SEC Dealer Rule Is Relic of Chevron Doctrine, Hedge Funds Say

The US Securities and Exchange Commission’s new rule expanding the definition of a securities dealer comes from a “bygone era” of judicial deference to agency actions, hedge fund industry groups told a federal court.

The Chevron doctrine the Supreme Court overruled last month is the rule’s “guiding spirit,” MFA, Alternative Investment Management Association, and National Association of Private Fund Managers said in a Thursday brief.

The SEC’s rule issued in February would boost oversight over proprietary traders and other companies that are responsible for significant liquidity in securities market but operate without registration as dealers. Private funds are concerned about being swept into the dealer definition.

The groups have asked the US District Court for the Northern District of Texas to set aside the rule, arguing the commission overstepped its authority. They also argue the rule is arbitrary and capricious.

“The rule institutes a novel, self-aggrandizing agency interpretation of the term ‘dealer’ that has no footing in the statutory text, history, or purpose, and is literally boundless,” the brief said.

The Supreme Court’s June decision in Loper Bright Enterps. v. Raimondo overturned the decades-old Chevron doctrine, under which courts deferred to reasonable agency interpretations of unclear laws.

The SEC in a filing last month, before the Loper Bright decision, said the rule fits comfortably within its authority to define terms in securities laws. The agency didn’t argue it was entitled to Chevron deference.

The industry groups say that, for decades, no one thought “dealer” meant what the SEC now says that it means.

“We are in a post-Chevron era, and there can be no mistaking what the commission is impermissibly trying to do here,” the brief said. “It cannot claim to be using interpretative discretion to adopt an admittedly different but (supposedly) reasonable construction of a statute to adapt it to changing times.”

Gibson Dunn & Crutcher LLP and Kelly Hart & Hallman LLP represent the industry groups.

The case is National Association of Private Fund Managers v. SEC, N.D. Tex., No. 24-cv-00250, 7/18/24.