1

National Exam Risk Alert

By the Office of Compliance Inspections and Examinations1

Volume I, Issue 1 September 29, 2011 

Master/Sub-accounts 

I. Introduction

The Securities and Exchange Commission’s (“Commission”) 

National Exam Program (“NEP”) has identified the master/subaccount trading model as a vehicle that could be used to further

violations of the federal securities laws as well as other laws and 

regulations. In particular, misuse of the account structure raises 

significant regulatory concerns with respect to: (i) money 

laundering, (ii) insider trading, (iii) market manipulation, (iv)

account intrusions, (v) information security, (vi) unregistered 

broker-dealer activity, and (vii) and excessive leverage (e.g.,

inadequate minimum equity for pattern day traders).

2

Generally, in the master/sub-account trading model, a top-level 

customer opens an account with a registered broker-dealer (the 

“master account”) that permits the customer to have subordinate 

accounts for different trading activities (“sub-account”). In many, if 

not most, instances, the customer opening the master account is a 

limited liability company (“LLC”), limited liability partnership 

(“LLP”) or similar legal entity or another broker-dealer with

numerous other persons trading through the master account 

(“traders”). The master account will usually be subdivided into 

subunits for the use of individual traders or groups of traders (“subaccounts”). In some instances, these sub-accounts are further 

divided to such an extent that the master account customer and the 

 

 1 The Securities and Exchange Commission (“SEC”), as a matter of policy, disclaims responsibility for any 

private publication or statement by any of its employees. The views expressed herein are those of the staff 

of the Office of Compliance Inspections and Examinations, in coordination with other SEC staff, including 

in the Division of Trading and Markets, and do not necessarily reflect the views of the Commission or the 

other staff members of the SEC. This document was prepared by the SEC staff and is not legal advice.

2 Under NASD Rule 2520, the term “pattern day trader” means any customer who executes four or more 

trades within five business days. If day-trading activities do not exceed six percent of the customer’s total 

trading activity for the five-day period, the clearing firm is not required to designate such account as pattern 

day traders. This rule applies to all broker-dealers that are FINRA members. 

In this Alert: 

Topic: Regulatory concerns related 

to master/sub-account structures.

Key Takeaways: 

Master/sub-account trading 

arrangements can pose the 

following risks, among others:

Money laundering;

Insider trading;

Market manipulation;

Account intrusions and 

information security;

Unregistered broker-dealer activity 

and excessive leverage.

New Rule 15c3-5 requires brokerdealers to have controls and 

procedures reasonably designed to 

manage the financial, regulatory 

and other risks associated with 

providing a customer or other 

person with market access.

This alert highlights examination 

points of inquiry and compliance 

suggestions to address these risks.
2

registered broker-dealer with which the master account is opened may not know the actual

identity of the underlying traders. Nevertheless, the master account customer usually tracks the 

trading activities in each sub-account, and will often evaluate the account for risk and/or provide 

a sub-account with additional trading leverage. Although these arrangements may be used for 

legitimate business purposes, some customers who seek these master/sub-account relationships 

often structure their account with the broker-dealer this way in an attempt to avoid or minimize 

regulatory obligations and oversight.

Promoters of these trading arrangements, who may be customers or other entities, often target 

potential traders in both the US and abroad with the promise of increased leverage and lower 

capital contributions than these persons would otherwise be allowed as day traders at a registered 

broker-dealer. The sub-account traders then usually engage in day-trading and/or other 

leveraged trading activity, with the trades executed via trading systems or other platforms 

provided by the master account customer/owner, whom the registered broker-dealer has 

authorized to use its Market Participant Symbol (or MPID). 

The Commission recently adopted Rule 15c3-5 (“Market Access Rule” or the “Rule”) under the 

Securities Exchange Act of 1934 (“Exchange Act”). 3

 The Market Access Rule applies to 

broker-dealers with market access to an exchange or alternative trading system, as well as to 

broker-dealers that provide customers or other persons with access to trading securities directly 

on an exchange or alternative trading system through the use of the broker-dealer’s MPID or 

otherwise.

