 

their funds were to avoid registration by 

reducing or ceasing certain trading 

activities, the marginal benefits of this 

alternative could still materialize if 

registered dealers then increased their 

own activities to compensate. This 

alternative would further promote 

market stability by ensuring that 

liquidity-providing activities are 

conducted by entities that maintain 

minimum levels of net capital. The 

alternative would result in a greater 

number of liquidity-providing 

transactions being directly reported to 

TRACE (to the extent that new dealer 

registrants choose FINRA as their SRO) 

or to CAT, which would enhance 

market stability by supporting 

regulators’ ability to research, 

understand, and respond to market 

events. For non-government and nonmunicipal fixed-income securities, 

additional TRACE reporting would also 

better inform investors since FINRA 

disseminates those data publicly. The 

benefits of TRACE reporting would not 

appear for new dealer registrants 

choosing another SRO, such as a stock 

exchange. 

However, this alternative would also 

carry disadvantages, including greater 

regulatory costs and possible negative 

effects on market liquidity, efficiency, 

and competition. Regulatory costs, 

including those associated with 

registration, reporting, and maintaining 

net capital, would increase for any new 

dealer registrants, but self-assessment 

costs would also increase for advisers 

that must continually determine their 

obligations under the Proposed Rules. If 

advisers or their accounts were to avoid 

registration by reducing or ceasing 

certain trading activities, and if 

registered dealers did not then increase 

their own activities to compensate, then 

market efficiency and liquidity may 

decline. Also, aggregating all 

discretionary accounts for the purposes 

of determining an adviser’s obligations 

under the Proposed Rules may reduce 

efficiency by creating incentives against 

economies of scale associated with large 

advisers. Finally, competition among 

liquidity providers may decline, but we 

believe that liquidity provision in U.S. 

security markets would remain 

reasonably competitive. 

Relative to the Proposed Rules, this 

alternative would primarily apply 

dealer regulations to smaller private 

funds or separately managed accounts 

(via their advisers), since larger funds 

and their advisers are more likely to be 

covered under the Proposed Rules. 

These benefits of new leverage 

constraints and additional transaction 

reporting would be small for such 

funds, while the funds would still bear 

all the registration and compliance costs 

described above. Therefore, we believe 

the additional benefits of this alternative 

would not justify the additional costs. 

5. Exclude Registered Investment 

Advisers 

The Proposed Rules do not aggregate 

registered investment advisers’ client 

accounts (including private funds or 

separately managed accounts) and 

attribute their activity to the adviser, as 

long as the adviser’s control over the 

accounts is limited to investment 

discretion. Accounts over which the 

adviser’s control rights include voting 

rights, capital contributions, or the 

rights to amounts upon dissolution 

would be aggregated and attributed to 

the adviser in determining whether the 

Proposed Rules would require the 

adviser to register as a dealer.298

Registered investment advisers can also 

trigger application of the Proposed 

Rules due to their own proprietary 

trading. Alternatively, the Commission 

could propose an exclusion for all 

registered investment advisers. 

The additional exclusion would 

reduce the benefits described above, 

since it would limit the Proposed Rules’ 

ability to raise the share of liquidity 

provision conducted by firms that are 

subject to the dealer rule. The Proposed 

Rule would do so by: (i) Inducing 

additional liquidity providers to register 

as dealers; or (ii) inducing liquidity 

providers who do not wish to register as 

dealers to cease their liquidityproviding strategies. If registered 

investment advisers categorically were 

excluded, it is likely that fewer of them 

would register and that fewer of them 

would register client accounts in order 

to avoid aggregating those accounts’ 

activities. Although registered advisers 

would still be subject to the existing 

regulations described above, including 

conduct rules, books and records 

requirements, reporting requirements, 

and examinations, their exclusion 

would undermine the Proposed Rules’ 

benefits related to net capital 

requirements and to transaction 

reporting. 

This alternative would also reduce the 

costs, since fewer entities would be 

subject to the dealer regime and fewer 

entities would be induced to exit certain 

trading strategies in order to avoid the 

dealer regime. The potential negative 

effects on market liquidity, efficiency, 

and competition would therefore be 

smaller under this alternative. 

However, a blanket exclusion may 

exclude, now or in the future, a large 

adviser whose client accounts, if 

aggregated, would meet the standards of 

the Proposed Rules and provide 

significant liquidity in the securities 

markets. Also, we are concerned that 

this alternative rule might lead a PTF to 

seek to register as an investment adviser 

rather than as a dealer, in order to 

escape the requirements to report 

transactions and maintain net capital. 

The regulations that apply to registered 

investment companies place greater 

restrictions on leverage and derivatives 

positions than do the regulations that 

apply to registered investment advisers, 

so it would be unlikely that PTFs would 

seek to register as investment 

companies. Due to the way in which 

this alternative compromises the 

Proposed Rules’ benefits related to net 

capital requirements and transaction 

reporting, and due also to the possibility 

for regulatory arbitrage, we believe the 

benefits of this alternative do not justify 

the costs. 

6. Exclude Private Funds 

The Proposed Rules do not exclude 

private funds, since we believe some 

private funds—particularly some hedge 

funds—engage in activities that have the 

effect of providing liquidity in securities 

market. The Commission could 

explicitly exclude private funds in order 

to avoid deterring certain fund strategies 

that may not be indicative of securities 

dealing. This exclusion would 

potentially reduce some of the benefits 

that would accrue if the Proposed Rules 

were to capture liquidity-providing 

activities—either because funds who 

satisfy the qualitative or quantitative 

standards register, or else because funds 

who satisfy the standards exit certain 

strategies to avoid registration and other 

(registered) dealers then arise to replace 

the lost activity. Excluding private 

funds would also reduce the costs of 

lost liquidity and reduced market 

efficiency that could materialize if 

affected private funds exit certain 

strategies without being replaced. 

However, the Commission believes 

that some private funds effectively 

provide liquidity in securities markets, 

and the Proposed Rules’ intent is to 


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23096 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

apply dealer regulation to these 

activities. 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. This may be 

particularly true given the similarity in 

incentive structures mentioned above. 

Despite the high degree of uncertainty 

around private funds and the possible 

negative effects of requiring some 

private funds to register as dealers, the 

Commission believes that not excluding 

them is more likely to meet the 

Proposed Rules’ objectives than 

excluding them. We therefore believe 

the costs of excluding private funds are 

justified by the potential benefits. 

7. Transaction Reporting Regime for 

Private Funds and Private Fund 

Advisers 

As described above, private funds and 

private fund advisers not registered as 

dealers are not subject to the 

requirement to report transactions to 

TRACE. Alternatively, the Commission 

could require private funds or private 

fund advisers who meet the rule’s 

activity standards to report to TRACE, 

without requiring them to comply with 

the other aspects of dealer regulations. 

However, this alternative would not 

require private funds or private fund 

advisers to comply with net capital 

requirements, or with the operational 

risk-management provisions of the 

dealer regime. Therefore, this alternative 

would fail to address all of the potential 

for negative externalities that may stem 

from market participants’ financial 

stress, as discussed in the baseline. It 

would also entail greater complexity in 

the need to specify how alternative 

entities would become subject to 

TRACE reporting. 

This alternative would reduce key 

benefits of the proposal, but it would 

also reduce some of the costs related to 

registration, compliance with 

requirements other than transaction 

reporting to TRACE, and self-evaluation. 

We do not believe the reduced costs 

justify the reduced benefits. 

