Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, November 3, 2010

SEC Requires Broker-Dealers to Have Risk Controls for "Sponsored Access"

The SEC today voted unanimously to adopt a new rule to require brokers and dealers to have risk controls in place before providing their customers with access to the market.  The new rule focuses on a practice in which broker-dealers hand their customer a special pass to access the markets called a market participant identifier. The customer then gains direct access to the applicable exchange or alternative trading system (ATS), also known as “sponsored access.”

The rule approved today prohibits broker-dealers from providing customers with “unfiltered” or “naked” access to an exchange or ATS. It also requires brokers with market access — including those who sponsor customers’ access to an exchange or ATS — to put in place risk management controls and supervisory procedures to help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.

Through sponsored access — especially “unfiltered” or “naked” sponsored access arrangements — there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. Of particular concern is the quality of broker-dealer risk controls in “unfiltered” access arrangements. In some cases, the broker may be relying on assurances from its customer that the customer has appropriate risk controls in place.

The new rule will be effective 60 days from the date of its publication in the Federal Register. Once effective, broker-dealers subject to the rule will have six months to comply with the requirements.

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The implementation date was extended to February 2011 to give the exchangesbtime to get ready.

Love your blog. Read it all the time for updates.

Thank you.

Posted by: Ana | Nov 4, 2010 5:43:46 PM

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