In early 2024, the Securities and Exchange Commision (SEC) pushed through a rule that, to many of us in the trading space, felt like it came out of nowhere. The rule would have forced certain prop firms to register as broker dealers. It was aimed directly at firms active in the U.S. Treasury markets, especially those trading their own book in size.

The thinking was simple. If you act like a dealer, you should be treated like one. That meant tighter regulations, Financial Industry Regulatory Authority (FINRA) exams breathing down your neck, and a whole set of capital and reporting requirements that most prop shops had never had to think about.

The SEC even laid out two tests that were supposed to capture this activity. The first looked at whether a firm regularly posted bids and offers on both sides of the market. They called it the “Expressing Trading Interest” test. The second was all about money. If your revenue came mainly from spreads, liquidity incentives, or similar trading activity, the “Primary Revenue” test flagged you. On top of that, if you had $50 million or more in total assets, you were expected to register.

And here’s the kicker. The SEC also took away the old exemption that let firms slide if most of their income wasn’t from customer business. That exemption used to be a lifeline for a lot of us.

With that gone, even shops that only traded their own capital (no clients, no advisory) were suddenly pulled into the dealer bucket. It is no surprise the rule set off alarms. Within weeks, lawsuits were flying, and by the end of the year it was tangled up in court.

Gross Income Exemption Removal and FINRA Oversight

One of the more painful parts of the SEC’s plan was the removal of the gross income exemption. Before, many firms stayed clear of dealer status because they weren’t making their living off customers. That exemption gave them cover. Once it was scrapped, even firms trading only their own balance sheet were suddenly in scope.

That change flipped the game. Suddenly, you could have a lean prop shop with a handful of traders, no outside clients, and you were being lumped in with full scale broker dealers. And registration doesn’t just mean filling out a form. It meant FINRA oversight. Exams, constant reporting, capital thresholds, compliance hires. All of the heavy machinery that most prop firms were never built to carry.

The stated goal was transparency and oversight in the Treasury market, which, to be fair, is critical for the financial system. But the net the SEC cast was way too wide. It risked sweeping in firms that provide liquidity but don’t operate like dealers in any traditional sense. That overreach is exactly what drove so much pushback.

Effective and Compliance Windows

When the SEC finalized the rule in early 2024, it gave firms what felt like a sprint. The rule would kick in 60 days after publication, landing in April 2024. From that point, there was a 12 month compliance window to get registered, build systems, hire compliance staff, and meet capital requirements.

For many of us, that was laughable. Prop firms aren’t structured like big banks. A year is barely enough time to set up reporting pipelines, let alone restructure your entire business model to fit under FINRA. Law firms and compliance shops were already circling because they knew a flood of firms would be forced into registration. Even FINRA was gearing up for a wave of new members.

Now that the rule has been vacated and the SEC has walked away, the timeline is meaningless. But the speed at which the SEC tried to roll it out says a lot. Once they make up their mind, they can move fast. That is worth remembering if something like this comes back in another form.

SEC Withdraws Appeal

Fast forward to February 2025, and the SEC finally blinked. After months of legal wrangling, the Commission dropped its appeal of the court decision that had already struck down the dealer rule. That ruling came out of the Northern District of Texas, where the judge said the SEC had gone too far by trying to shove proprietary firms into the broker dealer mold.

By pulling its appeal, the SEC essentially admitted defeat. No more scrambling for registration, no more mad dash to meet deadlines that were looming in the background. And if you follow the SEC closely, you know this is more than just one rule being shelved. With new leadership in place, it feels like the Commission is dialing back some of the hardline stances that were defining the last few years.

Traders and firm owners didn’t hesitate to call this a win. Legal analysts, industry groups, everyone basically agreed the rule was too broad and a poor fit for firms that trade their own money. Sure, the debate over market structure isn’t dead, but for now the playing field is reset.

What Prop Firms Must Do Now

So where does this leave prop firms? With the pressure off, it is tempting to carry on as if nothing happened. But that would be short sighted. The smart approach is to run a self assessment. Look at your trading activity, your revenue sources, and ask yourself honestly, would you have been flagged under the old rule? Knowing that answer keeps you prepared for whatever comes next.

Some firms had already started preparing for FINRA membership. They spent money on consultants, maybe even filed paperwork. Now those same firms have to decide whether to continue down that path or stand down. For bigger firms thinking about scaling globally, registration may still make sense strategically. However, for others, it may be wasted effort.

One thing is clear. This is not the time to disappear from the radar. Regulators are still watching liquidity provision and Treasury market structure closely. Just because the dealer rule is gone does not mean scrutiny is gone with it. Staying plugged into the regulatory conversation is the only way to avoid being blindsided.

What Does It Mean for Prop Firm Traders

This entire saga matters more than it might look on paper for traders on the desk. If the rule had survived, a lot of shops would have been forced to shift energy away from trading and into compliance. That would have meant slower decisions, more paperwork, more meetings. All the stuff that kills the nimble edge prop trading thrives on. Day to day, it would have been friction everywhere.

With the rule off the table, traders can breathe again. No looming deadlines, no risk of getting sidelined while your firm restructures around compliance. It lets firms go back to focusing on what drives results. That is sharp execution, quick reactions, and lean setups. The industry keeps its flexibility, and that is what gives prop trading its edge.

That said, it is not a free pass to ignore the bigger picture. The SEC may have stepped back, but that doesn’t mean the conversation is over. Traders should pay attention to what their firms are doing behind the scenes on the regulatory side.

Rules can come back in new shapes, and when they do, it is better to be ready than caught off guard. For now, though, business is back to normal, and the focus is where it belongs, on the markets.