E. Requests for Comment 

The Commission requests comment 

on all aspects of this initial economic 

analysis, including whether the analysis 

has: (1) Identified all benefits and costs, 

including all effects on efficiency, 

competition, and capital formation; (2) 

given due consideration to each benefit 

and cost, including each effect on 

efficiency, competition, and capital 

formation; and (3) identified and 

considered reasonable alternatives to 

the proposed new rules and rule 

amendments. We request and encourage 

any interested person to submit 

comments regarding the Proposed 

Rules, our analysis of the potential 

effects of the Proposed Rules and 

proposed amendments, and other 

matters that may have an effect on the 

Proposed Rules. We request that 

commenters identify sources of data and 

information as well as provide data and 

information to assist us in analyzing the 

economic consequences of the Proposed 

Rules and proposed amendments. We 

also are interested in comments on the 

qualitative benefits and costs we have 

identified and any benefits and costs we 

may have overlooked. In addition to our 

general request for comments on the 

economic analysis associated with the 

Proposed Rules and proposed 

amendments, we request specific 

comment on certain aspects of the 

proposal: 

Baseline 

57. Are firms that are not registered as 

dealers or as government securities 

dealers important participants in 

securities market? If so, in which 

markets and in what ways? Do 

commenters agree that such firms have 

emerged as de facto liquidity providers? 

58. The quantitative factor in 

proposed Rule 3a44–2 would identify as 

government securities dealers persons 

that trade more than $25 billion of 

Treasury securities monthly, during four 

out of the past six calendar months. Do 

you agree that approximately 46 firms 

would be government securities dealers 

based on this standard? Responses 

should provide empirical support, if 

possible. 

59. One of the rules’ qualitative 

factors would identify as dealers and 

government securities dealers persons 

that ‘‘routinely [make] roughly 

comparable purchases and sales of the 

same or substantially similar securities 

in a day.’’ Approximately how many 

firms would be dealers or government 

securities dealers based on this factor? 

Responses should provide empirical 

support, if possible. 

60. Do you agree that PTFs have 

emerged as de facto liquidity providers 

in the market for U.S. Treasury 

securities? To what extent do PTFs also 

provide liquidity in other securities 

markets? 

61. Do you agree with the 

Commission’s description of the 

potential market disruptions that may 

follow the failure of one or more market 

participants that are not registered as 

dealers—i.e., the potential negative 

effects on creditors, counterparties, 

market liquidity, and market volatility? 

Why or why not? 

62. Do you agree with the 

Commission’s description of the 

externality that arises due to the 

possibility of manipulative or 

fraudulent behavior? Why or why not? 

63. Do you agree with the 

Commission’s statement that the lack of 

regulatory insight into the practices and 

transactions of unregistered market 

participants negatively impacts markets 

by constraining regulators’ ability to 

understand and respond to significant 

market events? Why or why not? 

Economic Effects, Including Impact of 

Efficiency, Competition, and Capital 

Formation 

64. Do you agree that the Proposed 

Rules would promote investor 

protection and orderly markets by 

increasing the financial stability and 

resiliency of individual liquidity 

providers in securities markets, 

particularly those liquidity providers 

that are not registered with the 

Commission? Why or why not? 

65. Do you agree that the Proposed 

Rules would promote investor 

protection and orderly markets by better 

informing regulators through more 

comprehensive transaction reporting, 

annual filings by newly registered 

dealers, and examinations? 

66. Do you agree that the Proposed 

Rules would deter manipulation or 

fraud behavior, by improving the 

Commission’s ability to detect it? Why 

or why not? 

67. Do you agree with the 

Commission’s description of the direct 

costs incurred by new registrants—e.g., 

costs of registering, costs of SRO 

membership, costs of reporting, etc.? 

Why or why not? 

68. Do you agree that the Proposed 

Rules would have offsetting positive 

and negative effects on market 

participation, market liquidity, price 

efficiency, competition among liquidity 

providers, and capital formation? Are 

the overall effects on each of these likely 

to be positive or negative? Please 

explain. 

69. How will firms that register as 

dealers in response to the Proposed 

Rules bring themselves into compliance 

with the net capital requirements? 

Please provide details regarding how the 

new dealers will implement and manage 

their compliance. 

70. Do you expect market 

participants, especially those captured 

by the Proposed Rules, to alter their 

legal structures? What changes are they 


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299 44 U.S.C. 3501 et seq. 300See Section VI.C for a description of the 

categories of respondents. 

likely to make and what effects will 

those changes have? 

71. Do you expect some market 

participants, whom the Proposed Rules 

would otherwise require to register as 

dealers, to reduce or exit certain 

activities in order to avoid the 

requirement to register? What types of 

entities would do so, and which 

activities would be affected? 

Reasonable Alternatives 

72. What benefits or costs would 

result from setting the threshold on the 

quantitative factor higher or lower than 

$25 billion monthly volume during four 

out of the past six calendar months? 

73. What benefits or costs would 

result from limiting the quantitative 

threshold by incorporating other 

characteristics of trading activity, such 

as turnover or balance of buys and sells? 

For instance, an alternative quantitative 

standard could require firms to register 

as dealers if they met BOTH a dollar 

volume threshold and a turnover 

threshold; another alternative standard 

could require firms to register if they 

meet BOTH a buy-volume threshold and 

a sell-volume threshold. 

74. What benefits or costs would 

result from replacing the qualitative 

factors with quantitative ‘‘bright-line’’ 

thresholds? 

75. What benefits and costs would 

result from removing the exclusion for 

registered investment companies? How 

would these benefits and costs differ 

from the benefits and costs described 

above? 

76. What benefits or costs would 

result from removing the exclusion for 

registered investment advisers that only 

have investment discretion over client 

funds? 

77. What benefits or costs would 

result from excluding private funds? 

78. Are there other reasonable 

alternatives to the Proposed Rules that 

the Commission has not addressed? 

Commenters should describe any 

additional alternatives, along with the 

benefits and costs relative to the 

Proposed Rules. 

VI. Paperwork Reduction Act 

The Proposed Rules would define 

terms and do not in and of themselves 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).299 However, the new 

definitions may affect the number of 

respondents that meet the ‘‘collection of 

information’’ requirements in other 

Commission rules. The Commission 

believes the Proposed Rules may affect 

the number of respondents for 14 

Commission rules with existing 

collections of information. The potential 

changes in burden under the Office of 

Management and Budget (‘‘OMB’’) 

Control Numbers corresponding to the 

existing collections of information 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. If the new definitions 

in the Proposed Rules are adopted, the 

Commission will submit change 

requests to OMB to update the number 

of respondents for these 14 other 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 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) ....................... Amendments to application.

17 CFR 240.15b6–1 (Rule 15b6–1) and 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 

Rule 15c3–1 ........................................................... Net capital requirements for brokers and dealers .......................................... 3235–0200 

Rule 15c3–5 ........................................................... Risk management controls for brokers or dealers with market access ......... 3235–0673 

Rule 17a–3 ............................................................. Records to be made by certain exchange members, brokers, and dealers .. 3235–0033 

Rule 17a–4 ............................................................. Records to be preserved by certain members, brokers, and dealers ........... 3235–0279 

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. Summary of Collection of 

Information 

The Proposed Rules create burdens 

under the PRA by adding additional 

respondents to some of the 10 existing 

collections of information noted above. 

