The “Dealerization” of America: The SEC’s Misplaced Attempt at Broker-Dealer Registration for All

With the new administration in office, now is an appropriate time to reconsider the United States Securities and Exchange Commission’s (the “Commission” or “SEC”) efforts to require all securities traders to register as dealers. Over the last several years, the Commission has pursued enforcement actions against individuals and entities for allegedly operating as unregistered dealers in violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”). Notably, many of these actions involved convertible redeemable notes—debt instruments issuers can convert into common stock or redeem for cash. The SEC is now targeting established hedge funds, seeking expansive dealer registration even though such funds are exempt under Section 3(c)(1) of the Investment Company Act of 1940 (the “Investment Company Act”).

On February 6, 2024, the SEC adopted new rules expanding the definition of “dealer” to include entities that frequently engage in securities transactions. This article argues that (1) convertible redeemable notes are not securities, (2) hedge funds do not operate as brokers or dealers, and (3) the SEC’s attempt to expand the definition of “dealer” is improper.