SEC Adopts Final Rule Regarding Risk Management Controls for Broker-Dealers with Market Access

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On November 3, 2010, the Securities and Exchange Commission (the “SEC”) voted unanimously to adopt a new rule that will effectively prohibit broker-dealers with market access from providing customers with unfiltered access to an exchange or alternative trading system (“ATS”). Rule 15c3-5 (the “Rule”) will require broker-dealers with direct market access to trading securities on an exchange or ATS to establish, document, and maintain a system of risk management controls and supervisory procedures that, among other things, are reasonably designed to (1) systematically limit the financial exposure of broker-dealers that could arise as a result of market access, and (2) ensure compliance with all regulatory requirements that are applicable in connection with market access.1 It encompasses trading in all securities on an exchange or ATS, including equities, options, exchangetraded funds, and debt securities, and is intended to strengthen the controls with respect to market access and reduce regulatory inconsistency and the potential for regulatory arbitrage. The Rule was adopted with only minor changes to the proposed rule that was published for comment in January 2010, and becomes effective 60 days from the date of publication in the Federal Register.

Background

Broker-dealers with direct market access to an exchange or ATS use a market participant identifier (“MPID”) when effecting trades, and are legally responsible for any trades made using their MPID. Allowing third parties to trade using a broker-dealer’s MPID could result in the broker dealer paying lower transaction fees based on a volume discount. A broker-dealer also may network with another broker-dealer to gain access to an exchange where it is not a member.

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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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