A broad array of financial market participants—mutual funds, private funds, insurers, pension funds, family offices, individuals, and more—may be at risk after the Securities and Exchange Commission (SEC) secured summary judgment in a case alleging an individual and an affiliated entity acted as unregistered securities dealers when they bought and sold securities for their own account. SEC v. Fierro, No. 20-cv-2104 (D. NJ June 29, 2023), ECF No. 50.
As a recent article explained, as a result of decisions like this one, a “Sword of Damocles now hangs over … just about anyone making a dime in almost any market.” Brandon Kochkodin, Forbes, The Government Is Quietly Suing Its Way To Broader Powers Over Traders (July 12, 2023), https://tradingmarketsproject.com/wp-content/uploads/2023/07/The-Government-Is-Quietly-Suing-Its-Way-To-Broader-Powers-Over-Traders.pdf. That is because, under the new theory the SEC advanced in this case and other recent enforcement actions, many market participants could be required to register as dealers, disgorge profits, and pay interest and penalties earned from trading activity years ago that seemed perfectly legal at the time. The decision thus serves as a red flag for a wide range of entities that buy and sell securities—and in theory could ensnare any entity that trades or invests for its own account.
The Securities Exchange Act of 1934 requires those who act as securities dealers to register with the SEC. The act defines a “dealer” as “any person engaged in the business of buying and selling securities … for such person’s own account,” but exempts from that definition those who buy and sell securities “not as a part of a regular business.” 15 U.S.C. § 78c(a)(5). For nearly nine decades, that has meant that those who do not have customers, and thus cannot transact with their own customers, are not dealers. The SEC also published guidance highlighting various factors that indicate when someone is acting as a dealer. SEC, Guide to Broker-Dealer Registration (April 2008; revised Dec. 12, 2016), https://www.sec.gov/about/reports-publications/investor-publications/guide-broker-dealer-registration.
However, in a series of recent enforcement cases filed across the country, the SEC has been advocating a new and broad view—that a dealer can be anyone who is engaged in the business of buying and selling securities regardless of having customers and the presence of any factors. See, e.g., SEC v. Auctus Fund Management, LLC, No. 23-cv-11233 (D. Mass. filed June 1, 2023); SEC v. LG Capital Funding, LLC, No. 22-cv-03353 (E.D.N.Y. filed June 7, 2022); SEC v. Carebourn Cap., L.P., No. 21-cv-02144 (D.M.N. filed Sept. 24, 2021); SEC v. GPL Ventures LLC, No. 21-cv-06814 (S.D.N.Y. filed Aug. 13, 2021); SEC v. Morningview Financial, LLC, No. 22-cv-8142 (S.D.N.Y. filed Sept. 23, 2022); SEC v. Fife, No. 20-cv-5227 (N.D. Ill. filed Sept. 3, 2020); SEC v. Keener, No. 20-cv-21254 (S.D. Fla. filed Mar. 24, 2020); SEC v. Fierro, No. 3:20-cv-2104 (D.N.J. filed Feb. 26, 2020); SEC v. River N. Equity LLC, No. 1:19-cv-1711 (N.D. Ill. filed Mar. 11, 2019). In SEC v. Fierro, for example, the SEC alleged defendants acted as unregistered dealers when they bought convertible notes from corporate issuers, held them for at least six months, then converted the debt into equity and sold the resulting shares at a profit. Slip op. 1-3. The district court granted summary judgment for the SEC. Relying largely on two recent district court decisions from Florida, the court held that because “Defendants were engaged in the business of buying and selling securities” they were “required to register with the SEC as dealers.” Slip op. 15 (relying on SEC v. Almagarby, 479 F. Supp. 3d 1266 (S.D. Fla. 2020), appeal pending, No. 21-13755 (11th Cir.); SEC v. Keener, 2020 WL 4736205 (S.D. Fla. Aug. 14, 2020), appeal pending, No. 22-14237 (11th Cir.)).