SEC Pursues 'Dealer' Definition Expansion, to Industry's Dismay – Bloomberg Law

By Matthew Bultman
The SEC is quietly expanding its definition of “securities dealers” subject to tighter agency oversight, triggering a pushback from some private funds and investment advisers that are leery of more regulations.
The Securities and Exchange Commission is finalizing a rule that, as proposed, would clarify and expand the definition to include some financial firms—such as high-frequency traders—that have traditionally not been considered a dealer.
Industry advocates say the agency also is using recent lawsuits against penny-stock flippers to go further than it’s likely to do in its rulemaking—to stake out the position that a “dealer” is any company whose business model is based on buying and selling securities.
The agency’s statements in court filings represent a sweeping interpretation of federal securities law, critics say. The expansive definition of “dealer” has the potential to capture numerous businesses, including hedge funds and venture capital funds, that are already subject to regulations, they said.
“The type of language that is coming out of the Commission in its briefing in these various cases is so expansive that it would be one of the largest nets one might cast with respect to this industry,” said Marc Indeglia, a partner at Glaser Weil LLP and president of the Small Public Company Coalition.
Dealers generally have to register with the SEC and join an organization like Financial Industry Regulatory Authority (FINRA). They’re subject to various rules, like trading reporting obligations and net capital requirements.
Funds facing registration could change their investment strategies to avoid being labeled a dealer, industry reps say.
Critics of the SEC’s approach have zeroed in on a case the agency won against a Florida man, Ibrahim Almagarby, and his company, Microcap Equity Group, who are accused of acting as unregistered dealers. The US Court of Appeals for the Eleventh Circuit is expected to rule on it this year.
The SEC in court filings denies there’s anything radical about its interpretation of “dealer” and said critics are ascribing to the agency a position that it hasn’t taken. The agency declined to comment beyond its filings.
“Almagarby engaged in classic dealer activity by acquiring discounted securities from issuers and selling them as quickly as possible,” SEC lawyers said in court filings.
Almagarby was a 29-year-old student at Palm Beach State College in South Florida when he started MEG out of his home, according to court documents.
MEG would buy aged debt from penny stock issuers. After converting the debt into equity for discounted prices, MEG sold the new shares for a profit, the SEC alleged in a 2017 complaint. Almagarby and MEG were alleged to have made over $1.4 million.
Finding MEG was a dealer, the district court said the company’s business model was predicated on quickly unloading shares. MEG also had a network of deal finders, including a boiler room of telemarketers who cold called dozens of companies per day, the court said. MEG appealed to the Eleventh Circuit.
“He was doing all the things that dealers do,” said Cheryl Nichols, a Howard University law professor and former SEC attorney.
But financial trade groups—like the Alternative Investment Management Association and Small Public Company Coalition—have balked at what they argue are sweeping statements from the SEC that suggest a dealer is any business that buys and sells securities for profit.
“The approach that they’ve taken here, it encompasses anyone who invests in companies as part of a business, without regard to any other considerations,” Indeglia said. “Our view is that is radically different than what the world thinks it is.”
In a brief against Almagarby, the SEC indicated that the fact that his business model was based entirely on buying and selling securities could be “conclusive proof” that MEG is a dealer.
That type of statement is a trend in recent cases, industry trade groups say. In a lawsuit against Carebourn Capital, LP, the SEC said the only “definitional requirement is that a dealer engages in the business of buying and selling securities.”
In another case, against LG Capital Funding LLC, the SEC emphasized that “LG Capital is a business: it has offices, employees, keeps accounting records, and carries on for profit. And its business model is to buy and sell securities.”
That kind of theory could have vast implications for financial markets, AIMA, SPCC, and the National Association of Private Fund Managers said in an amicus brief supporting Almagarby.
“If a dealer is any company whose ‘business model’ is based on the ‘purchase and sale of securities,’ the only thing standing between nearly every financial firm and an enforcement action is the ‘benevolence’ of government lawyers,’” the groups said.
Daniel Austin, AIMA’s director of US policy and regulation, said the SEC’s interpretation is “simply inconsistent with the statutory text and the general understanding from the commission and market participants for the past almost 90 years.”
The Eleventh Circuit is considering Almagarby’s case as the SEC is working to finalize a rule that, as proposed in March 2022, would require more companies to register as dealers.
The proposal outlines certain standards that can trigger dealer status. That includes regularly making comparable purchases and sales of the same securities in a day.
The standards the SEC outlined ‘build upon and are consistent with past Commission regulations and case law for defining a dealer” under the Exchange Act, the non-profit group Better Markets said in a letter supporting the proposal.
But Republican lawmakers and other industry organizations are pushing back.
Sen. Bill Hagerty (R-Tenn.) and Rep. French Hill (R-Ark.), have asked the SEC to justify including private funds in the proposal. Private funds have signaled they’ll change or abandon some investment strategies if forced to register as dealers, they said.
The Eleventh Circuit’s decision in Almagarby’s case could impact the rulemaking, lawyers said.
“When the court says what the Exchange Act means, and what the word ‘dealer’ means, that could constrain or have an effect on the commission’s authority to interpret that in its rulemaking,” Gibson Dunn & Crutcher LLP attorney Brian Richman said recently on AIMA’s podcast.
The case is SEC v. Almagarby, 11th Cir., No. 21-13755.
To contact the reporter on this story: Matthew Bultman in New York at
To contact the editors responsible for this story: Roger Yu at; Keith Perine at
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