4 Under the Rule, the broker-dealer is responsible for having risk management 

controls and supervisory procedures reasonably designed to ensure compliance with all laws, 

rules and regulations imposed under the federal securities laws or by self-regulatory 

organizations (“SROs”) in connection with market access (“regulatory requirements”).5

 

Specifically, the Market Access Rule requires broker-dealers to have a system of risk 

management controls and supervisory procedures reasonably designed to manage the financial, 

regulatory and other risks of this business activity associated with providing a customer or other 

person with market access, including restricting access to the broker-dealer’s trading systems and 

technology that provide access to persons pre-approved and authorized by the broker-dealer.6 

Most of the provisions of the Market Access Rule became effective on July 14, 2011.

7

 

 3 Exchange Act Release No. 63241 (Nov. 3, 2010), 75 FR 69792 (Nov. 15, 2010) (“Adopting Release”), 

codified at 17 C.F.R. §15c3-5.

4 Rule 15c3-5(a)(1), 17 C.F.R. § 240.15c3-5(a)(1) defines market access as: (i) Access to trading in securities 

on an exchange or alternative trading system as a result of being a member or subscriber of the exchange or 

alternative trading system, respectively; or (ii) Access to trading in securities on an alternative trading 

system provided by a broker-dealer operator of an alternative trading system to a non broker-dealer. See 

also Adopting Release at 69796-97. 5 Rule 15c3-5(c)(2), 17 C.F.R. § 240.15c3-5(c)(2). See also Adopting Release at 69797-98. 6 Rule 15c3-5(b), 17 C.F.R. § 240.15c3-5(b) . 7 The Commission extended the compliance date, until November 30, 2011, for all of the requirements of 

Rule 15c3-5 for fixed income securities, and the requirements of Rule 15c3-5(c)(1)(i) for all securities. 

Rule 15c3-5(c)(1)(i) requires that the risk management controls must be reasonably designed to: “[p]revent 

the entry of orders that exceed appropriate pre-set credit or capital thresholds in the aggregate for each 

customer and the broker or dealer and, where appropriate, more finely-tuned by sector, security, or 

otherwise by rejecting orders if such orders would exceed the applicable credit or capital thresholds.”
3

The master/sub-account structure creates potential risks of noncompliance with legal 

requirements. 

One of the most significant risks associated with these arrangements is that, many times, the 

registered broker-dealer obtains and maintains information only with respect to its customer, the

owner of the master account (i.e., the LLC or LLP). As mentioned above, because sub-accounts 

may be further divided, the broker-dealer may not know who is utilizing its MPID and trading in 

the sub-accounts. This lack of information may expose the registered broker-dealer to legal and 

reputational risks. The Market Access Rule is intended in part to address these risks by requiring 

broker-dealers to establish, document and maintain a system of risk management controls and 

supervisory procedures that are reasonably designed, among other things, to ensure compliance 

with all regulatory requirements that are applicable in connection with market access.8

Identified below are certain risks associated with the master/sub-account trading model. Failing 

to reasonably address these risks could place the broker-dealer in violation of the federal 

securities laws and rules thereunder, including the Market Access Rule, as well as applicable 

SRO rules.

 

Money Laundering, Terrorist Financing and Other Illicit Activity – The Bank 

Secrecy Act (“BSA”),9 initially adopted in 1970, establishes the basic framework for anti-money 

laundering (“AML”) obligations imposed on financial institutions.10 The BSA, as amended, is 

intended to facilitate the prevention, detection, and prosecution of money laundering, terrorist 

financing, and other financial crimes. Among other things, the BSA requires broker-dealers to: 

(i) establish and implement an effective AML program,

11 (ii) establish a Customer Identification 

Program (“CIP”),

12 and (iii) monitor, detect and file reports of suspicious activity (the “SAR 

Requirement”).13 Moreover, Exchange Act Rule 17a-8 requires broker-dealers to comply with 

the reporting, recordkeeping and record retention requirements in regulations under the BSA.14

