On September 29, 2011, the SEC issued a Risk Alert warning of concerns regarding trading through sub-accounts, and offered suggestions to help the securities industry address those risks. Generally, in the master/sub-account trading model, a top-level customer opens an account with a registered broker-dealer that permits the customer to have subordinate accounts for different trading activities. The master account usually will be subdivided into sub-units for the use of individual traders or groups of traders. In some instances, these sub-accounts are further divided to such an extent that the master account customer and the registered broker-dealer may not know the actual identity of the underlying traders. Although these arrangements may be used for legitimate business purposes, this structure may expose both the customer and broker-dealer to significant risks or violations of securities laws. For example, the SEC has identified the following risks associated with master/sub-account trading model: money laundering, insider trading, market manipulation, account intrusions, unregistered broker-dealer activity, and excessive leverage. To mitigate these risks and to reduce the opportunity for violations of securities laws, consider utilizing the following controls with master/sub-account trading models:
- Obtain and maintain the names of all traders authorized to trade in each master account, including all sub-account traders; verify the identities of all such traders, using fingerprints if appropriate, background checks and interviews; and periodically check the names of all such traders through criminal and other databases;
- Monitor trading patterns in both the master account and sub-accounts for indications of insider trading, market manipulation, or other suspicious activity;
- Physically secure information of customer or client systems and technology;
- Regularly review the effectiveness of all controls and procedures around sub-account due diligence and monitoring; and
- Create written descriptions of all controls and procedures for sub-account due diligence and monitoring, including the frequency of reviews, the identity of those responsible for conducting such reviews, and a description of the review process.
For additional information please contact the Jacko Law Group PC at (619) 298-2880.