By: Cassy Sulzer

On February 6, 2024, The Securities and Exchange Commission (“SEC”) implemented two new rules in the Securities Exchange Act of 1934 (“the Act”): Rule 3a5-4 and 3a44-2.[1] These rules introduce ambiguity regarding the classification of individuals as “dealers” or as “traders,” crucial for determining registration requirements with both the SEC and self-regulatory organizations.[2] This uncertainty is particularly challenging for participants in markets like decentralized finance (“DeFi”).

The Act defines a “dealer” as “any person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise.”[3] However, it excludes individual’s known as traders, who are “persons that buy or sell securities for their own account, whether individually or in a fiduciary capacity, but not as a part of a regular business.”[4] The recent rules broaden the scope of “acting as part of a regular business,” thereby narrowing the circumstances under which an individual qualifies as a trader and necessitating their registration as a dealer.[5]

Traditionally, the “dealer-trader distinction” categorized those trading solely for their own account as traders and those conducting trading activities as part of their business operations as dealers.[6] However, the recent rules have blurred this distinction. For those classified as dealers, registration with the SEC as a broker-dealer is mandatory, involving membership in the Financial Industry Regulatory Authority (“FINRA”) and compliance with federal securities laws under Section 15(a) of the Act.[7]

The reinterpretation of “acting as part of a regular business” shifts the distinction between excluded traders and registered dealers under the amended Act.[8] This regulatory change is expected to require proprietary trading firms and large private funds actively providing liquidity in securities markets to register as dealers.[9] The new rules narrow the exception by defining “as part of a regular business” with two qualitative standards.[10] Firstly, a person engaging in buying and selling securities for its own account falls under this definition if they regularly express trading interest at or near the best available prices on both sides of the market, making it accessible to others.[11] Secondly, the new rules also include individuals who primarily earn revenue by capturing bid-ask spreads or incentives from trading venues for liquidity-supplying trading interest.[12]

These amendments have significant implications, potentially mandating various entities including proprietary trading firms, private funds, pension funds, sovereign wealth funds, and DeFi automated market makers, to register as dealers or government securities dealers.[13] The implementation of these new regulation is likely to drive competitors out of the market due to the burdensome costs of registration and regulatory compliance imposed on liquidity providers, potentially leading to market consolidation favoring large firms over smaller ones.[14] While these new rules introduce uncertainties and challenges, they also prompt further examination of the evolving DeFi landscape and its interactions with regulatory frameworks.[15] However, it is more likely to impact the provision of liquidity on centralized exchanges, as individuals engaged in activities covered by the new definition will be easier to identify within these platforms. This reduction in liquidity providers may heighten market volatility, especially during periods of market stress, and potential conflicts of interest arise for certain market participants such as pension plans, private funds, and registered investment advisers.[16] Ultimately, the new definition may inadvertently drive more market activity towards DeFi, where participants can operate within the comfort of pseudonymity and navigate through ambiguous regulations.[17]

[1] Securities Exchange Act Release No. 99477 (Feb. 6, 2024) (Adopting Release), Federal Register publication pending.

[2] Jenny Cieplak et. al, The SEC’s Definition of a “Dealer”– End of the Road for DeFi, or Just Another Bump?, Global Fintech & Digital Assets Blog (Feb. 27, 2024),

[3]  Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (2018).

[4] Id.

[5] Wayne M. Aaron et. al, SEC Significantly Broadens “Dealer” Definition, The National Law Review (Feb. 23, 2024),

[6] Id.

[7] Securities Exchange Act Release No. 99477 (Feb. 6, 2024) (Adopting Release), Federal Register publication pending.

[8] Matthre Bultman, Private Funds Warn SEC Underestimates Impact of ‘Dealer’ Label, BL (Feb. 9, 2024 at 5:00 AM),

[9] Maydeen Merino, SEC Expands Definition of ‘Dealer,’ ‘Government Securities Dealer’, The National Law Journal (Feb. 6, 2024 at 3:19 PM),

[10] Michael Fluhr et. al, New SEC Rule May Sweep DeFi Participants Into the Definition of “Dealer”, DLA Piper(Feb. 12, 2024),

[11] Bultman, supra note 8.

[12] Aaron Brown, New SEC Rule will Impair the World’s Most Important Market, Bloomberg (Feb. 9, 2024, at 5:00 AM),

[13] Lydia Beyoud, Hedge Funds Trading Treasuries to Be Tagged Dealers by SEC, Bloomberg (Feb. 6, 2024 at 10:00 AM),; Matt Levine, Hedge Funds Are Dealers Now, Bloomberg (Feb. 7, 2024 at 1:56 PM),

[14] Michael J. Austin et al., Who Needs Customers, Anyway? New SEC Rules Turn Traders Into Dealers, Jones Day(Feb. 2024),

[15]  Alison Frankel, U.S. regulator wins key appeal challenging definition of securities ‘dealers”, Reuters (Feb. 15, 2024),

[16] Id.

[17] See, e.g.SEC v. Goldstein, No. 1:24-cv-20261 (S.D. Fla. filed Jan. 23, 2024) (alleging that the defendants operated as unregistered securities dealers for selling stock of convertible debt instruments); Keener v. SEC, Appeal No. 22-14237, (11th Cir. 2022) (appealing the district court’s finding that the defendant acted as an unregistered dealer); Almagarby v. SEC, Appeal No. 21-13755 (11th Cir. 2021) (appealing the district court’s ruling that the defendants were required to be registered as dealers).

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