On September 1, 2010, as part of concurrent enforcement actions with the Financial 

Crimes Enforcement Network of the Department of the Treasury,

 

15

 8 Adopting Release at 69797-98. The required controls and procedures would need to adapt as regulatory 

requirements applicable to market access change. Id.

the Commission found that

Pinnacle Capital Markets violated Exchange Act Section 17(a) and Rule 17a-8 thereunder by 

9 Currency and Foreign Transactions Reporting Act of 1970, (commonly referred to as the Bank Secrecy 

Act), 12 U.S.C. § 1829b, 12 U.S.C. §§ 1951-1959, and 31 U.S.C. § 5311-5330. 10 31 C.F.R. § 1000-1099.

11 The BSA requires that broker-dealers establish AML programs that include, at a minimum, (1) the 

development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) 

an ongoing employee training program; and (4) an independent audit function to test programs. 31 U.S.C. § 

5318(h). A broker-dealer is deemed to have complied with this AML program requirement if the brokerdealer adopts an AML program pursuant to the rules of a self-regulatory organization. See 31 C.F.R. § 

1023.210(b)(2). FINRA Rule 3310, as well as other SRO rules, requires broker-dealers to establish such a 

program. 12 31 C.F.R. §1023.220.

13 31 C.F.R. § 1023.320. 14 17 C.F.R. §240.17a-8. 15 See In the Matter of: Pinnacle Capital Markets, LLC, FinCEN Matter No. 2010-4 (Sept. 1, 2010). 
4

failing to document accurately its customer verification procedures.

16

Risk: If money laundering, terrorist financing or other suspicious activity (such as the 

activity detailed below) is occurring through a customer’s master/sub-account, it may be difficult 

for the broker-dealer to identify who is responsible for such activity or whether suspicious 

activity is the result of one person or many persons who have authority to trade in the accounts. 

As a result, these relationships may make it difficult for a broker-dealer to adequately monitor

for suspicious activity, and therefore to comply with the SAR Requirement. 

 Pinnacle held master 

omnibus accounts for foreign entities, which in turn were subdivided into sub-accounts for other 

foreign entities. The holders of these sub-accounts were then able to conduct transactions 

directly in the US securities markets. The Commission found that Pinnacle treated these subaccount holders in the same manner as it did its regular account holders, allowing them to use 

direct market access software to enter securities trades directly and instantly through their own 

computers. The Commission concluded that the sub-account holders were Pinnacle's customers 

for purposes of the CIP rule because the sub-account holders effected securities transactions 

directly and without the intermediation of the master account holders. The Commission found

that Pinnacle did not accurately document its CIP as required by the CIP rule, because Pinnacle 

had not identified the customer sub-account holders or verified their identities. As a result of this 

and other conduct, Pinnacle was found to have willfully violated Section 17(a) of the Exchange 

Act and Rule 17a-8 thereunder. 

A broker-dealer must remain cognizant of its obligations under the CIP rule with respect 

to master/sub-account arrangements, as there are instances when the CIP rule may require 

identification and verification of sub-account holders.17 Where a sub-account holder is the 

broker-dealer’s “customer” for purposes of the CIP rule, the broker-dealer must treat the subaccount accordingly. 18

 16 In the Matter of Pinnacle Capital Markets LLC and Michael A. Paciorek, Exchange Act Release No. 62811 

(Sept. 1, 2010) (settled administrative proceeding); In the Matter of: Pinnacle Capital Markets,LLC, 

FinCEN Matter No. 2010-4 (Sept. 1, 2010)(concurrent FinCen action). The Commission has brought a 

number of other actions to enforce compliance by brokers and dealers with regulations under the BSA 

pursuant to Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. See e.g., In the Matter of 

E*Trade Clearing LLC and E*Trade Securities LLC, Exchange Act Release No. 58250 (Jul. 30, 2008); In 

the Matter of Crowell, Weedon & Co., Exchange Act Release No. 53847 (May 22, 2006).

