Targeted Examination Letters

August 2010

 

Re: Direct Market Access, Naked Access, Electronic Access or Sponsored Access ("DMA")

 

FINRA's Enforcement Department is conducting a review of broker/dealers that provide Direct Market Access, Naked Access, Electronic Access or Sponsored Access ("DMA") to their customers. This request is for documentation and information for the time period January 1, 2009 to the present (the "review period"), unless otherwise specified:

 

  1. Provide a detailed written description of the Firm's DMA business and operations. Include in the narrative a description of:
    1. the technology used by DMA participants to enter and execute orders;
    2. each type of account utilized by DMA participants and how they are structured (master/sub-accounts, omnibus accounts, standalone accounts, etc.);
    3. number of each type of DMA account indentified in item 1(b) that was maintained by the Firm as of December 31, 2009;
    4. trading access per account and whether multiple trader log-ons are permitted per account;
    5. commission and fee structure associated with the DMA; and
    6. how ECN rebates are handled;
  2. Copies of documentation provided by the Firm to the customer or trader when establishing a DMA relationship, including but not limited to, instructive or informational documentation, new account forms, margin agreements, and trading authorizations;
  3. State whether the Firm has undertaken any risk assessment of its DMA business. If so, provide a description of the assessment undertaken, a copy of any findings, and a description of any undertakings in response to the results of the assessment;
  4. In electronic format, provide all written supervisory procedures in place that govern the Direct Market Access business at the Firm;
  5. In electronic format, provide a complete set of the Firm's written policies and procedures that relate to, refer to, or concern all aspects of the Firm's AML program in effect during the review period identified;
  6. Provide a detailed description of all independent testing for AML compliance performed from January 1, 2009 to the present. Include the name and background of the individuals conducting the testing. Also provide a copy of the results of the testing, including but not limited to, written reports, memoranda and analyses. Identify any undertakings by the Firm as a result of the testing;
  7. If the Firm permits master/sub-accounts, provide a detailed written explanation of the process the Firm uses to determine whether a master/sub-account can be recognized as one customer account or as separate accounts for the purposes of FINRA Rules, the federal securities laws, the Bank Secrecy Act and other applicable federal laws;
  8. If the Firm permits accounts with multiple trader log-ons, provide a description of how these accounts are reviewed and approved for opening;
  9. A narrative describing the firm's process in establishing standards for position and credit limits for DMA accounts. Describe any monitoring the firm conducts on an ongoing basis of position and credit limits;
  10. A detailed description of the Firm's procedures for reviewing for suspicious activities, the types of tools employed in the monitoring, and the manner in which they are utilized. Suspicious activities include suspicious securities trading, securities movement, and money movement. The response should include, but not be limited to:
    1. A list of each type of exception, surveillance or risk monitoring report or other tools used by the Firm to monitor for suspicious activities. Provide a detailed explanation of the tool or report, including information on the frequency with which the report is run or the tool is utilized, the type of activity the tool or report is set up to monitor (including the parameters set), and the manner in which the data is gathered, interpreted and used by the Firm;
    2. Identification of individual(s) responsible for using the tool or reviewing the report and the names of all individuals receiving copies of the report or a sub-set of the report;
    3. Copies of all procedures, explanatory documents or guidelines used in connection with each report or tool;
    4. A copy of each type of exception report or system output identified above for the months of June and December 2009;
    5. If no exception, surveillance or risk monitoring reports or tools are utilized, provide a detailed explanation of the reviews conducted to monitor for suspicious transactions;
  11. Indicate: (a) the percentage of accounts that are engaged in DMA as of December 31, 2009 and (b) percentage of foreign accounts as of December 31, 2009