Alert October 04, 2011

SEC Examination Staff Issues Report Suggesting Approaches for Addressing Risks Posed by Master/Sub-Account Arrangements

The SEC’s Office of Compliance Inspections and Examinations announced the issuance of the first in a series of Nation Exam Risk Alerts that discusses the risks posed by the master/sub-account trading model with respect to money laundering, insider trading and other types of regulatory, economic and reputational risks resulting from lack of information about the persons making trading decisions at the sub-account level.  The master/sub-account trading model generally involves a limited liability company, limited liability partnership or similar legal entity that opens an account with a registered broker-dealer (the “master account”).  The master account is then divided into subordinate accounts (“sub-accounts”) that can engage in their own trading activities.  The National Exam Risk Alert outlines the potential problems for broker-dealers in ensuring compliance with various federal securities laws (with particular emphasis on the new “Market Access Rule” discussed in the November 16, 2010 Financial Services Alert) and the requirements of self-regulatory organizations to the extent that a master/sub-account arrangement obscures the identity and activities of a sub-account owner.  The National Exam Risk Alert provides examples of effective controls and practices employed by broker-dealers to address these risks that have been observed by SEC examination staff.