On Tuesday, February 6, 2024, the United States Securities and Exchange Commission promulgated final rules relating to changing the definition of dealer pursuant to the Securities Exchange Act of 1934. See SEC.gov | SEC Adopts Rules to Include Certain Significant Market Participants as “Dealers” or “Government Securities Dealers”. This definitional change is a watershed moment in securities regulation.

Although the SEC has for several years now sought to expand the definition of dealer in certain markets, most notably the convertible debt market, this is the first time the SEC has taken advantage of its rule- making ability to dramatically shift decades of precedent. The change in the definitional language for dealer will now bring under its registration rubric numerous entities that, for years, were previously excluded from such registration requirements. Significantly, many in the private equity hedge fund and government securities markets, among others. Many of these entities will be required to register as dealers to continue their business, and such registration will require enormous amounts of money and capital to create compliance programs as well to monitor activity of those involved in the transactions.

The SEC believes this change is necessary to protect the markets. However, this radical departure comes at a great cost that we are uncertain if the SEC adequately considered before promulgating these final rules. Of course, the new Rules are not effective until 60 days after they are published in the Federal Register and the SEC also delayed compliance with the Rules for one year from the effective date.

Additionally, it is likely these new Rules will be challenged in the courts and given the SEC’s less than stellar record regarding its rules in the courts, it is unclear as to if these rules will pass judicial muster. Nonetheless, we urge those effected to consult securities counsel to prepare for any eventuality.