The Securities Exchange Act of 1934 (“Exchange Act”) requires “dealers” to register with the Securities and Exchange Commission, the purpose of registration being regulation of their conduct. The Exchange Act defines a “dealer” as a person who is engaged in the business of buying and selling securities for her or his own account. In common understanding, “a ‘dealer’ is a professional market-maker who matches the buyers and sellers of securities.” Sec. & Exch. Comm’n v. Almagarby, 92 F.4th 1306, 1315 (11th Cir. Feb. 14, 2024).
The Exchange Act exempts “traders” from registration and thus from the same sort of regulation as is accorded dealers. The Exchange Act provides that a trader is a person who does not engage in a regular business of transacting in securities.
In the case that bears his name, the facts showed that Almagarby made $885,000.00 in quick turnarounds in 3 ½ years of transacting in securities. He used modern methods in his business.
In Almagarby, an otherwise divided panel of the Eleventh Circuit Court of Appeals took note of the modern role of securities transactions regulated by the Securities Exchange Act of 1934. The Eleventh Circuit wrote that “[a]lthough the distinction between dealers and traders remains crucial for regulatory purposes, dealers’ and traders’ functions have somewhat converged. Today, high-frequency and algorithmic traders represent most of the trading volume in public market equities.” Almagarby, 92 F.4th at 1315.
The Eleventh Circuit panel concluded that Almagarby made his business as a dealer rather than trader under the Exchange Act. The District Court was correct in part here pertinent, the appellate panel said, in resolving the Securities and Exchange Commission’s civil case by ruling that Almagarby’s disgorgement was an appropriate remedy upon the facts presented. Almagarby, 92 F.4th at 1312.
The National Association of Private Fund Managers unsuccessfully filed an amicus brief on Almagarby’s behalf in the Almagarby case.
The National Association of Private Fund Managers did not give up. It was more successful when it filed suit in its own name against the Securities and Exchange Commission a few months later in the Northern District of Texas. In Nat’l Ass’n Private Fund Mgrs. v. Sec. & Exch. Comm’n, No. 4:24-cv-00250-O, 2024 WL 4858589 (N.D. Tex. Nov. 21, 2024), the Northern District of Texas ruled that the Securities and Exchange Commission exceeded its authority in enacting a Rule that take account of modern algorithms, as the Securities Exchange Act of 1934 did not address them.
The judge assigned to the Northern District of Texas case, Reed O’Connor, J., ruled that the SEC’s Rule was therefore vacated in its entirety, i.e., void.
The Almagarby case will be cited in the upcoming Edition of Catastrophe Claims / Insurance Coverage for Natural and Man-Made Disasters (Thomson Reuters, currently in its November 2024 Edition).
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