Revisiting the SEC’s Attempted Expansion of the “Dealer” Definition
As some of you may remember, in February 2024 the SEC adopted Final Rules under Release No. 34-99477 significantly expanding the scope of who must register as a “dealer” or “government securities dealer” under the Exchange Act.
The rules were scheduled to take effect in April 2024 with a compliance deadline of April 29, 2025. At the time, the move made headlines, but discussion quickly faded.
Since then, however, a major legal development has reshaped the landscape: the rules have been vacated by a federal court and will not take effect.
Background: The Final Rules
Section 3(a)(5) of the Exchange 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,” but excludes persons not acting “as a part of a regular business.” The same concept appears in Section 3(a)(44) for government securities dealers.
Historically, this so-called “dealer/trader distinction” allowed proprietary trading firms, principal trading entities, and funds to avoid registration where they were trading for their own account, not engaging in traditional dealer conduct (such as underwriting or holding out to the market).
The Final Rules sought to narrow that distinction by clarifying what it means to be acting as part of a regular business.
The Two Qualitative Standards
Under the rules, a firm trading for its own account would be deemed a dealer if it:
Expressed Trading Interest
Regularly posted both buy and sell interest at or near the best available prices for the same security in a manner accessible to other market participants.
Derived Primary Revenue from Liquidity Provision
Earned most of its revenue from capturing bid–ask spreads or liquidity incentives from trading venues. The SEC characterized these standards as targeting “de facto market makers.”
The rules included exclusions for entities with less than $50 million in total assets, registered investment companies, and official sector entities.
Legal Challenge and Vacatur
Almost immediately, two lawsuits were filed in the Northern District of Texas — one by private fund industry groups, the other by crypto trade associations. The plaintiffs argued the rule exceeded the SEC’s statutory authority and was arbitrary and capricious under the Administrative Procedure Act.
On Nov. 21, 2024, Judge Reed O’Connor vacated the rule in its entirety. He reasoned that:
The Exchange Act incorporated a longstanding understanding that dealers transact with or for customers.
Private funds and proprietary traders act for their own accounts and are not in the business of “customer-order facilitation.”
By sweeping such entities into the dealer regime, the SEC exceeded its statutory mandate.
Judge O’Connor rejected remand, holding that vacatur simply restored the 90-year status quo and would not be disruptive.
In early 2025, the SEC withdrew its appeal, confirming that the rule will not take effect.
Current Status (August 2025)
The Dealer Rule is no longer operative. It was vacated before the April 2025 compliance date.
The pre-rule framework remains in place. Market participants continue to apply the traditional dealer/trader distinction.
No new obligations apply. Proprietary trading firms, hedge funds, and crypto market makers are not required to register solely by virtue of liquidity provision.
Key Takeaways
The expanded definition is off the table. The vacatur means firms are not subject to the qualitative tests the SEC attempted to impose.
Status quo remains. Dealer status continues to turn on longstanding statutory language and precedent.
Future rulemaking uncertain. With the SEC’s appeal withdrawn and a new Commission leadership expected in 2025, it is unlikely the Dealer Rule will be revived in its prior form.
Congress may need to act. Any significant expansion of the dealer definition may now require legislative action.
Enforcement still possible. Firms must continue to assess activities under existing precedent, as the SEC may pursue individual cases alleging de facto dealer activity.
Conclusion
The SEC’s 2024 Dealer Rule was one of the most ambitious attempts in decades to expand the definition of “dealer.” But as of August 2025, the rule is vacated and unenforceable. For now, the long-standing dealer/trader framework remains intact, and firms that would have been captured by the new rule are not subject to additional registration or supervisory requirements.
That said, the litigation highlights both the SEC’s interest in re-examining market structure and the judiciary’s willingness to cabin that authority. Market participants should continue to monitor for new proposals or legislative efforts that could re-ignite this debate.
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