USA Law and Practice Contributed by: Margo H. K. Tank, Michael Fluhr, Deborah Meshulam, Kristin Boggiano, David Stier, Liz S. M. Caires, Adam Dubin, Emily Honsa Hicks, Meghan Carey, Kathleen Birrane and Eric Hall, DLA Piper LLP
7.3 Regulatory Distinction Between Funds and Dealers In the US, a fund may qualify as an investment company and be subject to the registration requirements of the ICA, unless subject to an exemption. An adviser to a fund likely must reg - ister with the SEC pursuant to the Advisers Act or with a state securities regulator. An adviser manages portfolios or pooled investments from third parties. Advisers are generally paid by col - lecting a management fee and/or incentive fees based upon the performance of the portfolio. Advisers are subject to fiduciary, custody, and disclosure obligations. “dealer” is any person engaged in the business of buying and selling securities for the person’s own account, through a broker or otherwise. Dealers, like brokers, must register pursuant to the Exchange Act, absent limited exemptions. Dealers generally make money by collecting transaction-based fees or through the bid-ask spread. They do not collect management or incentive fees, like funds. In February 2024, the SEC adopted rules that significantly broaden the definition of “dealer” to include crypto-asset market makers, those pro - viding liquidity to AMMs, and potentially even developers of AMMs. Those rules were struck down by a court in November 2024, and their status remains uncertain. 7.4 Regulation of Programmers and Programming There is not an SEC regulation that expressly applies to programmers, but all persons are sub - ject to the anti-market manipulation and fraud provisions of the US federal securities laws. Fur - ther, the definition of a broker is broadly con - strued and could include persons who provide services to registered brokers, thereby requir -
tions to register as dealers, subjecting them to capital requirements and anti-manipulation and anti-fraud provisions. Also, HFT and algorithmic trading are often scrutinised in the context of potential market manipulation, including under the Exchange Act and Rule 10b-5. The CFTC implemented anti-manipulation rules under the Dodd Frank Act, such as banning spoofing and other disruptive trading practices. The CFTC also implemented a principle-based approach applicable to DCMs and generally imposed risk controls regarding trading. 7.2 Requirement to Be Licensed or Otherwise Register as Market Makers When Functioning in a Principal Capacity Market makers in the US are typically acting as dealers. A dealer is defined as any person engaged in the business of effecting transac - tions in securities from its own inventory, not acting as an intermediary between sellers and buyers. Dealers present themselves as willing to buy or sell a security at a quoted price on a con - tinuous basis. The Exchange Act requires, with limited exemptions, dealers to register with the SEC as a broker-dealer. Dealers are also subject to regulatory oversight by FINRA. See 7.3 Regu- latory Distinction Between Funds and Dealers . Digital asset market makers either offer con - tinuous quotes of bids and offers on central - ised cryptocurrency exchanges or contribute to liquidity pools on decentralised cryptocurrency exchanges that fund the trading of token pairs effected by smart contract-powered algorithms called automated market makers (AMMs). Cryp - to-asset market making is generally unregulated given that neither centralised crypto-exchanges nor AMMs are registered with the SEC. The SEC has asserted, in enforcement actions, that crypto market makers are required to register as dealers.
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