SEC Urges Brokers to Bolster Controls Over Market Access
The U.S. Securities and Exchange Commission is urging brokers to tighten controls over accounts used to give clients direct access to markets, saying the so- called sub-accounts can be used to hide wrongdoing.
“Although master/sub-account arrangements have legitimate business purposes, some customers may use them as vehicles for illegal activity or in an attempt to avoid or minimize regulatory obligations and oversight,” Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations, said today in a Risk Alert issued by agency staff.
The alert offers suggestions for brokers on compliance with the market access rule approved by commissioners in November. The rule, which went into effect in July, directed firms to implement controls to limit risks associated with trading by their customers. It also ended unsupervised trading, or “naked access” to markets.
Because master accounts are often subdivided, brokers must take steps such as verifying user identities, monitoring trading patterns and tracking hacking attempts to protect against crimes including money laundering and insider trading, the SEC said in the alert.
“The basic concern is there could be a structure where someone is not a broker-dealer that should be a broker-dealer,” George Hessler, president and chief executive officer of Stock USA Execution Services Inc., a Carmel, New York-based securities firm, said in a phone interview. “That’s the worry.”
Except in certain permitted situations, if a broker-dealer has a customer with sub-accounts, that customer may function as a broker and should therefore be registered as one, he said. A broker-dealer allowing that arrangement could be permitting trading that shouldn’t be allowed, he said.
The SEC’s market-access rule requires brokers to implement controls to prevent orders from exceeding credit or capital limits as well as those that appear to be erroneous. Some aspects of the rule were delayed until Nov. 30. Naked access in the stock market had been used by traders whose strategy of buying and selling thousands of shares in milliseconds would be slowed by submitting orders through a broker’s system.
“Our national examination staff intends to scrutinize the controls and procedures at broker-dealers that offer market access to master/sub-account customers,” di Florio said in the agency’s statement.
The Financial Industry Regulatory Authority issued guidance last year advising brokers that they may be required to treat sub-accounts as separate customer accounts. It said some arrangements raise questions about “whether they can legitimately be viewed as one customer account for purposes of Finra rules, the federal securities laws and other applicable federal laws.”
Finra has identified 20 to 25 broker-dealers it will examine to assess compliance, Thomas Gira, executive vice president for market regulation, said at a conference in New York on Sept. 21. The aim is to ensure that firms are making “good-faith” attempts to comply, he said.
“We are going to be seeing and hearing issues for the first time,” Gira said. Finra aims to construct “best- practices” guidelines for the securities industry, he said.
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