SEC Seeks to Expand “Dealer” Definition to Expand Regulatory Oversight
From the desk of Jim Eccleston at Eccleston Law
The Securities and Exchange Commission (SEC) is seeking to expand its definition of “securities dealers”, which has resulted in criticism from various private fund and investment advisors that wish to avoid additional regulatory oversight.
The SEC is finalizing a rule that would expand the definition to include some financial advisory firms, including high-frequency traders, which traditionally have not been considered securities dealers. Investor advocates contend that the SEC uses lawsuits against penny-stock flippers to indicate that a “securities dealer” is any company whose business model revolves around buying and selling securities. According to industry experts, the expanded definition of “dealer” will likely implicate several businesses, including hedge funds and venture capital funds. Funds that are required to register under the new definition could seek to alter their investment strategies to avoid heightened regulation, according to industry sources.
Critics of the SEC’s expanded definition have pointed to a case that the SEC won against Ibrahim Almagarby and his Florida-based company, Microcap Equity Group (MEG). Almagarby launched MEG, which would buy aged debt from penny stock issuers before converting the debt into equity for discounted prices and selling the new shares for a profit, according to the SEC. The SEC alleged that Almagarby and MEG generated at least $1.4 million, but the district court determined that MEG was a dealer because the company’s business model was based on quickly unloading equity shares. MEG appealed to the Eleventh Circuit, which is expected to rule on the case this year. While the Eleventh Circuit considers Almagarby’s case, the SEC is working to finalize its rule that would require more firms to register as dealers. The SEC’s proposal notes certain standards that can trigger the dealer classification, including regularly making comparable purchases and selling the same securities in one day.
Eccleston Law LLC represents financial advisors and investors nationwide in securities, employment, transition, regulatory and disciplinary matters.
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