The Proposed Rules would not create 

any new collections of information. The 

collections of information applicable to 

the additional respondents 300 are 

summarized in the table below. 

Collection of information Burden 

Rule 15b1–1 and Form BD ............. Register as a dealer (required by Section 15 of the Exchange Act). 

Rule 15Ca1–1 and Form BD .......... Notification requirement that a dealer is acting as a government securities dealer. 

Rule 15Ca2–1 and Form BD 301 ..... Register as a government securities dealer (required by Section 15C of the Exchange Act). 

Rule 15b3–1 .................................... Comply with requirements to amend Form BD. 

Rule 15b6–1 and Form BDW ......... File a notice of withdrawal using Form BDW. 

Rule 15Cc1–1 and Form BDW 302 .. File a notice of withdrawal using Form BDW. 

Rule 15c2–7 .................................... Enumerates certain criteria that broker-dealers must meet to furnish a quotation for a security to an interdealer quotation system. 


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301Financial institutions that are government 

securities dealers not exempt under 17 CFR part 

401 must use Form G–FIN to notify their 

appropriate regulatory agency of their status as a 

government securities dealer. See 17 CFR 449.1. 

302Financial institutions that are government 

securities dealers must use Form G–FINW to notify 

their appropriate regulatory agency that they have 

ceased to function as a government securities broker 

or dealer. See 17 CFR 449.2. 

Collection of information Burden 

Rule 15c3–1 .................................... Comply with notification and record-keeping obligations concerning capital requirements set for brokersdealers. 

Rule 15c3–5 .................................... Comply with requirements to establish and maintain risk management and supervisory procedures. 

Rule 17a–3 ...................................... Comply with requirements to make and keep certain business records. 

Rule 17a–4 ...................................... Comply with requirements to keep certain records. 

Rule 17a–5 ...................................... Comply with requirements to make, keep, and report certain records. 

Rule 17a–11 .................................... Comply with notification requirements concerning broker-dealers that are experiencing certain financial or 

operational difficulties. 

Rule 613 .......................................... Comply with requirements to report certain information. 

B. Proposed Use of Information 

The existing information collections 

affected by the Proposed Rules are used 

as described below: 

1. Rules 15b1–1, 15Ca–1, 15Ca2–1, and 

15b3–1 and Form BD 

Section 15(a)(1) of the Exchange Act 

provides that it is unlawful for brokerdealers 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. In addition, 

Section 15C(a)(1) of the Exchange Act 

provides that it is unlawful for 

government securities broker-dealers, 

other than registered broker-dealers and 

certain financial institutions, to solicit 

or effect transactions in government 

securities unless they are registered as 

government securities broker-dealers 

with the Commission pursuant to 

Section 15C(a)(2) of the Exchange Act. 

To implement these provisions, the 

Commission adopted Rules 15b1–1, 

15Ca–1, and 15Ca2–1 and Form BD. In 

addition, Rule 15b3–1 requires a brokerdealer to file amendments to Form BD 

only when information originally 

reported in 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. 

Without the information disclosed in 

Form BD, the Commission could not 

effectively implement policy objectives 

of the Exchange Act with respect to its 

investor protection function. 

2. Rules 15b6–1 and 15Cc–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. In addition, Section 

15C(c)(1)(B) of the Exchange Act 

provides that any 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 the 

foregoing statutory provisions of the 

Exchange Act, the Commission has 

promulgated Rules 15b6–1 and 15Cc1– 

1, as well as 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 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) to develop statistical 

information about broker-dealers, 

notice-registered broker-dealers, and 

government securities broker-dealers. 

Without Form BDW, the Commission, 

SROs, state regulators, the Commodity 

Futures Trading Commission, and the 

public would be without an important 

source of information regarding brokerdealers and notice-registered brokerdealers that are seeking to withdraw 

from registration. 

3. Rule 15c2–7 

The information required by Rule 

15c2–7 is necessary for the 

Commission’s mandate under the 

Exchange Act to prevent fraud, 

manipulation and deceptive acts and 

practices. When Rule 15c2–7 was 

adopted, the information it required was 

critical to the Commission’s role in 

monitoring broker-dealers and 

protecting the integrity of over the 

counter markets. It was through the 

disclosures required by Rule 15c2–7 

that inter-dealer quotation systems 

would reflect the demand for and 

market activity related to the securities 

quoted on these systems. 

4. Rule 15c3–1 

Rule 15c3–1 is intended to help 

ensure that broker-dealers maintain at 

all times sufficient liquid resources to 

meet all liabilities by requiring that 

broker-dealers maintain a minimum 

amount of net capital. A broker-dealer’s 

minimum net capital requirement is the 

greater of: (1) A fixed minimum amount 

set forth in Rule 15c3–1 based on the 

types of business that the broker-dealer 

conducts; or (2) a financial ratio. 

Exchange Act Section 15(c)(3) and Rule 

15c3–1 promulgated thereunder 

prohibit a broker-dealer from effecting 

transactions in securities while not in 

compliance with its minimum net 

capital requirement. 

Various provisions of Rule 15c3–1 

require that broker-dealers provide 

written notification to the Commission 

and/or their designated examining 

authority (‘‘DEA’’) under certain 

circumstances. For example, a brokerdealer must send notice to the 

Commission if it withdraws more than 

10 percent or 20 percent of its excess net 

capital. In addition, a broker-dealer 

electing to compute its net capital using 

the alternative method under paragraph 

(a)(1)(ii) of Rule 15c3–1 must notify its 

DEA of the election in writing, and 

thereafter must continue to compute its 

net capital in this manner unless a 

change is approved upon application to 


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303See 17 CFR 240.15c3–5(a)(1). 

304See 17 CFR 242.613. 

305This estimate is based on the analysis 

described in Section V.B.2. As identified in Table 

4, the analysis indicates that between 41 and 61 

CAT FDID institutional customer accounts 

(depending on the thresholds used) had both low 

buy-sell dollar volume imbalance in SPY and above 

de minimis total dollar volume in SPY in at least 

14 of 21 trading days in October 2021. See Section 

V.B.2. Although there is currently no simple oneContinued 

the Commission. Further, there are 

special notification requirements for 

broker-dealers that carry the accounts of 

options market makers to identify when 

the activities of those options market 

makers may impact the financial 

stability of the carrying broker-dealer. 

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. These records 

help the Commission and its staff, as 

well as DEAs, facilitate the monitoring 

of the financial condition of brokerdealers. 

The provision at 17 CFR 240.15c3–1c 

(appendix C to Rule 15c3–1) requires 

broker-dealers that consolidate their 

financial statements with a subsidiary or 

affiliate, under certain circumstances, to 

submit to their DEA an opinion of 

counsel. The opinion of counsel must 

state, among other things, that the 

broker-dealer may cause that portion of 

the net assets of a subsidiary or affiliate 

related to its ownership interest in the 

entity to be distributed to the brokerdealer within 30 calendar days. 

5. Rule 15c3–5 

Rule 15c3–5 seeks to ensure that 

broker-dealers with market access 

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.303

6. Rule 17a–3 

The purpose of requiring brokerdealers to create the records specified in 

Rule 17a–3 is to enhance regulators’ 

ability to protect investors. These 

records and the information contained 

therein will be and are used by 

examiners and other representatives of 

the Commission, State securities 

regulatory authorities, and the selfregulatory organizations (e.g., FINRA, 

CBOE, etc.) (‘‘SROs’’) to determine 

whether broker-dealers are in 

compliance with the Commission’s 

antifraud and anti-manipulation rules, 

financial responsibility program, and 

other Commission, SRO, and State laws, 

rules, and regulations. If broker-dealers 

were not required to create these 

records, Commission, SRO, and state 

examiners would be unable to conduct 

effective and efficient examinations to 

determine whether broker-dealers were 

complying with relevant laws, rules, 

and regulations. 

