SEC Adopts New Rule Preventing Unfiltered Market Access

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On November 3, the Securities and Exchange Commission announced the adoption of Rule 15c3-5, which prohibits broker-dealers from providing customers with “unfiltered” or “naked” access to an exchange or alternative trading system (i.e., where broker-dealers allow customers to trade in those markets electronically using the broker-dealers’ market participant identifiers). The rule also requires broker-dealers to have better risk controls when they access the market on behalf of their customers or themselves. For example, broker-dealers must put in place risk management controls and supervisory procedures to help prevent erroneous orders, ensure compliance with regulatory requirements and enforce preset credit or capital thresholds.

The final rule includes certain limited exceptions to these requirements. For example, a broker-dealer providing market access is permitted to reasonably allocate control over specific regulatory risk management controls and supervisory procedures to a customer that is a broker-dealer, so long as such broker-dealer customer has better access to that ultimate customer and its trading information such that it can more effectively implement the specified controls and procedures.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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