Risk Management Controls for Brokers or Dealers With Market Access

The Securities and Exchange Commission ("Commission" or "SEC") is adopting new Rule 15c3-5 under the Securities Exchange Act of 1934 ("Exchange Act"). Rule 15c3-5 will require brokers or dealers with access to trading securities directly on an exchange or alternative trading system ("ATS"), including those providing sponsored or direct market access to customers or other persons, and broker-dealer operators of an ATS that provide access to trading securities directly on their ATS to a person other than a broker or dealer, to establish, document, and maintain a system of risk management controls and supervisory procedures that, among other things, are reasonably designed to systematically limit the financial exposure of the broker or dealer that could arise as a result of market access, and ensure compliance with all regulatory requirements that are applicable in connection with market access. The required financial risk management controls and supervisory procedures must be reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous. The regulatory risk management controls and supervisory procedures must also be reasonably designed to prevent the entry of orders unless there has been compliance with all regulatory requirements that must be satisfied on a pre-order entry basis, prevent the entry of orders that the broker or dealer or customer is restricted from trading, restrict market access technology and systems to authorized persons, and assure appropriate surveillance personnel receive immediate post-trade execution reports. The financial and regulatory risk management controls and supervisory procedures required by Rule 15c3-5 must be under the direct and exclusive control of the broker or dealer with market access, with limited exceptions specified in the Rule that permit reasonable allocation of certain controls and procedures to another registered broker or dealer that, based on its position in the transaction and relationship with the ultimate customer, can more effectively implement them. In addition, a broker or dealer with market access will be required to establish, document, and maintain a system for regularly reviewing the effectiveness of the risk management controls and supervisory procedures and for promptly addressing any issues. Among other things, the broker or dealer will be required to review, no less frequently than annually, the business activity of the broker or dealer in connection with market access to assure the overall effectiveness of such risk management controls and supervisory procedures and document that review. The review will be required to be conducted in accordance with written procedures and will be required to be documented. In addition, the Chief Executive Officer (or equivalent officer) of the broker or dealer will be required, on an annual basis, to certify that the risk management controls and supervisory procedures comply with Rule 15c3-5, and that the regular review described above has been conducted.