So yesterday, the SEC finalized the "dealer" rule. Below are my preliminary thoughts about what this means. Tl;dr - LPs, DEXs, RIAs, Prop Trading Firms may all be impacted. The SEC created yet another amorphous "facts and circumstances" test.

So yesterday, the SEC finalized the "dealer" rule. Below are my preliminary thoughts about what this means. Tl;dr - LPs, DEXs, RIAs, Prop Trading Firms may all be impacted. The SEC created yet another amorphous "facts and circumstances" test.

https://www.sec.gov/files/rules/final/2024/34-99477.pdf

Head of Legal @ Blockchain Association. Casts not legal advice. 

Author of @ The Undefined on Substack. 

The SEC applies a "qualitative standard" to determine if a participant falls within the scope of the rule:

(1) Regularly expressing trading interest; or

(2) Earning revenue primarily from capturing bid-ask spreads or from capturing any incentives offered by trading venues to liquidity-supplying trading interest.

The SEC is VERY focused on "the effect of providing liquidity" which is an amorphous standard and pulls in market participants despite the stated exceptions. This is how LPs would be pulled in.

And the standard isn't clear. For instance, there is an exception for RIAs, but then the SEC explains that this exception is not "express" and depends on....guess what..."the totality of the facts" - again pointing to whether the qualitative standard is met. Depending on providing liquidity.

They've also distinguished traders from dealers by pointing to when liquidity provision is only incidental to trading activities (traders) vs. those whose trading patterns have the effect of providing liquidity (dealers).

But this is so vague. Couldn't trading likely have the "effect" of providing liquidity while also being incidental to the trading activity? Makes no sense.

They've seemingly gotten rid of the trading exception to the dealer rule [experts, please correct me if I'm wrong], and are definitely focused on prop trading firms who...you guessed it...are "de facto market makers" by providing liquidity. The word "de facto" is problematic.

The SEC also does a less than adequate job of addressing concerns by commenters (like the trader vs. dealer concern noted above). 

Simply recognizing that a commenter had a concern, does not address that concern.

And their economic analysis seems thin, especially as it relates to crypto assets. Being "unable to estimate the number of crypto asset market participants" can't possibly meet APA requirements, right?

At numerous points throughout the proposal the SEC relies on their vague "facts and circumstances" test - this can't possibly be enough for market participants to evaluate whether they fall within the scope of the rule.

And of course the SEC does nothing to clarify - or attempt to clarify - the core issue of when a "crypto asset" constitutes a security.

Lastly, stop saying "so-called DeFi" - DeFi is real and here to stay. Just because there isn't an intermediary or a centralized party, does NOT mean one should be created. Why add risk when risk is already mitigated by the framework of the thing?

In any event, I would expect that many of these issues will be raised in court...as we've seen with overzealous regulators in the past. This is no exception.

Luckily there are judges who take these issues seriously.

The rule changes the definition of a dealer under the securities laws so that dealer means a person engaged in a "regular pattern of buying and selling securities that has the effect of providing liquidity to other market participants."

Thanks for the thorough take on the SEC rulemaking. As you note, lots of issues here.

Law & Policy

The SEC’s broker-dealer expansion would include LPs of $50m+ in AMMs. 

But there’s a fatal flaw: the definition requires actors be in the “business” of trading securities.

A “business” is a *for profit* entity.

But most LPs don’t profit, they lose money.

Checkmate, Gary.

It’s okay, I’ve pinned down the legal argument to defeat the dealer rule.

It’s okay, I’ve pinned down the legal argument to defeat the dealer rule. 

https://warpcast.com/ocosme/0xc64f29fa

just a quick comment that I don't believe 60 days for public comment before publication is sufficient provided the high technical complexity of these issues, litigation in process that creates contingencies (SEC v Coinbase etc), and no clear need to rush publication. Comment echoing to slow down? Risk of APA violation.