The creator of technology, risk, and compliance solutions, ACA Group, has investigated what this implies.

These changes may force some hedge funds and proprietary trading companies—especially those that add liquidity to the market—to register as broker-dealers and become members of FINRA. As stated in the Adopting Release, this action is a response to the significant impact that unregistered firms have on liquidity provision, highlighting the need for these modifications.

In the past, any entity involved in the transaction of securities for its own account, either directly or through a broker, was considered a dealer under the Exchange Act's Section 3(a)(5), with a few exceptions. By adopting qualitative requirements to determine whether an entity's securities transactions constitute part of its usual business operations, the Final Rules seek to define "dealer" more precisely and broadly.

Dealer status is redefined by qualitative parameters

These requirements depend on whether an organization with assets of at least $50 million regularly transacts in securities or government securities and satisfies either the Primary Revenue Factor or the Trading Interest Factor.

The former concerns consistently exhibiting trading interests at prices that are competitive and available to other market players, whereas the latter focuses on generating income solely from bid-ask spreads or trading incentives.

Notably, some organizations are still exempt from these regulations, including foreign financial institutions and registered investment corporations.

minimal effect yet important for hedge funds that trade at high frequencies

The SEC expects that a small percentage of funds will be impacted by these laws, with a focus on hedge funds that engage in algorithmic high-frequency trading. The Final Rules are centered on these kinds of activities, which are defined by regular and equitable market participation or by gains from trading margins and incentives. Even with this restricted scope, there are significant ramifications for individuals who fall under its purview, requiring broker-dealer registration and compliance with extensive regulatory requirements.

SEC Chairman Gensler has stated that these rules primarily target large, high-speed trading companies, not hedge funds in general, in response to industry concerns.

Simplified assistance with registration and compliance

Regulatory Notice 23-19, which outlines FINRA's streamlined application process, allows for accelerated consideration for businesses that must register under these new criteria, thereby facilitating compliance. With a grace period that runs until April 29, 2025, the Final Rules will go into effect on April 29, 2024, and impacted entities will have until then to finish registering.

All-inclusive compliance solutions from ACA Signature

A customized compliance and advising solution is offered by ACA Signature to broker-dealers navigating these regulatory waters. Customized to meet the unique requirements of every organization, ACA Signature combines cybersecurity knowledge, managed services, state-of-the-art technology, and compliance counsel to successfully and efficiently handle regulatory requirements. In order to maximize their Governance, Risk, and Compliance (GRC) plans and ensure readiness and resilience in the face of regulatory evolution, firms are recommended to engage with ACA.