 For example, as in Pinnacle, where a broker-dealer has treated a sub17 This alert is not intended to be a comprehensive review of a broker-dealer’s AML obligations generally, or 

specifically with respect to master/sub-account relationships. Other AML obligations may require a 

broker-dealer to obtain information regarding sub-account holders, including, among other things, the due 

diligence obligations for private banking accounts and for correspondent accounts for foreign financial 

institutions, and requirements relating to the prohibition on correspondent accounts for foreign shell banks. 

See, e.g., 31 C.F.R. 1010.610, 1010.620, and 1010.630. See, also, Guidance on Obtaining and Retaining 

Beneficial Ownership Information, Exchange Act Release No. 61651 (Mar. 5, 2010). 18 See, e.g., 31 C.F.R. §1023.100(d) (defining a “customer” for purposes of the CIP rule as a person who 

opens a new account); 31 C.F.R. §1023.220(a)(2)(ii)(C) (additional verification requirements for certain 

customers (i.e., customers that are not individuals); Question and Answer Regarding the Broker-Dealer 

Customer Identification Program Rule (31 CFR 103.122) (Oct. 1, 2003) available at

http://sec.gov/divisions/marketreg/qa-bdidprogram.htm (Question and Answer (“Q&A”) that addressed the 

non-exclusive circumstances under which a broker-dealer could treat an omnibus account holder as the 

only customer for the purposes of the CIP rule and would not also be required to treat the underlying 

beneficial owner as a customer. Among other things, the Q&A contemplated a scenario in which all 

securities transactions in the omnibus account or sub-account would be initiated by the financial 
5

account owner as its own customer (i.e., sub-account owner effects transactions directly with the 

broker-dealer and without the intermediation of the master account owner), the broker-dealer 

has an obligation to identify and verify the identities of such sub-account holders as required by 

the CIP rule. 

Furthermore, a broker-dealer’s CIP must address situations where, based on the brokerdealer's risk assessment of a new account opened by a customer that is not an individual, the 

broker-dealer will obtain information about individuals with authority or control over such 

account.19 This verification method applies when the broker-dealer cannot verify the customer's 

true identity using the documentary or non-documentary verification methods described in the 

CIP rule.

20

Even absent a CIP obligation, a broker-dealer’s other AML obligations still apply, 

including the SAR Requirement. Among other things, a broker-dealer’s AML program should

evaluate the risks that may be presented by such master/sub-accounts. Specifically, as part of a 

broker-dealer’s AML Program, a broker-dealer should establish and maintain customer due 

diligence procedures that are reasonably designed to identify and verify the identity of subaccount holders, as appropriate, based on the broker-dealer’s evaluation of risks presented by

such a master account.

 This may require a broker-dealer to obtain information about and verify the identity 

of a sub-account holder where the broker-dealer cannot otherwise verify the identity of the 

master account holder. 

21

Insider Trading – Illegal insider trading refers generally to buying or selling a security, in 

breach of a fiduciary duty or other relationship of trust and confidence, while in possession of 

material, nonpublic information about the security.

A broker-dealer’s acceptance of master/sub-account business may be 

higher risk for the reasons detailed above.

22

The regulatory requirements provisions of the Market Access Rule include a requirement 

that a broker-dealer’s risk management controls and supervisory procedures are reasonably

designed to “prevent the entry of orders for securities that the broker-dealer, customer, or other 

person ...is restricted from trading.”

Insider trading violations may also include 

“tipping” such information, securities trading by the person “tipped,” and securities trading by 

those who misappropriate such information. The Commission staff is concerned that customers 

with master/sub-account arrangements may seek to use them as vehicles for insider trading 

schemes. 

