The Securities and Exchange Commission is set to impose new rules that would require many private funds to register with the agency as so-called dealers, a move that regulators say will help them better monitor a sometimes wobbly market for U.S. government debt.
When firms that deal Treasury bonds register with the SEC “they become subject to a variety of important laws and rules that help protect the public, promote market integrity and facilitate capital formation,” SEC Chair Gary Gensler told an industry group in October.
The SEC will vote on whether to adopt the new rule at a meeting beginning at 10 a.m. Eastern time.
The rule follows another adopted in December that will force more government-debt trades to be centrally cleared and is part of a broader effort by the Biden administration to stabilize the Treasury market.
The private funds industry, high-frequency trading firms and their allies in Congress, however, predict the rule could lead some investment companies to flee the market for U.S. Treasuries, bringing greater instability.
Sen. Bill Hagerty of Tennessee and Rep. French Hill of Arkansas, both Republicans, expressed these fears in a letter to Gensler last year, writing that the new rule would only “exacerbate” a recent trend of liquidity strains in the market for U.S. government debt.
The private fund industry is taking an increasingly combative stance toward the SEC. The Managed Funds Association, which represents alternative asset managers, has spearheaded two lawsuits against the SEC for rules related to short sale disclosures and another rule requiring private equity and hedge funds to disclose quarterly performance, fees and expenses.
The SEC did water down the rule from the initial 2022 proposal, removing a provision that anyone trading more than $25 billion worth of Treasuries in four of the last six calendar months would have to register as a broker-dealer.
The agency predicts the rule will require upwards of 43 entities to register, according to SEC officials.
The crypto industry is also sounding the alarm that a change in the legal definition of securities “dealer” could encompass a wide swath of crypto traders who provide liquidity on decentralized digital asset exchanges.