Texas federal judge nixes SEC dealer rule

FORT WORTH, Texas (CN) — A federal judge in Texas on Thursday vacated a new Securities and Exchange Commission rule expanding the definition of entities that are required to register as "dealers" with the agency.

In two rulings on related cases, U.S. District Judge Reed O'Connor found the rule change exceeded the SEC's statutory authority. He wrote that the new definition is "untethered from the text, history, and structure" of the Securities Exchange Act of 1934, the federal law that created the SEC.

That law defines a dealer as "any person engaged in the business of buying and selling securities."

Those individuals and entities are required to register as dealers with the SEC and are thereby subject to certain regulatory requirements — but the act exempts those who buy and sell securities "not as a part of a regular business." Under the act, operating as an unregistered dealer is a felony.

In February 2024, the SEC adopted a new rule expanding the meaning of "part of a regular business.” Under the new definition, people and entities would qualify as dealers if their trading activity regularly has the effect of "providing liquidity" to the market.

Following the ruling, the agency is now "reviewing the decision and will determine next steps as appropriate," an SEC spokesperson said in an email.

In overturning the rule, O'Connor found that the text and structure of the Securities Exchange Act, as well as how the term dealer was commonly used at the time the act was passed, showed that Congress intended for the definition of dealer to be limited to those who trade securities on behalf of customers.

The SEC said the rule change was necessary because recent advancements in electronic trading had created a gap in the regulation of securities. But in two lawsuits, industry groups representing private investment funds and the crypto industry argued the new definition would wrongly include some of their members.

The groups filed their cases in federal court in Fort Worth — an increasingly popular venue for many companies and industry groups seeking to challenge federal regulations due to its conservative judges. O'Connor, a George W. Bush appointee, has frequently overturned Biden administration policies.

Bryan Corbett is president and CEO of the Managed Funds Association, one of the groups that sued over the rule.

In a statement, he celebrated the decision.

“The Court ruling affirms what MFA has maintained all along — alternative asset managers are not dealers," Corbett said. "Today’s decision will benefit markets, fund managers, and investors, including pensions, foundations, and endowments. The SEC’s rushed rulemaking resulted in a final rule that was unworkable, ignored that dealers have customers, and exceeded the Commission’s statutory authority.”