7. Rule 17a–4 

The purpose of requiring brokerdealers to maintain the records specified 

in Rule 17a–4 is to help ensure that 

examiners and other representatives of 

the Commission, State securities 

regulatory authorities, and SROs have 

access to the information and 

documents necessary to determine 

whether broker-dealers are in 

compliance with the Commission’s 

antifraud and anti-manipulation rules, 

financial responsibility program, and 

other Commission, SRO, and State laws, 

rules, and regulations. Without Rule 

17a–4, it would be impossible for the 

Commission to determine whether a 

dealer that chose not to preserve records 

was in compliance with these rules. 

Such a situation would not be in the 

public interest and would be 

detrimental to investors and the 

financial community as a whole. 

8. Rule 17a–5 

Reports required to be made 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 dealer’s 

DEA. The reports required under Rule 

17a–5 are one of the primary means of 

ensuring compliance with the financial 

responsibility rules. A firm’s failure to 

comply with these rules would severely 

impair the ability of the Commission 

and the firm’s DEA to protect customers. 

The reported data is used in preparation 

for broker-dealer examinations and 

inspections. 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. 

9. Rule 17a–11 

The information obtained under Rule 

17a–11 is used to monitor the financial 

and operational condition of a brokerdealer by the Commission staff, by the 

broker-dealer’s DEA and, if applicable, 

by the Commodity Futures Trading 

Commission (‘‘CFTC’’). This 

information alerts the Commission, the 

DEA, and the CFTC of the need to 

increase surveillance of the brokerdealer’s financial and operational 

condition and to assist the broker-dealer 

to comply with the Commission’s rules. 

No similar information is already 

available to use or modify for purposes 

of complying with Rule 17a–11 because 

the disclosures required by the rule are 

unobtainable until the early warning 

mechanisms are triggered. Only the 

most up-to-date information will help 

the Commission, DEAs, and the CFTC to 

monitor broker-dealers experiencing 

financial or operational difficulties. 

10. Rule 613 

Rule 613 creates a comprehensive 

CAT that allows regulators to efficiently 

and accurately track all activity 

throughout the U.S. markets in certain 

securities.304 The rule specifies the type 

of data to be collected and when the 

data is to be reported to a central 

repository. The information collected 

and reported to the central repository 

improves the quality of the data 

available to regulators and could be 

used by regulators to monitor and 

surveil the securities markets and detect 

and investigate activity, whether on one 

market or across markets. The data 

collected and reported to the central 

repository could also be used by 

regulators for the evaluation of tips and 

complaints and for complex 

enforcement inquiries or investigations, 

as well as inspections and 

examinations. Further, regulators could 

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 

decisions. 

C. Respondents 

As discussed above, proposed Rules 

3a5–4 and 3a44–2 would further define 

activities that would cause a person 

engaged in the regular business of 

buying and selling securities for its own 

account within the meaning of the 

Exchange Act. A person who satisfies 

any one of the factors set forth in either 

of the Proposed Rules would be a dealer 

or government securities dealer and so 

required to register, absent an exception 

or exemption. 

1. Dealers 

The qualitative factors identified in 

proposed Rule 3a5–4 would further 

define dealer activity. The Commission 

estimates that for proposed Rule 3a5–4 

the total number of respondents that 

would register as a dealer would be 

approximately 51 persons.305 The 


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to-one correspondence between the number of CAT 

FDID customer accounts that satisfy various 

thresholds in Table 4 and the number of 

unregistered market participants in the market (e.g., 

some unregistered market participants may have 

several CAT FDID accounts, and some CAT FDID 

accounts may represent more than one customer), 

the Commission believes that the analysis in Table 

4 provides a useful indication about the scope of 

a potential impact of proposed Rule 3a5–4 and has 

used the median of the results at Table 4 to 

determine the number of approximate market 

participants that would register as a dealer as a 

result of proposed Rule 3a5–4. Additionally, the 

Commission recognizes that some of the 41 to 61 

CAT FDID institutional customer accounts may be 

held by registered investment companies that are 

excluded from the Proposed Rules. 

306This estimate is based on the analysis descried 

in Section V.B.2. That analysis found that 46 nonFINRA member firms would likely meet the 

proposed quantitative standard. The Commission 

recognizes that some of these firms may be 

exempted from registration (e.g., banks) or affiliated 

with other entities that are registered dealers, in 

which case a parent entity could avoid the costs of 

registration by shifting the activities covered by the 

Proposed Rules to the registered dealer affiliate. 

307See Section VI.D.1. Respondents that register 

with the Commission as a dealer or government 

securities dealer file a Form BD. Respondents that 

are government securities dealer are subject to the 

rules governing government securities dealers 

promulgated by the U.S. Treasury at 17 CFR parts 

400 through 499. See 15 U.S.C. 78o–5(b); see also 

17 CFR parts 400 through 499. The Treasury Rules, 

for the most part, incorporate with some 

modifications the Commission’s rules for 

government securities dealers that are not financial 

institutions. See supra note 81. 

308See 15 U.S.C. 78o–5(a). 

309Compare 15 U.S.C. 78o(a) with 15 U.S.C. 78o– 

5(a). A government securities dealer that registers 

under Section 15C(a)(l)(A) will be limited to 

conducting a government securities business only. 

310Compare 17 CFR 240.15b1–1(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) (‘‘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) (‘‘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.’’). 

311See 17 CFR 240.15b3–1. 

312See Extension Without Change of a Currently 

Approved Collection: Form BD and Rule 15b1–1; 

Application for Registration as a Broker-Dealer; ICR 

Reference No. 201905–3235–016; OMB Control No. 

3235–0012 (Aug. 7, 2019), available at https://

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=201905-3235-016 (‘‘Form BD 

PRA Supporting Statement’’). 

313The Commission’s currently approved burden 

for the average ongoing compliance burden for each 

respondent amending Form BD is .95 hours 

(Compliance Manager at 0.33 hours × 2.87 

amendments per year). See Form BD PRA 

Supporting Statement at 5. 

314 97 respondents multiplied by 2.75 hours per 

respondent. 

315 97 respondents multiplied by .95 hours per 

respondent. 

316Form BD PRA Supporting Statement at 5. 

317 97 respondents multiplied by (2.75 initial 

hours per respondent multiplied by $314 per hour). 

318 97 respondents multiplied by (.95 annual 

hours per respondent multiplied by $314 per hour). 

319Form BD PRA Supporting Statement at 6. 

320See Extension Without Change of a Currently 

Approved Collection: Rule 15b6–1 and Form BDW; 

ICR Reference No: 202005–3235–003; OMB Control 

No: 3235–0018 (May 5, 2020), available at https:// 

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=202005-3235-003 (‘‘Form BDW 

Supporting Statement’’). 

321One respondent multiplied by 1 hour per 

respondent. 

322Form BDW Supporting Statement at 5. 

323One respondent multiplied by (1 hour per 

respondent multiplied by $536 per hour). 

324Form BDW Supporting Statement at 5. 

