The compliance deadline for the SEC’s expanded dealer definition is less than one year away. Do you know what your firm’s obligations are?

If not, you’re not alone. This new rule, which passed in January by a 3-2 vote, has caused significant controversy. Market participants have been largely left on their own to make sense of the terminology and determine whether they need to register with FINRA as a dealer by May 2025. In a press release announcing a joint lawsuit against the SEC, three industry organizations (AIMA, MFA and NAPFM) referred to the new rule as “vague and overbroad.” That’s a good one-line summary.

The new definition will require certain market participants – perhaps just a few, as the SEC predicts, or potentially thousands – to register as dealers for the first time. Proprietary trading shops, hedge funds, and clients of broker-dealers could all be affected. These entities will face regulatory burdens unknown or previously avoided. Non-compliance could be detrimental to their business, exposing them to potentially severe consequences, from being forced to halt operations immediately to being disgorged of all profits earned following the registration deadline. And that’s to say nothing of the client or market impact, nor the reputational loss that could follow. While some firms are holding out hope that the rule will be vacated or the implementation timeline extended, market participants have no choice but to adapt, and fast.

Why the urgency? Let’s take a closer look at the registration standards and count the ways they could be interpreted far more broadly than it may seem on first read.

A Matter of Interpretation

While the updated rule does define a few registration standards, they are almost completely undermined by just a few operative words. Market participants should carefully read the new rule and thoughtfully question their status. In other words, if you think your firm is exempt, you may need to think again.

For example, the rule states that entities controlling “total assets of less than $50 million” do not need to register. But what does that really mean? “Control” is a vague term. Many firms that manage sums far below this threshold take positions in the tens or even hundreds of millions intraday and exit them before the markets close. Will they be declared dealers?

For entities who do believe their assets meet this unclear threshold, there are two qualitative standards governing whether they will need to register. Again, any possible clarity is almost completely negated by just a few adjectives and adverbs.

For example, the first standard – the “Expressing Trading Interest Factor” – will force entities “regularly expressing trading interest that is at or near the best available prices on both sides of the market” to register. Who gets to decide what “regularly” means? Does it mean at least 5% of your trading activity is market making? Maybe 10%, or 50%? What if market making is your firm’s main source of revenue, but only in a few dozen niche stocks? What if you’re not a market maker at all but you’re still trading in the inside market with some frequency? None of this is clear.

The second standard – the “Primary Revenue Factor” – is no less confusing. This factor impacts entities “earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interest.” Depending on your interpretation, this standard sounds like it could impact any entity that makes a profit via the age-old practice of buying low and selling high. Also, the term “primarily” is obviously fuzzy – does it simply mean your biggest source of revenue, or does it need to be a certain percentage?

On top of all this uncertainty, the SEC adds a “no presumption” clause. Essentially, any entity could be considered a dealer if it regularly buys and sells securities for its own account, even if it does not meet any of the conditions outlined above. Translation: just about every single market participant, from meme stock devotees to the largest institutional trading firms, should assume they are required to register with FINRA. Pages upon pages of guidance are rendered almost inconsequential by this simple provision.

A Proactive Approach

All this means that firms need to start preparing to register with FINRA today. While some of the above considerations represent extremely broad interpretations of the expanded dealer definition, the potentially severe penalties laid out at the beginning of this article mean it makes infinitely more sense to overreact than to underreact. You may be skeptical of the new rule, but that’s no reason to get complacent. FINRA can take up to eight months to accept an application, so even if you start getting your ducks in a row soon, time is of the essence.

Locking Down Trade Surveillance

While no one provider can help you navigate every challenge, what we can do is make trade surveillance – one of the most complex requirements in the broker-dealer application – the least of your worries. We recognize that many new registrants will not have a solution in place, so we are 100% committed to helping you make a smooth transition to your new responsibilities.

Here’s a snapshot of what we can provide:

• Once you’ve gotten to know our product and team, you can sign a nonbinding contract with Surveyor and name us as your trade surveillance provider on your Form BD. If you end up not needing to register, we’ll tear up the agreement. We’ll also hold off on any implementation work until you have full clarity on your new requirements. If this blows over, there’s no obligation – but if you do end up needing to register, you will be fully prepared to adapt.
  
  
• Once you’ve signed, our consulting partner can help you with your actual Form BD. You’ll receive specific language to outline your approach to your new trade surveillance obligations under Standards 3 and 4 of the new member application, as well as guidance to develop your procedures for Standards 9 and 10 based on your business and activities. You’ll also receive help as you craft written supervisory procedures (WSPs) that clearly communicate how you’ll run your compliance organization and monitor all your trading activity. Our consulting partner will also work with you to provide specific information per asset classes, a full range of manipulative behaviors (spoofing, layering, wash sales, cross trades, etc.) and more
  
  
• We stand ready to help you understand the new dealer definition and what it means for your firm. While we can’t provide all the answers, we can help you ask the right questions and determine logical next steps. Our people bring a wealth of regulatory and compliance expertise, not to mention firsthand experience with what it means to rapidly implement a trade surveillance solution. Just reach out to us.

Bottom line: the expanded dealer definition may have just foisted an array of new compliance considerations on your firm. Lean on us to make the trade surveillance piece easier. We can help you write your application. We can negotiate a nonbinding contract that meets your needs and gets you ready for a rapid onboarding process if and whenever you need it. That frees you up to focus on the numerous other aspects of Form BD.

The road ahead is uncertain, so you should leave nothing to chance. We are here to take this journey alongside you and help make sure you’re ready to meet any new compliance responsibilities, no matter what form they may take.