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Hedge fund bodies sue SEC over Treasury dealer rule

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The National Association of Private Fund Managers (NAPFM), Managed Funds Association (MFA) and the Alternative Investment Management Association (AIMA) have sued the US Securities and Exchange Commission (SEC) over a new rule increasing scrutiny on the $27tn Treasury market.

According to a lawsuit filed in the US District Court for the Northern District of Texas in Fort Worth on Monday, the measures (the Dealer Rule), which affect firms that trade large volumes of stocks and US government bonds, will unfairly subject their members to regulation as “dealers” and “government securities dealers”.

In a press statement, Bryan Corbett, President & CEO of the MFA, said: “We were left with no choice but to challenge the Dealer Rule, because it will harm markets and create tremendous uncertainty for investors. The Dealer Rule is indeterminate and leaves certain market participants uncertain of their need to comply with the dealer regulatory framework.

“Alternative asset managers are not dealers. They are customers of dealers. If the rule is permitted to stand, it could mean that managers in scope and the funds they manage would lose their customer protections with their dealer counterparties and could not participate in IPOs. This would harm funds, their investors, and issuers looking to raise capital.”

The associations argue that the SEC has overstepped its legal authority in adopting the rule and has failed to consider the economic consequences of its action. The complaint also asserts that the rule upends the well-understood meaning of what constitutes dealer activity under the Securities Exchange Act of 1934 and nearly a century of market practice.

Jack Inglis, CEO of AIMA, said: “The SEC has exceeded its statutory authority by incorrectly concluding that customers of dealers may be dealers themselves – a clear departure from the statutory definition and understanding of what has meant to be a securities ‘dealer’ for the past 90 years.

“This rule will force certain hedge funds – who are not dealers and have never been considered dealers – to either register as dealers, thereby subjecting them to an unworkable regulatory framework, or force them to significantly curtail or cease altogether their trading activity. Both results will lead to unnecessary and significant harm to markets, investors, and certain funds. We do not take the decision lightly to challenge the Dealer Rule, but if left unchallenged, it threatens the future of certain funds and strategies.”

The NAPFM said: “The SEC’s redefinition of ‘dealer’ upsets a century’s worth of understanding about the meaning of that term under the Exchange Act. As with respect to the Private Fund Adviser Rule that NAPFM recently challenged, the agency here tries to extend its reach over private funds in ways Congress never imagined. The Dealer Rule – purportedly designed to increase liquidity in trading markets – could ultimately have the effect of decreasing such liquidity.”

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