23

 

intermediary holding the omnibus account, and the beneficial owner of the omnibus account or sub-account 

would have no direct control of the transactions effected in the account.).

19 31 C.F.R. §1023.220(a)(2)(ii)(C). As discussed infra note 32 and accompanying text, SRO rules have 

independent due diligence and “know your customer” obligations that may apply. 20 Id. 

21 See, e.g., Guidance on Obtaining and Retaining Beneficial Ownership Information, Exchange Act Release 

No. 61651 (Mar. 5, 2010). 22 See, e.g., United States v. O’Hagan, 521 U.S. 642, 652-53 (1997). 

23 17 C.F.R. §240.15c3-5(c)(2)(ii). 
6

Risk: Insider trading may be conducted through a sub-account to try to avoid detection. 

The master account owner (if not a registered broker-dealer) may not be subject to supervisory 

obligations under the securities laws for the activities of the sub-accounts for compliance with 

insider trading rules. However, the registered broker-dealer carrying the master account does 

have certain obligations.

24 While these accounts may be visible to investigators after the 

occurrence of possible insider trading through information requests by self-regulatory 

organizations or the Commission under Exchange Act Rule 17a-25,25

any weaknesses in frontline monitoring by a broker-dealer may create opportunities for abuse. 

If a broker-dealer offering its customers master accounts does not have reasonablydesigned controls and procedures to prevent unlawful trading, there may be significant legal and 

reputational risk for the broker-dealer. Reasonable controls and procedures should be designed 

to address factors such as the high volume of transactions flowing through these accounts and 

the lack of knowledge as to who is actually doing the trading. For example, broker-dealers may 

need to design procedures to identify patterns of trading that may indicate potential misuse of 

nonpublic information, and consider whether further due diligence as to the identity of the trader 

is necessary. Broker-dealers offering master accounts should consider surveilling the trading 

activity in master accounts and sub-accounts against their “grey list” and/or “restricted list,” 

and for the purpose of identifying unusual trading ahead of major market announcements or of 

highly profitable trading. Such activity could indicate the possibility of misuse of inside 

information. Broker-dealers should also consider the kind of appropriate due diligence needed 

to identify when the ultimate customer is an insider of a corporation and may be subject to 

trading restrictions in that corporation. 

Market Manipulation – Market manipulation refers to intentional conduct designed to 

deceive investors by controlling or artificially affecting the price of a security.26 Manipulation 

may involve a number of techniques to affect the supply of, or demand for, a security. They 

include: spreading false or misleading information about a company, improperly limiting the 

number of publicly-available shares, rigging quotes, or pricing trades to create a false or 

deceptive picture of the demand for a security. Those who engage in manipulation are subject to 

various civil and criminal sanctions. As with insider trading, the Commission staff is concerned 

that master/sub-accounts arrangements could be vehicles for market manipulation schemes.

Risk: A sub-account trader may open multiple accounts under a single master account 

or accounts under different master accounts and at different broker-dealers. The trader could 

effect trades on both sides of the market to manipulate a stock by entering orders to drive the 

price up, mark the close, or engage in other manipulative activity with minimal chance of 

detection. Such conduct may create the false appearance of activity or volume and can 

 24 See, e.g., Rule 15(g), 17 C.F.R. §240.15(g)(policies and procedures reasonably designed to prevent misuse 

of material, nonpublic information by the broker-dealer or associated persons); NASD Rule 3010 

(supervision generally); 31 C.F.R. § 1023.320 (obligation to monitor, detect and file reports of suspicious 

activity). 25 17 C.F.R. §240.17a-25. The information provided under Rule 17a-25 is commonly referred to as the 

Bluesheets. While Bluesheets may not directly reveal which sub-accounts were responsible for individual 

trades, that information should be obtainable by inquiry or subpoena to the master account owner. 26 Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).
7

therefore fraudulently influence the price of a security. In addition, some bad actors may be 

engaged in account intrusions to further their manipulative conduct. Broker-dealers offering 

customers master accounts should apply their market manipulation surveillance parameters to 

trading activity at both the master account and sub-account levels.