325See Extension without change of a currently 

approved collection: Rule 15c2–7, Identification of 

Quotations (17 CFR 240.15c2–7); ICR Reference No: 

Commission estimates that respondents 

will be subject to some or all of the 

following collections of information as 

estimated below. 

2. Government Securities Dealers 

The Commission estimates that, as a 

result, for proposed Rule 3a44–2 the 

total number of respondents that would 

register as a government securities 

dealer with the Commission would be 

approximately 46 persons 306 and that 

some of the respondents may elect to 

register as a dealer under Section 15(a), 

rather than as a government securities 

dealer under Section 15C.307 The 

Commission estimates that respondents 

will be subject to some or all of the 

following collections of information as 

estimated below. 

D. Total PRA Burdens 

1. Burden of Rules 15b1–1, 15Ca–1, 

15Ca2–1, and 15b3–1 and Form BD 

As discussed above, Section 15C of 

the Exchange Act requires government 

securities dealers to register with the 

Commission.308 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 

15Ca–1, or register as a government 

securities dealer under Rule 15Ca2–1.309

In either case, the respondent is 

required to complete a Form BD.310 The 

Commission believes that Proposed 

Rules would impose the same burden to 

the 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.311 The 

Commission estimates an initial burden 

of 2.75 hours 312 for completing a Form 

BD and an annual burden of .95 hour 313

per respondent for amending Form BD, 

resulting in a total initial burden of 

266.75 hours 314 and a total annual 

burden of 76.95 hours.315

In addition, the Commission believes 

that a respondent’s compliance manager 

would complete and file the application 

and amendments on Form BD at $314/ 

hour.316 Consequently, the Commission 

estimates that the internal cost of 

compliance associated with these 

burden hours for the respondents is 

approximately an initial burden of 

$83,759.50 317 and an annual burden of 

$28,935.10.318 It is not anticipated that 

respondents will have to incur any 

capital and start-up costs, nor any 

additional operational or maintenance 

costs, to comply with the collection of 

information.319

2. Burden of Rules 15b6–1 and 15Cc–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 320 per 

respondent to complete and file a Form 

BDW to withdraw from Commission 

registration. The Commission estimates 

that at least one of the 97 respondents 

will withdraw as a dealer, resulting in 

a total annual burden of one hour.321

The Commission believes that a 

respondent would have a compliance 

officer, at $536 per hour, complete and 

file the Form BDW to withdraw from 

Commission registration.322

Accordingly, the Commission estimates 

an internal compliance cost associated 

with the burden hours for the 

respondents is approximately $536.323 It 

is not anticipated that respondents will 

have to incur any capital and start-up 

costs, nor any additional operational or 

maintenance costs, to comply with the 

collection of information.324

3. Burden of Rule 15c2–7 

Any broker-dealer could be a 

potential respondent for Rule 15c2–7. 

Only quotations entered into an interdealer quotation system such as OTC 

Link, OTC Bulletin Board (OTCBB), and 

Global OTC, are covered by Rule 15c2– 

7. According to representatives of OTC 

Link, Global OTC, and the OTCBB, none 

of those entities has recently received, 

nor anticipates receiving, any Rule 

15c2–7 notices.325 However, because 


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202008–3235–005; OMB Control No: 3235–0479 

(Sep. 16, 2020), available at https://

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=202008-3235-005 (‘‘Rule 15c2–7 

PRA Supporting Statement’’). 

326Rule 15c2–7 PRA Supporting Statement at 3. 

327 Id. 

328Extension Without Change of a Currently 

Approved Collection: Rule 15c3–1: Net Capital 

Requirements for Brokers and Dealers; ICR 

Reference No: 201912–3235–005; OMB Control No: 

3235–0200 (Jan. 16, 2020), available at https://

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=201912-3235-005 (‘‘Rule 15c3–1 

PRA Supporting Statement’’). 

329The Commission estimated that as of June 

2019 broker-dealers submitted approximately 844 

notices annually. Rule 15c3–1 PRA Supporting 

Statement at 4. The number of active broker-dealers 

on June 30, 2019 was 3,710. Thus, approximately 

23 percent of the active broker-dealers submitted a 

notice annually as of June 2019. Based on this, the 

Commission estimates that the 97 respondents that 

would need to register with the Commission under 

the Proposed Rules would file approximately 23 

notices annually. 

330 23 respondents multiplied by .5 hours per 

respondent. 

331Rule 15c3–1 PRA Supporting Statement at 5. 332The Commission estimated that as of June 

2019 broker-dealers submitted approximately 84 

notices annually. Rule 15c3–1 PRA Supporting 

Statement at 5. The number of active broker-dealers 

on June 30, 2019 was 3,710. Thus, approximately 

.02 percent of the active broker-dealers submitted 

a notice annually as of June 2019. Based on this, 

the Commission estimates that the 97 respondents 

that would need to register with the Commission 

under the Proposed Rules would file approximately 

two notices annually. 

333Two respondents multiplied by 1 hour per 

respondent. 

334Rule 15c3–1 PRA Supporting Statement at 11. 

335See 17 CFR 240.15c3–5. 

336 Id. 

337See Extension Without Change of a Currently 

Approved Collection: Rule 15c3–5—Risk 

Management Controls for Brokers or Dealers with 

Market Access; ICR Reference No: 201907–3235– 

022; OMB Control No: 3235–0673 (July 23, 2019) 

available at https://www.reginfo.gov/public/do/ 

PRAViewDocument?ref_nbr=201907-3235-022 

(‘‘Rule 15c3–5 Supporting Statement’’). 338Rule 15c3–5 Supporting Statement at 4. 339 Id. 340 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. 

341 Id. 

342 115 hours for technology + 45 hours for legal 

and compliance. 

343 97 respondents multiplied by 160 hours. 

344 97 respondents multiplied by ($31,717 for 

technology + $25,645 for legal and compliance). 

345Rule 15c3–5 Supporting Statement at 6. 

346 97 respondents multiplied by $20,500 per 

respondent. 

such notices could be made, the 

Commission estimates that one filing, in 

the aggregate, by only one broker-dealer, 

is made annually pursuant to Rule 

15c2–7.326 Based on prior industry 

estimates, the time required to enter a 

notice pursuant to Rule 15c2–7 is 45 

seconds, or .75 minutes.327 The 

Commission believes that there will not 

be any respondents that are required to 

register as a result of the Proposed Rules 

that must file a Rule 15c2–7 notice as a 

result of the Proposed Rules. 

Accordingly, the Commission estimates 

that there will be no internal 

compliance cost associated with the 

burden hours for Rule 15c2–7. 

4. Burden of Rule 15c3–1 

Some of the respondents that would 

register with the Commission as a result 

of the Proposed Rules would likely 

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 in 2019, 

the Commission estimates that brokerdealers annually file approximately 844 

notices under Rule 15c3–1 and that a 

broker-dealer will spend approximately 

30 minutes preparing and filing these 

notices.328 The Commission estimates 

that at least approximately 23 of the 97 

respondents would likely each file one 

notice under Rule 15c3–1, for a total of 

23 notices.329 Accordingly the 

Commission estimates a total additional 

annual burden of approximately 11.5 

hours.330

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 amendment 

also includes the presumption that 

capital withdrawn within one year of 

contribution is presumed to have been 

intended to be withdrawn within one 

year, unless the broker-dealer receives 

permission in writing for the 

withdrawal from its DEA. The 

Commission estimates it will take a 

broker-dealer approximately one hour to 

prepare and submit the request to its 

DEA to withdraw capital,331 and that at 

least approximately two respondents 

would likely seek permission in writing 

one occasion for the capital 

withdrawal.332 Accordingly, the 

Commission estimates that the total 

annual reporting burden will be 

approximately two hours.333

Some broker-dealers that file 

consolidated financial reports obtain an 

opinion of counsel under appendix C of 

Rule 15c3–1.334 The Commission 

believes that 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 of Rule 

15c3–1. It is not anticipated that 

respondents will have to incur any 

capital and start-up costs, nor any 

additional operational or maintenance 

costs, to comply with the collection of 

information. 

