A Texas judge has invalidated the SEC’s Dealer Rule, ruling the agency overstepped its authority by expanding the definition of a dealer.
A federal judge in Texas has vacated the U.S. Securities and Exchange Commission’s (SEC’s) contested Dealer Rule, declaring that the agency overstepped its authority in setting the rule, which required proprietary traders of government bonds and other securities to register as broker-dealers, subjecting them to stricter oversight.
The
decision, handed down on Nov. 21 by Judge Reed O'Connor of the Northern District of Texas, marks the third significant SEC regulation overturned by courts in the past year or so, underscoring judicial resistance to the agency’s regulatory agenda under the Biden administration.
“A regulator’s temptation may be to put every corner of the market under a regulatory spotlight,” the judge wrote in the opinion. ”When engaging in that temptation causes an agency to act beyond its authority, the judiciary is obligated to thwart that action.”
The rule was
adopted in February in a split 3–2 vote over the
objections of both Republican SEC commissioners. It sought to redefine “dealer” to include market participants such as proprietary traders who provide liquidity but do not traditionally engage in customer-facing activities. The SEC
argued that it was necessary to ensure that companies engaging in significant liquidity-providing activities, akin to market-making, register as dealers to promote market integrity, resiliency, and transparency.
Opponents of the rule who challenged it in court
argued that it overstepped the SEC’s authority by vastly expanding the definition of “dealer” under the Securities Exchange Act of 1934, thereby imposing unnecessary regulatory burdens on private funds. They contended the rule would harm market liquidity, subject private funds to onerous dealer requirements such as prohibition on IPO investing, and strip protections for funds as customers of broker-dealers.
After hearing oral arguments in the case in mid-November, O'Connor sided with the plaintiffs, concluding that the SEC exceeded its authority in adopting the rule.
“Having considered the above-referenced filings and applicable law, the Court concludes that Defendant engaged in unlawful agency action taken in excess of its authority,” O'Connor wrote, while vacating the SEC’s Dealer Rule.
The SEC said it was reviewing the decision. The Managed Funds Association (MFA), which brought the case against the agency, praised the ruling.
“Today’s decision will benefit markets, fund managers, and investors, including pensions, foundations, and endowments,” MFA President and CEO Bryan Corbett said in a
statement. “The SEC’s rushed rulemaking resulted in a final rule that was unworkable, ignored that dealers have customers, and exceeded the Commission’s statutory authority.”
Over the past year, courts have also struck down SEC rules on share buybacks and private fund adviser disclosures.
In December 2023, a federal court
invalidated the SEC’s rule requiring public companies to disclose the timing and rationale for share repurchases, ruling that the agency had failed to adequately justify the regulation’s benefits relative to its costs. In June 2024, a court
vacated a rule imposing extensive disclosure requirements on private fund advisers, finding that it exceeded the SEC’s statutory authority and placed undue burdens on private equity and hedge funds.