Information Security – Information security means protecting information and 

information systems from unauthorized access, use, disclosure, disruption, modification, perusal, 

inspection, recording or destruction. The Commission staff has observed that broker-dealers, 

master account owners and sub-account traders could be vulnerable to breaches of information 

security due to weak controls. This vulnerability implicates the Market Access Rule requirement

that broker-dealers “establish, document, and maintain a system of risk management controls and 

supervisory procedures reasonably designed to manage the financial, regulatory, and other risks” 

of providing market access to any other person.27

Risk: If a broker-dealer does not have appropriate controls over access to a master 

account, the broker-dealer may lack means to protect itself, the master account/sub-account 

owners, and its other customers from unauthorized access and use. Although hacking is a 

potential risk for any broker-dealer, a master/sub account structure poses a greater risk of 

hacking based on the risk that a larger population of persons with access to a broker-dealer’s 

trading systems is more likely to include either bad actors or persons who are careless about 

information security.

Under a scenario in which the master account owner is the beneficial owner of not only the 

master account but also the various sub-accounts, the broker-dealer only knows the master 

account owner as its customer. As illustrated by a number of Commission enforcement actions, 

various forms of electronic account intrusion are a serious risk for broker-dealers and their 

customers,28

Master/sub-account relationships could also present a risk to informational national 

security if multiple sub-accounts, held through one or many different customers’ master 

accounts, are used to conduct a single or multi-source cyberattack on a systemically important 

financial institution, such as the broker-dealer carrying the master account, a market utility 

linked to the broker-dealer or to the master account, such as a clearance or settlement system, or 

a counterparty of the broker-dealer or master account. While the NEP staff has not observed 

indications of such an attack, the consequences of such an attack could be severe, for the host 

broker-dealer as well as for the securities markets generally.

and broker-dealers that permit master/sub-account arrangements must take 

reasonable measures to address this risk. 

 27 Rule 15c3-5(b), 17 C.F.R. § 15c3-5(b). This vulnerability could also implicate Rule 15c3-5(c)(2)(iii), 17 

C.F.R. § 15c3-5(c)(2)(iii), which specifies that the required risk management controls and supervisory 

procedures should be reasonably designed to, inter alia, “restrict access to trading systems and technology 

that provide market access to persons and accounts pre-approved and authorized by the broker or dealer.” 28 See, e.g., SEC v. Dorozhko, Litigation Release No. 21465 (Mar. 29, 2010)(summary judgment against 

computer hacker for insider trading); SEC v. Marimuthu, et al., Litigation Release No. 20037 (Mar. 12, 

2007)(offshore hackers charged with account intrusion into online accounts and market manipulation); SEC 

v. Dinh, Litigation Release No. 18401 (Oct. 9, 2003)(allegations that hacker broke into investor’s online 

account and placed unauthorized buy orders). 
8

Broker-dealers offering customers master accounts may consider applying information

security parameters and triggers to ensure that the trading activity and volume flowing through 

the master account do not result in undue added operational risk to the broker-dealer. In 

addition, the broker-dealers may require master account owners to implement controls to 

prevent the use of technology for inappropriate purposes. 

Unregistered Broker-Dealer Activity – Section 15(a) of the Exchange Act makes it 

unlawful for any broker or dealer to effect any transaction in, or induce or attempt to induce the 

purchase or sale of, any security unless such broker or dealer is registered with the Commission. 

The staff is concerned that broker-dealers offering master/sub-account arrangements may 

provide an avenue for unregistered broker-dealer activity, in which an LLC, LLP or other entity 

solicits customers to trade through the unregistered broker-dealer’s master account while taking

trading commissions or other compensation from the sub-account traders. Indeed, the 

Commission has recently brought actions against persons opening master accounts through a 

registered broker-dealer and then giving day traders access to the securities markets through subaccounts.

