SEC Files Memo Defending New Dealer Rule Against Crypto Group’s Lawsuit

On Wednesday, June 26, 2024, a memorandum was filed in the US District Court for the Northern District of Texas in support of the Securities and Exchange Commission’s motion for summary judgment and in opposition to the plaintiff’s cross-motion for summary judgment.

The case involves a lawsuit brought by several crypto interest groups, referred to as the Crypto Freedom Alliance of Texas et al, against the SEC and its chairman Gary Gensler. The groups are challenging a new rule adopted by the SEC in February 2024 that further defines what it means to be “buying and selling securities as part of a regular business” in connection with certain liquidity providers.

The rule aims to address a gap in how electronic trading has evolved, where high-frequency traders and other liquidity providers play a major role in markets but may not be registered as dealers. Specifically, the rule establishes qualitative standards to identify those whose trading activity has the effect of providing liquidity, such as routinely making purchases and sales near the best market prices on both sides or earning revenue from capturing bid-ask spreads. It also includes a quantitative threshold for deeming certain high-volume activity as part of a regular business.

In its memorandum, the SEC argues the plaintiffs’ claims should be dismissed. It asserts that the rule is within the SEC’s authority under statute to define terms related to dealers. The SEC also argues it engaged in a reasonable rulemaking process with notice and comment, and adequately addressed comments received. It contends the concerns raised about the rule’s impact on crypto asset markets are unfounded and that exempting such assets would undermine investor protections.

The plaintiffs had argued the rule exceeds the SEC’s power and improperly turns on the post-hoc effect of trading activity. But the SEC cites recent court precedent rejecting the idea that dealers must have customers. It also maintains the rule is consistent with longstanding interpretations of what defines a regular business.

The case will likely see further arguments around whether the SEC appropriately exercised its authority and reasonably considered the rule’s effects. A decision could provide clarity around the SEC’s role in regulating crypto trading platforms and high-frequency firms that provide liquidity across different digital and traditional markets.

Please contact BlockTribune for access to a copy of this filing.