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SEC to Brokerage Firms: You Need to Supervise Subaccounts

The Securities and Exchange Commission is warning broker-dealers it will scrutinize the procedures they use to ensure they don’t run afoul of the new market access rule when dealing in subaccounts used by disreputable day traders.

In a communique made on Sept. 29 entitled “National Exam Risk Alert,” the SEC’s Office of Compliance Inspections and Examinations says in many cases, the registered broker-dealer with subaccounts will obtain information only with respect to its customer, the owner of the master account. That means, the broker-dealer won’t know who is using its market participant symbol –or MPID– to trade. That lack of knowledge opens the broker-dealer up legal and reputational risks.

The new market access rule, otherwise known as Rule 15c3-5 requires broker dealers to have sufficient risk management controls and supervisory procedures in place to manage the financial, regulatory and other risks with providing a customer with access to the broker-dealer’s trading systems and technology to execute orders.

In a master or sub-account trading model, a customer opens an account with a registered broker-dealer that permits the customer to have subordinate or subaccounts for different trading activities. In some instances, these subaccounts are further divided.