29

Risks: As illustrated in actions against Tuco Trading, LLC and Warrior Fund, LLC, 

many master/sub-account arrangements may permit the master account owner, and possibly a 

sub-account owner, to act as unregistered broker-dealers in violation of Section 15(a) of the 

Exchange Act. In addition, the registered broker-dealer with which an unregistered broker 

opens an account may also have liability for aiding and abetting in the activities of the 

unregistered broker-dealer’s registration violations.

 

In exercising its “know your customer” reasonable diligence,30

Excessive Leverage and Others Risks – In addition to the risks identified above, market 

participants and sub-account traders are also exposed to a number of other risks as a result of 

abusive practices facilitated by the master/sub-account trading model, including being 

inappropriately used to offer excessive leverage. 

a broker-dealer offering 

customers master accounts should understand the relationship that exists between the master 

account and the sub-account traders. For example, if the master account is identified by the 

broker-dealer’s customer as a proprietary account, the broker-dealer should endeavor to obtain

and review valid partnership or employment agreements to evidence that the relationship 

between the master account customer and the sub-account is an employee or partnership 

relationship rather than a customer relationship. 

Risks: In addition to unregistered broker-dealer activity, Tuco Trading, LLC and Warrior 

Fund, LLC, illustrate that master/sub-account arrangements also can be inappropriately used to 

offer excessive leverage to pattern day-traders who may have inadequate equity balances for 

such leverage. Additionally, staff continues to have a concern that the master/sub-account 

 29 See In the Matter of Tuco Trading, LLC and Douglas G. Frederic, Litigation Release No. 20500 (Mar. 18, 

2008); In the Matter of Warrior Fund, LLC, Exchange Act Release No. 61625 (Mar. 2, 2010). 30 The “know your customer rule” has long applied to most broker-dealers under New York Stock Exchange 

Rule 405(1). That rule, now enforced by FINRA, will soon be supplanted by FINRA Rule 2090, which 

takes effect July 9, 2012. See Securities Exchange Act Release No. 63325 (Nov. 17, 2010), 75 FR 71479 

(Nov. 23, 2010) (Order Approving Proposed Rule Change; File No. SR-FINRA-2010-039). FINRA Rule 

2090 is substantially the same as NYSE Rule 405(1). See FINRA NTM 11-25 (May 2011) at 2.
9

trading model may be used by master account owners as a means to defraud traders who 

contribute money in order to obtain market access to trade.31

II. The National Exam Program will examine for compliance with the Market 

Access Rule as a means to combat violative activity in the master/sub-account 

trading model. 

 

With the adoption of the Market Access Rule, broker-dealers that provide market access are

required to establish, document, and maintain a system of risk management controls and 

supervisory procedures that, among other things, is reasonably designed to systematically limit 

the financial, regulatory and other risks to the broker or dealer that could arise as a result of 

market access to an exchange or ATS, and ensure compliance with all regulatory requirements 

that are applicable in connection with market access.32

(1) the system of risk management controls and supervisory procedures that addresses

master account customers to which a broker-dealer offers market access, as defined in the 

Market Access Rule, and 

In examining for compliance with the 

Market Access Rule, the staff intends to scrutinize 

(2) whether, in accordance with such controls and procedures, a subject broker-dealer is 

appropriately vetting the master account customer and sub-accounts identified as 

customers engaged in the trading business, or proprietary accounts, and individual traders 

with access to the broker-dealer’s MPID, trading system and technology providing

market access. 

