Private Funds Trade Groups Challenge New SEC Dealer Rule

Trade groups in the private funds industry sued the Securities and Exchange Commission Tuesday, challenging the SEC’s government securities dealer rule, which was finalized in February.

Starting in April 2025, firms that regularly trade on both sides of a market or that derive most of their revenue by trading on the gap between a security’s bid and ask prices or by exploiting trading venue incentives will have to register as a dealer with the SEC and with the Financial Industry Regulatory Authority, according to TaNeka Ray, a senior manager with EisnerAmper’s regulatory risk and compliance solutions division.

Ray says the new rule will primarily apply to a small number of hedge funds and other private funds that buy and sell government securities in large quantities on their own accounts, instead of with investors’ money. According to Ray, the SEC wants to maintain control of this market “and keep out any bad actors,” and it also has an interest in data collection to monitor systemic risk in the Treasurys markets.

The complaint was filed in U.S. District Court for the Northern District of Texas, Fort Worth Division, by the National Association of Private Fund Managers, the Alternative Investment Management Association and the Managed Funds Association.

The trade groups’ complaint argues that private funds have not traditionally been considered dealers or brokers; instead, they are customers of securities broker/dealers. As a result of having to register, the funds could not participate in initial public offerings and would have to begin paying insurance premiums to the independent nonprofit Securities Investor Protection Fund to protect customer accounts unaffected by the trading in question, according to the lawsuit.

The complaint also asserts that the definition of dealer used in the SEC rule is too broad, and the criteria used to determine who must register is explicitly non-exhaustive, meaning it could later be interpreted to include other actors. According to the complaint, the broadness of the definition forced the SEC to exclude certain organizations that otherwise would have been swept up by the rule, such as: mutual funds, central banks, sovereign entities and international financial institutions.

The plaintiffs are asking the court to vacate the rule because, they argue, it violates the Administrative Procedures Act.

Ray says the new compliance obligations for the covered actors are “not too far out of line with what is already in effect at most of these firms.” They will have to file a Form BD and register with FINRA, which can take up to 180 days to complete. They will also have to name a chief compliance officer and create new policies, procedures and training policies for employees.