5. Burden of 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.335 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) under the Exchange Act.336 The 

Commission estimates that the ongoing 

annualized burden for a respondent to 

maintain its risk management system 

will be approximately 115 burden 

hours.337 The Commission estimates the 

related internal compliance cost for this 

hour burden per respondent at 

approximately $31,717 per year.338 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.339 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.340 The Commission estimates the 

related internal compliance cost for this 

hour burden per respondent at 

approximately $25,645 per year.341

Accordingly, the Commission 

estimates the annual aggregate 

information burden per respondent 

would be 160 hours,342 for a total 

annual burden of 15,520 hours.343 The 

Commission estimates the related total 

internal compliance cost for the 

respondents required to register as a 

result of the Proposed Rules for this 

hour burden at approximately 

$5,564,114 per year.344 In addition, the 

Commission estimates that for hardware 

and software expenses, the average 

ongoing external cost would be 

approximately $20,500 per 

respondent,345 for a total annualized 

external cost for all respondents of 

$1,988,500.346

6. Burden of Rule 17a–3 

As discussed above, the respondents 

that would register as dealers or 


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347See Revision of a Currently Approved 

Collection: Rule 17a–3; Records to be Made by 

Certain Exchange Members, Brokers and Dealers; 

ICR Reference No: 202107–3235–019; OMB Control 

No: 3235–0033 (July 29, 2021), available at https:// 

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=202107-3235-019 (‘‘Rule 17a–3 

PRA Supporting Statement’’). 

348 97 respondents multiplied by 249 hours per 

respondent a year. 

349These 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 

broker-dealer 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)). 

350Rule 17a–3 PRA Supporting Statement at 6. 

351 97 respondents multiplied by .5 hours per 

respondent. 

352See 17 CFR 240.17a–3(a)(20); 17 CFR 240.17a– 

3(a)(21); 17 CFR 240.17a–3(a)(22). 

353 Id. 

354Rule 17a–3 PRA Supporting Statement at 6. 

355 (97 respondents multiplied by 10 minutes per 

respondent) divided by 60 minutes. 

356See 17 CFR 240.17a–4. 

357See Revision of a currently approved 

collection: Rule 17a–4; Records to be Preserved by 

Certain Exchange Members, Brokers and Dealers; 

ICR Reference No: 202107–3235–021; OMB Control 

No: 3235–0279 (Sep. 23. 2021), available at https:// 

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=202107-3235-021 (‘‘Rule 17a–4 

Supporting Statement’’). 

358 97 respondents multiplied by 254 hours per 

respondent. 

359Rule 17a–4 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. 

360 97 respondents multiplied by $5,000 per 

respondent. 

361Registered government securities dealers are 

required to comply with Rule 17a–11, subject to the 

enumerated modifications in 17 U.S.C. 405.3. See 

17 U.S.C. 405.3. 

362See 17 CFR 240.17a–5(a)(2)(iii). 

363See Revision of a Currently Approved 

Collection: Rule 17a–5, Form X–17A–5 (FOCUS 

REPORT); ICR Reference No: 202107–3235–022; 

OMB Control No: 3235–0123 (July 29, 2021), 

available at https://www.reginfo.gov/public/do/ 

PRAViewDocument?ref_nbr=202107-3235-022 

(‘‘Rule 17a–5 PRA Supporting Statement’’). 

364Rule 17a–5 PRA Supporting Statement at 6. 

365 97 respondents multiplied by 48 hours per 

respondent. 

366Rule 17a–5 PRA Supporting Statement at 7. 

367 97 respondents multiplied by 12 hours per 

respondent. 

368See 17 CFR 240.17a–5(d)(1)(i)(B). 

government securities as a result of the 

Proposed Rules would incur a burden of 

collection of information necessary to 

comply with Rule 17a–3. While 

recordkeeping requirements will vary 

based on the size and complexity of the 

broker-dealer, the Commission estimates 

that one hour a day 347 is the average 

amount of time needed by a brokerdealer 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 is 24,153 hours.348

(i) 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.349 The 

Commission estimates that each brokerdealer spends, on average, 

approximately 30 minutes each year 350

to ensure that it is in compliance with 

these requirements, resulting in a total 

annual compliance burden of 

approximately 48.5 hours for the 

respondents.351

(ii) 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.352 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.353 The Commission 

estimates that, on average, each brokerdealer will spend 10 minutes each 

year 354 to ensure compliance with these 

requirements, resulting in a total annual 

burden for the respondents of about 

approximately 16 hours.355

7. Burden of 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 

preserved by broker-dealers.356 The 

Commission estimates that, on average, 

each broker-dealer spends 254 hours 

each year 357 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 24,638 

hours to comply with the Rule 17a–4 

requirements applicable to the 

respondents.358 The Commission 

estimates that the average broker-dealer 

spends approximately $5,000 each year 

to store documents required to be 

retained under Rule 17a–4.359

Accordingly, the Commission estimates 

the annual reporting and recordkeeping 

cost burden for the respondents to be 

$485,000.360

8. Burden of Rule 17a–5 361

This section summarizes the burdens 

associated with Rule 17a–5. 

FOCUS Report for Broker-Dealers that 

do not Clear Transactions or Carry 

Customer Accounts: Rule 17a– 

5(a)(2)(iii) requires that broker-dealers 

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.362 The Commission 

believes that the 97 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.363 As a result, 

each respondent is estimated to have an 

annual reporting burden of 48 hours,364

resulting in an annual burden of 4,656 

hours.365

Annual Reports: Rule 17a– 

5(d)(1)(i)(A) 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. The Commission believes 

that the 97 respondents that would be 

required to register with the 

Commission would be need to file an 

annual report. The Commission 

estimates that each respondent is 

estimated to have an annual reporting 

burden of 12 hours under Rule 17a– 

5(d),366 resulting in an annual burden of 

1,164 hours for the respondents.367

Exemption Report: Rule 17a– 

5(d)(1)(i)(B) requires a broker-dealer that 

claims it was exempt from 17 CFR 

240.15c3–3 (Rule 15c3–3) throughout 

the most recent fiscal year must file an 

exemption report with the Commission 

on an annual basis.368 As of December 

31, 2019, 3,689 broker-dealers filed 

FOCUS Reports with the Commission 

and, of these, 3,001 broker-dealers 


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369Rule 17a–5 PRA Supporting Statement at 8. 

370 Id. 

371The Commission believes that the same 

percentage of broker-dealers that claimed 

exemptions from Rule 15c3–3 as of December 31, 

2019 applies to the 97 respondents that would 

register with the Commission as a result of the 

Proposed Rules. Accordingly, the Commission 

estimates that 80 percent of the 97 respondents 

would file an exemption report under Rule 17a– 

5(d)(1)(i)(A). 

