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Hedge Fund Compliance: The National Exam Risk Alert

The SEC recently released a National Exam Risk Alert outlining the various threats posed by master/sub-account relationships. These account types have gained in popularity within the institutional market, largely due to the ease of market access for the sub-account traders.

The master account is typically an entity with a LLC or LLP structure that provides the broker-dealer’s MPID to the sub-accounts in order to trade on platforms provided by the master account. These account arrangements can be used to dodge the recently effective Market Access Rule (Rule 15c3-5) if the sub-account owners are not known to the broker-dealer. Additional threats posed by the master/sub-account structure include:

  • Money laundering
  • Insider trading
  • Market manipulation
  • Data security risks
  • Unregistered broker-dealer activity
  • Excessive leverage

Regulators are looking closely at these account arrangements during routine examinations. The SEC is seeking proof from broker-dealers to ensure that they have the required controls and procedures in place to manage the additional financial and regulatory risks imposed upon them when they provide another person with market access via a master/sub-account relationship.

View the SEC’s National Exam Risk Alert

 

About Alex Akesson

Alex has been specializing in hedge fund and alternative investment news since April 2006. Working mainly in research and manager interviews, she has published breaking news on the hedge fund industry on her blog, as well as several industry publications. Her access to hedge fund managers gives her insight into news stories as well, and the ability to track press releases and other breaking news in real time.
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