Nashville Standard

United States Senator Bill Hagerty and Representative French Hill have raised concerns over the Securities and Exchange Commission's (SEC) proposed dealer rule and its potential impact on the liquidity and efficiency of the U.S. Treasury markets. In a letter addressed to Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen, the lawmakers expressed their worries about the reduction of liquidity in the market resulting from private fund advisers modifying their investment strategies.

The lawmakers highlighted the significant costs and potential harmful effects of forcing non-dealers to either become dealers or change their investment behavior. They emphasized that the SEC's uncertainty about the Proposal's impacts on market efficiency, capital formation, and competition is unsettling, especially considering the warning letters from market participants about the negative consequences for the U.S. government and Treasury market if the Proposal is adopted.

"We are concerned that the Proposal could significantly harm the market and the ability of the U.S. government to fund itself," the lawmakers concluded in their letter. They urged the Federal Reserve and Treasury to conduct a detailed analysis of the potential impact the Proposal would have on U.S. government funding and the U.S. Treasury market liquidity and efficiency.

This is not the first time the lawmakers have expressed their concerns about the proposal. They previously sent a letter to the SEC, but the agency has failed to provide a substantive response.

The Proposal in question would require non-dealers to register as dealers if certain standards are met. Private fund advisers argue that they would have to change or abandon certain investment and hedging strategies if faced with dealer registration. The SEC did not consider this in the Proposal and has been vague in its responses to questions about the issue.

The lawmakers pointed out that the Proposal represents a seismic shift in broker-dealer regulation and should require a careful and thorough cost-benefit analysis. They also stressed the importance of private funds in the U.S. Treasury market and expressed concerns that applying the dealer regime to entities that are not structurally capable of functioning as dealers could result in reduced liquidity and competition.

In light of these concerns, Senator Hagerty and Representative Hill requested that the Federal Reserve and Treasury conduct a detailed analysis of the potential impact of the Proposal on U.S. government funding and the U.S. Treasury market. They asked for this analysis to be shared with them and the respective committees of jurisdiction in the Senate and House of Representatives by January 5, 2024.

The lawmakers' letter to the SEC and their recent letter to the Federal Reserve and Treasury highlight their commitment to ensuring the resilience and liquidity of the U.S. Treasury market while raising concerns about the potential negative consequences of the proposed dealer rule. The outcome of their request for a detailed analysis remains to be seen.

To find out more, go to this link: https://www.hagerty.senate.gov/press-releases/2023/12/19/hagerty-hill-express-concerns-over-sec-dealer-rules-impact-on-treasury-market-liquidity/