The following are examples of effective practices to evidence due diligence that the staff has 

observed when examining for reasonable controls and procedures in similar contexts,33 as well as 

illustrations of types of controls that firms might apply in order to comply with the controls and 

procedures requirements of the Market Access Rule:

34

 31 For example, in the Tuco Trading case, the Commission successfully sought a federal court permanent 

injunction from future violations of the federal securities laws, based on its allegation that the firm 

inaccurately reported equity balances to the traders and had used millions of dollars of the traders’ equity to 

pay for the firm’s expenses, which was not disclosed to the traders. These unregistered broker-dealers 

offering master-sub-account arrangements, even with adequate disclosure, still expose the traders to the risk 

of losing all of their capital contributions and profits based on the actions of the LLC, LLP or other entity 

or the actions/losses of fellow traders. 32 Rule 15c3-5(b) and (c)(2), 17 C.F.R. § 15c3-5(b) and (c)(2). 33 E.g., compliance with Exchange Act 15(g)’s requirement that broker-dealers have controls and procedures 

reasonably designed to prevent insider trading; compliance with supervisory obligations under the federal 

securities laws. 34 These examples are not intended to be exclusive. Firms may demonstrate to the examination staff that they 

have acceptable alternative ways to comply with the Market Access Rule.
10

• To evidence that the subject broker dealer has performed35

• Monitoring trading patterns in both the master account and sub-account levels for 

indications of insider trading, market manipulation, or other suspicious activity;

appropriate suitability, knowyour-customer and other due diligence on the master account holder and traders to whom 

market access (with an MPID or similar arrangements) has been provided based on the 

broker-dealer’s risk assessment of the business activity: (i) obtaining and maintaining 

the names of all traders authorized to trade with the broker-dealer’s MPID in each subaccount; (ii) verifying through documentation the identities of all such traders, including 

fingerprints if appropriate, background checks and interviews; and (iii) periodically 

checking the names of all such traders through criminal and other data bases such as, in 

the case of foreign nationals, the Special Designated Nationals List of the Office of 

Foreign Assets Control of the United States Treasury Department;

• Physically securing information of customer or client systems and technology; 

• Establishing trader validation requirements (e.g., minimum procedures for effective 

password management, IP address identification, and other mechanisms that validate the 

trader’s identity);

• Tracking and logging incidents of penetration-of-system attempts by outside parties 

without authority;

• Determining that traders who have access to the broker-dealer’s trading system and 

technology have received training in areas relevant to their activity, including market 

trading rules and credit;

• Regularly reviewing the effectiveness of all controls and procedures around sub-account

due diligence and monitoring; and

• Creating written descriptions of all controls and procedures around sub-account due 

diligence and monitoring, including frequency of reviews, identity of who is responsible 

for conducting such reviews, and a description of the review process.

In the course of these examinations, the broker-dealer providing access will be asked to supply 

information regarding the nature of its risk assessment and to support its conclusions. The staff 

may request records evidencing whether persons associated with the master account customer,

who are provided access to the market through the broker-dealer’s trading systems or other 

technology, are not themselves customers for purposes of Exchange Act Rule 15c3-3. For 

example, the subject broker-dealer may supply (i) partnership or shareholder agreements signed 

by the person at the sub-account level to whom market access is provided, or (ii) documentary

evidence among the various persons to whom access or technology is provided that sufficiently 

demonstrates that the relationship between the customer and the sub-account traders is an 

employment or trading relationship rather than a customer relationship.

III. Conclusion. 

While master/sub-account arrangements may be used for legitimate business purposes, the NEP 

has also identified a number of serious abusive practices that this account structure can facilitate. 

Broker-dealers offering master/sub-accounts have an obligation under the Market Access Rule to 

 35 The Market Access Rule provides that broker-dealers may have a reasonable, written allocation 

arrangement under certain circumstances with a customer that is a registered broker-dealer for specific 

controls and procedures Rule 15c3-5(d)(1), 17 C.F.R. § 15c3-5(d)(1).
11

establish, document and maintain a system of risk management controls and supervisory 

procedures that are reasonably designed, among other things, to ensure compliance with all 

regulatory requirements that are applicable in connection with market access. In this Alert we 

have described certain risks that broker-dealers that offer the master/sub-account trading model 

to customers should consider in designing such controls and procedures. We have also 

highlighted certain practices that we believe could be helpful to firms in meeting their 

obligations under the Market Access Rule.