HomeNews & BlogMFA Cautions SEC Against Violating APA In Dealer Rule

MFA Cautions SEC Against Violating APA In Dealer Rule

Washington, D.C.— MFA cautions the Securities and Exchange Commission (SEC) against finalizing the dealer proposal without first seeking further public feedback in a supplemental comment letter filed today. The letter notes the “significant and pervasive flaws” with the dealer proposal and highlights that for the SEC to remedy these flaws it must make numerous material changes from the proposal. These changes should not be finalized before market participants have an opportunity to provide feedback on the alterations. Failing to solicit additional input from market participants will likely produce a final rule that:

  • Is not appropriately tailored; and
  • Violates the “logical outgrowth” doctrine under the Administrative Procedure Act (APA).

“The SEC’s dealer proposal is flawed. Without significant fixes, the rule will negatively impact Treasury markets by deterring market participants from participating in those markets, which will hurt market liquidity, lead to greater market volatility, increase costs for businesses and consumers, and inflate the cost of borrowing for the government,” said Bryan Corbett, MFA President and CEO. “To avoid disrupting the Treasury markets the proposal requires numerous material changes. The SEC should solicit feedback on any changes from market participants before finalizing the rule. Failure to get further public input could result in a rule that significantly disrupts the U.S. Treasury markets, increases costs for businesses and the U.S. government, and violates the Administrative Procedure Act.”

The letter also expresses concern that even if the SEC fixes the dealer definition in a final rule, it may still bring enforcement actions against market participants for being an unregistered dealer based on a broad, illogical, and unwritten definition of dealer. The SEC’s proposal sets vague and overbroad quantitative and qualitative tests for determining who is a dealer. However, the proposal asserts that a market participant can be a dealer even if they do not qualify based on the test in the proposal. From the letter:

It would be arbitrary and capricious for the Commission to finalize a Proposal intended to define a term, but then not define it and continue to pursue enforcement actions based on broader statutory interpretations of who a dealer is that are fundamentally inconsistent with, and effectively override, the final rule. In other words, the Commission should not seek, through litigation, to pursue an interpretation of the term “dealer” that exceeds both the bounds of the Proposal and the traditional understanding of who a dealer is based on longstanding market practice and existing Commission guidance. Essentially, the Commission would be adopting one definition of dealer through the rulemaking process while seeking to advance a much broader and conflicting interpretation of dealer through the judicial process that effectively renders the rulemaking process moot.

Read the full letter here.


About the Global Alternative Asset Management Industry

The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $5.5 trillion (Q3 2023). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.

About Managed Funds Association

Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 170 member firms, including traditional hedge funds, credit funds, and crossover funds, that collectively manage nearly $3 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.

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