2025 SEC Dealer Registration Guide: Rules 3a5-4 and 3a44-2 Explained

On February 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted Rules 3a5-4 and 3a44-2 under the Securities Exchange Act of 1934, broadening the definitions of "dealer" and "government securities dealer" to include more market participants engaged in liquidity-providing activities.

Key Aspects of the New Rules:

• Qualitative Standards: The rules introduce criteria to determine when a person's trading activities constitute being "in the business" of buying and selling securities. A person is considered to be engaged in such a business if they:
  • Regularly express trading interest at or near the best available prices on both sides of the market for the same security, making it accessible to other market participants.
  • Earn revenue primarily from capturing bid-ask spreads or from incentives offered by trading venues to liquidity providers.
• Exclusions: The rules exclude certain entities from these definitions, including those with total assets under $50 million, registered investment companies, and specific governmental or international organizations.

Implications for Investment Advisers and Investment Companies:

Investment advisers and companies engaging in frequent buying and selling of securities may now fall under the expanded definitions, necessitating registration as dealers or government securities dealers. This registration entails compliance with additional regulatory requirements, such as membership in a self-regulatory organization like FINRA, adherence to financial responsibility rules, and submission to regulatory oversight.

Compliance Timeline:

• Effective Date: April 29, 2024
• Compliance Deadline: May 29, 2025

Firms should assess their trading activities to determine if they meet the new criteria and prepare for compliance accordingly.

Nabu's Role in Assisting Compliance:

In light of these regulatory changes, Nabu's AI-driven compliance solutions can help firms navigate the expanded definitions and associated requirements. Nabu automates the monitoring of trading activities, ensuring firms can identify patterns that may trigger registration obligations. By providing real-time insights and facilitating adherence to regulatory standards, Nabu supports firms in maintaining compliance with the evolving securities regulations.