372 78 respondents multiplied by 7 hours per 

respondent. 

373See 17 CFR 240.17a–5(d)(6). 

374Rule 17a–5 PRA Supporting Statement at 8. 

375 97 respondents multiplied by .5 hour per 

respondent. 

376See 17 CFR 240.17a–5(e)(4). 

377Rule 17a–5 PRA Supporting Statement at 9. 

378 97 respondents multiplied by 5 hours per 

respondent. 

379 17 CFR 240.17a–5(f)(2). 

380Rule 17a–5 PRA Supporting Statement at 9. 

381 97 respondents multiplied by 2 hours per 

respondent. 

382Rule 17a–5 PRA Supporting Statement at 15. 

383 97 respondents multiplied by $7.75 per 

respondent. 

384See 17 CFR 240.17a–5(d)(1)(i)(B). 

385Rule 17a–5 PRA Supporting Statement at 16. 

386 78 respondents multiplied by $3,000 per 

respondent. As discussed above, the Commission 

also estimates that approximately 78 of the 97 

respondents would also claim exemptions from 

Rule 15c3–3. 

387Rule 17a–5 PRA Supporting Statement at 16. 

388 97 respondents multiplied by $0.50 per 

respondent. 

389Rule 17a–5 PRA Supporting Statement at 16. 

390 97 respondents multiplied by $0.50 per 

respondent. 

391Rule 17a–5 PRA Supporting Statement at 17. 

392 97 respondents multiplied by $0.50 per 

respondent. 

393Revision of a Currently Approved Collection: 

Rule 17a–11 (17 CFR 240.17a–11) Notification 

provisions for Brokers and Dealers; ICR Reference 

No: 202107–3235–023; OMB Control No: 3235– 

0085 (Sep. 14, 2021), available at https://

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=202107-3235-023 (‘‘17a–11 PRA 

Supporting Statement’’). 

394 17a–11 PRA Supporting Statement at 4. 

395 17 CFR 242.613(c). 

396Revision of a currently approved collection: 

Consolidated Audit Trail NMS Plan (NMS Plan 

Required to be Filed under Commission Rule 613); 

ICR Reference No: 201911–3235–003; OMB Control 

No: 3235–0671 (Apr. 1, 2020), available at https:// 

www.reginfo.gov/public/do/PRAView

Document?ref_nbr=201911-3235-003 (‘‘CAT 

Supporting Statement’’). 

claimed exemptions from Rule 15c3– 

3.369 The Commission estimates that it 

takes a broker-dealer claiming an 

exemption from Rule 15c3–3 

approximately 7 hours to complete the 

exemption report.370 The Commission 

also estimates that approximately 78 of 

the 97 respondents 371 would also claim 

exemptions from Rule 15c3–3 and be 

required to file an exemption report, 

resulting in an annual burden of 546 

hours.372

SIPC Annual Reports: Paragraph (d)(6) 

of Rule 17a–5 requires a Securities 

Investor Protection Corporation 

(‘‘SIPC’’) member broker-dealers to file a 

copy of the annual reports with SIPC.373

The Commission estimates that it takes 

a broker-dealer approximately 30 

minutes to file the annual reports with 

SIPC.374 As a result, each firm is 

estimated to have an annual burden of 

.5 hour, resulting in an annual burden 

of 48.5 hours for the respondents.375

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.376 The Commission 

estimates that it takes a broker-dealer 

approximately 5 hours to file SIPC’s 

annual assessment reconciliation form 

or certification of exclusion from 

membership forms,377 resulting in an 

estimated annual burden of about 485 

hours for the respondents.378

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).379

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.380 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 194 hours for the 

respondents.381

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,382 resulting 

in a total annual cost for the 

respondents of approximately 

$751.75.383

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.384 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,385

for a total annual reporting cost of 

approximately $234,000.386

SIPC Annual Reports: The 

Commission estimates that postage costs 

to comply with paragraph (d)(6) of Rule 

17a–5 impose an annual dollar cost of 

50 cents per firm registered with SIPC 

as a SIPC member broker-dealer,387

totaling for the 97 respondents an 

estimated cost burden for the response 

of $48.50.388

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.389 The Commission estimates 

that each year the 97 respondents will 

file with SIPC a report on the SIPC 

annual general assessment 

reconciliation or exclusion from 

membership forms, such that the 

estimated cost burden totals $48.50 per 

year.390

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.391 Accordingly, the 

Commission estimates a total cost of 

$48.50 per year for the 97 

respondents.392

9. Burden of Rule 17a–11 

In 2019, the Commission received 343 

Rule 17a–11 notices from brokerdealers.393 The Commission previously 

estimated that it would receive a similar 

number of notices from broker-dealers 

each year over the next three years and 

that it will take approximately one hour 

to prepare and transmit each notice.394

The Commission believes that the 

Proposed Rules would not cause any 

change to the Commission’s estimated 

number of 17a–11 notices received from 

broker-dealers. 

10. Burden of Rule 613 

Rule 613(c) provides that certain 

requirements are placed upon brokerdealers to record and report CAT 

information to the central repository in 

accordance with specified timelines.395

The Commission recognizes that brokerdealers may insource or outsource CAT 

data reporting obligations.396 The 

Commission believes all 97 respondents 

would likely have reporting obligations 

under Rule 613 and strategically decide 

to insource their data reporting 

functions as a result of their high level 


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397See CAT Supporting Statement at 37. 

398 Id. at 39. 

399 97 respondents multiplied by 14,490 hours. 

400See CAT Supporting Statement at 39–40. 

401 Id. at 40. 

402 97 respondents multiplied by 13,338 hours. 

403See CAT Supporting Statement at 63–64. 

404 97 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). 

405See CAT Supporting Statement at 66. 

406 Id. 

407 97 respondents multiplied by (($80,000 in 

external hardware and software costs) + ($29,166.67 

to maintain the modified allocation timestamp 

requirement) + ($1,300 ongoing external third 

party/outsourcing costs) = $110,466.68). 

408 5 U.S.C. 603(a). 

409Although 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 proposed rulemaking, are set forth 

in 17 CFR 240.0–10 (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). 

410 5 U.S.C. 605(b). 

411 5 U.S.C. 605(b). 

412 5 U.S.C. 601(6). 

413Exchange Act Rule 0–10 (17 CFR 240.0–10) 

contains applicable definitions. 

414 Id. 

415See proposed Rule 3a5–4(a)(2)(i) and proposed 

Rule 3a44–2(a)(3)(i). See also Section V.B.2.c. 

of trading activity.397 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,398 totaling an initial burden of 

1,405,530 hours for the respondents.399

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 and the maintenance of the systems 

to report the required data; and 

implementing changes to trading 

systems that might result in additional 

reports.400 The Commission believes 

that it would take each respondent 

approximately 13,338 burden hours per 

year 401 to continue to comply with Rule 

613, totaling an annual ongoing burden 

of 1,293,786 hours for the 

respondents.402

Additionally, the Commission 

estimates that each respondent, on 

average, incurs 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,403 totaling an 

initial cost of $68,821,500 for the 

respondents.404 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 and the 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.405 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 

$29,166.67 per year to maintain the 

modified allocation timestamp 

requirement,406 totaling an estimated 

annual ongoing cost of $10,715,268 for 

the respondents.407

E. Request for Comments 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Commission solicits comments to: 

79. Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

Commission’s functions, including 

whether the information shall have 

practical utility; 

80. Evaluate whether the Commission 

is adequately capturing the number of 

respondents that would be subject to the 

burdens under the Proposed Rules; 

81. Evaluate the accuracy of the 

Commission’s estimates of the burden of 

the proposed collection of information; 

82. Evaluate the accuracy of the 

Commission’s estimates of the costs 

associated with the proposed collection 

of information, including but not 

limited to any start-up, technology, 

personnel, legal services, operational, or 

maintenance costs, to comply with the 

collection of information; 

83. Evaluate whether the Proposed 

Rules would have any effects on any 

other collection of information not 

previously identified in this section; 

and 

84. Determine whether any aspects of 

the Proposed Rules that are not 

discussed in this PRA analysis impact 

the burden or costs associated with the 

collection of information. 

