SEC Staff Issues Risk Alert on Master/Sub-account Risks

FOR IMMEDIATE RELEASE
2011-198

Washington, D.C., Sept. 29, 2011 — The staff of the Securities and Exchange Commission today issued a Risk Alert warning of significant concerns regarding trading through sub-accounts, and offered suggestions to help securities industry firms address those risks.


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Money laundering, insider trading, market manipulation, account intrusions, unregistered broker-dealer activity, and excessive leverage are all potential risks associated with the master/sub-account trading model, according to the alert. Customers who open master accounts with a registered broker-dealer usually subdivide it for use by individual traders or groups of traders. In some instances, the sub-accounts may be divided to such an extent that the master account customer and the firm where the account is held might not know the identity of the traders in the sub-accounts.

“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,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, whose national examination staff issued the alert.

The alert includes suggestions for broker-dealers to address concerns arising from trading in sub-accounts and to comply with the SEC’s Market Access Rule, which requires broker-dealers to have controls and procedures to limit risks associated with offering market access to customers, including those with master/sub-accounts.

“When a broker-dealer offers master/sub-accounts, this includes an obligation to reasonably design controls and procedures that address the types of risks that we identify in this report. Our national examination staff intends to scrutinize the controls and procedures at broker-dealers that offer market access to master/sub-account customers,” Mr. di Florio said.

Possible approaches include:

This is the first in a continuing series of Risk Alerts that the SEC’s examination staff expects to issue.

The following staff contributed substantially to preparing this Risk Alert: Julius Leiman-Carbia, Robert Sollazzo, Rosanne Smith, George Kramer, Laura Magyar and John Guidroz. 

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For more information contact:

Carlo di Florio
Director, Office of Compliance Inspections and Examinations
202-551-6200

Julius Leiman-Carbia,
Associate Director, Office of Compliance Inspections and Examinations
212-336-0970

George Kramer
Senior Counsel to the Director, Office of Compliance Inspections and Examinations
202-551-8959