Federal Court Vacates SEC’s Expanded Dealer Definition

By: Eden L. Rohrer, Richard F. Kerr, Jessica D. Cohn, and Joshua L. Durham

On 21 November 2024, the US District Court for the Northern District of Texas (Court) ruled against the US Securities and Exchange Commission (SEC) in two separate cases, vacating its rule which expanded the definition of securities dealers.

In February 2024, the SEC adopted a rule expanding the definitions of “dealer” and “government securities dealer” to extend to market participants who provide significant liquidity to the markets (the Dealer Rule). See our client alert dated 29 February 2024 here. The Dealer Rule would have included many market participants who trade for their own accounts, such as private funds. 

In the spring of 2024, several trade associations filed two separate actions challenging the Dealer Rule on the grounds that the SEC exceeded its statutory authority and that the Dealer Rule was arbitrary and capricious and therefore should be vacated in its entirety. The first case was filed by the National Association of Private Fund Managers, Alternative Investment Management Association Limited, and Managed Funds Association representing the interests of their private fund members (the Private Funds Association Case), while the second was filed by the Crypto Freedom Alliance of Texas and the Blockchain Association. 

In both decisions, District Court Judge Reed O’Connor granted the trade associations’ motions for summary judgment, finding that the SEC had exceeded its statutory authority. The Court reasoned that the new definition is inconsistent with the history of the Securities Exchange Act of 1934 (the Exchange Act) which indicates that “dealers” act on behalf of customers. The Court stated in the Private Funds Association Case that the structure of the Exchange Act “only makes sense if dealers are in the business of customer-order facilitation.” 

The Court also rejected the SEC’s requests to vacate the Dealer Rule only as it applies to private funds or to remand to the SEC for further rulemaking, handing the SEC two significant defeats.

The Dealer Rule was part of SEC Chair Gary Gensler’s rulemaking agenda. The decision was published on the same day that the SEC announced Chair Gensler’s resignation, effective 20 January 2025, contemporaneous with the new Presidential administration.