Persons submitting comments on the 

collection of information requirements 

should direct them to the Office of 

Management and Budget, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should also 

send a copy of their comments to 

Vanessa Countryman, Secretary, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–1090, with reference to File 

Number S7–12–22. Requests for 

materials submitted to OMB by the 

Commission with regard to this 

collection of information should be in 

writing, with reference to File Number 

S7–12–22 and be submitted to the 

Securities and Exchange Commission, 

Office of FOIA/PA Services, 100 F Street 

NE, Washington, DC 20549–2736. As 

OMB is required to make a decision 

concerning the collection of information 

between 30 and 60 days after 

publication, a comment to OMB is best 

assured of having its full effect if OMB 

receives it within 30 days of 

publication. 

VII. Regulatory Flexibility Certification 

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 

Procedure Act,408 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.’’ 409 Section 605(b) of 

the RFA 410 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.411

The RFA defines ‘‘small entity’’ to 

mean ‘‘small business,’’ ‘‘small 

organization,’’ or ‘‘small governmental 

jurisdiction.’’ 412 The Commission’s 

rules define ‘‘small business’’ and 

‘‘small organization’’ for purpose of the 

RFA for each of the types of entities 

regulated by the Commission.413 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.414

The Proposed Rules would not apply 

to persons that have or control total 

assets of less than $50 million.415


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416 5 U.S.C. 603. 

Therefore, because small businesses and 

small organizations with total assets of 

$5 million or less would not meet the 

requirements of the Proposed Rules, the 

Commission believes the Proposed 

Rules would not, if adopted, have a 

significant economic impact on a 

substantial number of small entities. 

For the foregoing reasons, the 

Commission certifies, pursuant to 5 

U.S.C. 605(b), that the Proposed Rules, 

if adopted, would not have a significant 

economic impact on a substantial 

number of small entities for purposes of 

the RFA. The Commission encourages 

written comments regarding this 

certification. Specifically, the 

Commission solicits comment as to 

whether the proposed Rules 3a5–4 and 

3a44–2 could have an effect on small 

entities that has not been considered. 

We request that commenters describe 

the nature of any impact on small 

entities and provide empirical data to 

support the extent of such impact. 

These comments will be considered in 

the preparation of the Final Regulatory 

Flexibility Certification, if the Proposed 

Rules are adopted, and will be placed in 

the same public file as comments on the 

Proposed Rules. Persons wishing to 

submit written comments should refer 

to the instructions for submitting 

comments in the front of this release. 

VIII. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996,416 the Commission requests 

comment on the potential effect of the 

Proposed Rules on the United States 

economy on an annual basis. The 

Commission also requests comment on 

any potential increases in costs or prices 

for consumers or individual industries, 

and any potential effect on competition, 

investment, or innovation. 

Statutory Basis and Text of the 

Proposed Rules 

The Commission is proposing 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). 

Text of Proposed Rule 

List of Subjects in 17 CFR Part 240 

Government securities dealers, 

Securities dealers. 

For the reasons set out in the 

preamble, the Commission proposes to 

amend 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 authority citation for part 240 

continues to read, in part, 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, 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, and 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; 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’’. 

(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) (15 

U.S.C. 78c(a)(5)(B)) of the Act if that 

person: 

(1) Engages in a routine pattern of 

buying and selling securities that has 

the effect of providing liquidity to other 

market participants by: 

(i) Routinely making roughly 

comparable purchases and sales of the 

same or substantially similar 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 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; 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. 

(b) For purposes of this section: 

(1) The term ‘‘person’’ has the same 

meaning as prescribed in Section 3(a)(9) 

(15 U.S.C. 78c(a)(9)) of the Act. 

(2) A person’s ‘‘own account’’ means 

any account: 

(i) Held in the name of that person; or 

(ii) Held in the name of a person over 

whom that person exercises control or 

with whom that person is under 

common control, provided that this 

paragraph (b)(2)(ii) does not include: 

(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; or 

(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 controls 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; or 

(C) With respect to any person, an 

account in the name of another person 

that is under common control with that 

person solely because both persons are 

clients of an investment adviser 

registered under the Investment 

Advisers Act of 1940 unless those 

accounts constitute a parallel account 

structure; or 

(iii) Held for the benefit of those 

persons identified in paragraphs (b)(2)(i) 

and (ii) of this section. 

(3) The term ‘‘control’’ has the same 

meaning as prescribed in § 240.13h–l 

(Rule 13h–l), under the Act. 

(4) The term ‘‘parallel account 

structure’’ means a structure in which 

one or more private funds (each 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. 

(c) No presumption shall arise that a 

person is not a dealer within the 

meaning of Section 3(a)(5) (15 U.S.C. 

78c(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’’. 

(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) (15 

U.S.C. 78c(a)(44)(A)) of the Act if that 

person: 

(1) Engages in a routine pattern of 

buying and selling government 

securities that has the effect of 

providing liquidity to other market 

participants by: 

(i) Routinely making roughly 

comparable purchases and sales of the 


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23106 Federal Register / Vol. 87, No. 74 / Monday, April 18, 2022 / Proposed Rules 

same or substantially similar 

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 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; or 

(2) 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 securities as 

defined in Section 3(a)(42)(A) (15 U.S.C. 

78c(a)(42)(A)) of the Act; and 

(3) 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. 

(b) For purposes of this section: 

(1) The term ‘‘person’’ has the same 

meaning as prescribed in Section 3(a)(9) 

(15 U.S.C. 78c(a)(9)) of the Act. 

(2) A person’s ‘‘own account’’ means 

any account: 

(i) Held in the name of that person; or 

(ii) Held in the name of a person over 

whom that person exercises control or 

with whom that person is under 

common control, provided that this 

paragraph (b)(2)(ii) does not include: 

(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; or 

(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 controls 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; or 

(C) With respect to any person, an 

account in the name of another person 

that is under common control with that 

person solely because both persons are 

clients of an investment adviser 

registered under the Investment 

Advisers Act of 1940 unless those 

accounts constitute a parallel account 

structure; or 

(iii) Held for the benefit of those 

persons identified in paragraphs (b)(2)(i) 

and (ii) of this section. 

(3) The term ‘‘control’’ has the same 

meaning as prescribed in § 240.13h–l 

(Rule 13h–l), under the Act. 

(4) The term ‘‘parallel account 

structure’’ means a structure in which 

one or more private funds (each 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. 

(c) No presumption shall arise that a 

person is not a government securities 

dealer within the meaning of Section 

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

solely because that person does not 

satisfy paragraph (a) of this section. 

By the Commission. 

Dated: March 28, 2022. 

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–06960 Filed 4–15–22; 8:45 am] 

BILLING CODE 8011–01–P 


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