Market Access Rule 15c3-5: Still a priority for FINRA

The Market Access Rule (Rule 15c3-5) remains on FINRA’s priority list – they have provided guidance on the rule and initiated enforcement actions against firms struggling to adhere to it. Oyster Consulting often works with clients after regulators have found issues with their Market Access program. It’s in your firm’s best interest to take a proactive look at your Market Access program.

In the first of two Oyster Stew podcasts covering the Market Access Rule (Rule 15c3-5), Oyster Consultants Joe Sisti and Evan Rosser discuss who’s affected, regulatory focus and what firms should be doing to comply.

Transcript

Transcript provided by Temi transcript services

Joe Sisti:  Welcome to Oyster Stew, a mix of financial services, commentary, and insights. Today is Monday the 5th of October. I’m Joe Sisti. Joining me today is another Oyster consultant, Evan Rosser. We’re excited you decided to join us for a brief discussion about the Market Access rule and why firms should be concerned with their efforts to comply with it. Rule 15-c3-5 remains on FINRA’s priority list. They provided guidance on the rule and they have initiated enforcement actions against firms struggling to adhere to it. We usually end up working with clients after they’ve been dinged by the regulators, and we really think it’s in your firm’s best interest to take a proactive look, to get your market access program assessed and in good order, before regulators take a deeper look. So Evan, can you elaborate on what we’ve seen and heard from FINRA of late?

Evan Rosser:  Well, thank you, Joe. We thought it might be a good time to talk about the Market Access Rule because it remains a priority for regulators. FINRA has kept it in their exam priorities letter for several years now. I think it’s a good time for us to talk a little bit about what we’ve seen in our exams, what we’ve seen in talking to our clients and what we’ve seen from regulators. They’re enforcing this rule, and FINRA particularly has brought several cases around it. Certainly, the electronic trading that we’ve seen in the last few years, the high frequency traders, have really been a impetus to this rule. However, it does cover fixed income securities, and FINRA has brought some cases around fixed income. And that’s one issue that firms need to be aware of: if they’re giving access to their traders at the firm, either for principal trading or to their customers, if they’re giving them access to markets that trade bonds, then that is covered by the rule at the heart of it.

Evan Rosser:  Yes. That’s a good point, because one thing that we found both in exam findings from FINRA in some enforcement and also just from talking to clients is, it’s an ongoing process. You don’t just set the controls up once and they’re good to go forever. They need to be continually reviewed to see if the parameters of those controls are set properly. You need a process by which you amend those controls when necessary. And, as you point out, you have to test them. You have to make sure they’re reasonably designed, that they are testing and controlling the right things, but also that they’re working, that they are in fact working effectively, as they are planned to work all your controls. You have to know where they are. The rule requires you to have control over the controls, that you can set the parameters based on the risk presented by your own firm’s activities, and then test them. You can’t allow others to set those controls without your input. You can’t rely on the controls that may be on an OMS, your fix connection, your exchange, the exchanges. You need to have control over your own controls, and you need to test them, as you say, and you need written procedures around that to review your controls, their parameters, on a regular basis.

Joe Sisti:  Given the complexity of the role and the complexity of the programs we’ve seen at firms both large and small, there really is a call to urge firms to proactively have someone come in and take a look and do a current state assessment of their program. I think there’s a lot of value in that because as you’re working in the day-to-day, and we’ve seen something as simple as onboarding a client and establishing the limits for those clients and considering the way that client changes all the time is often a place where people stumble. I think when you get a second set of eyes to come in and take a look at your program from the outside, looking at not only the breadth of the program, but the details within that program, whether it be something like setting limits or the post-trade reports that you’re utilizing to make sure that your program is effective.

I think you get a lot of value out of that and really have an opportunity to enhance what you have in place today. The fact that we come in and try and mitigate fines and come in and try and help firms with the regulatory situation is one thing. But I think there’s a lot to be gained from just taking a periodic look at your program, either in a broad sense or in a more detailed area where you think your controls might not be as strong as they should be.

Evan Rosser:  One thing that we have always done, and it’s an important part of every review that we’ve done, is the governance piece. That piece that looks at how a firm determines the capital limits around its proprietary traders, how those limits are set, how that capital is allocated and how it’s monitored throughout the day. You can have a capital limit for one of your traders, but if you don’t have a way of monitoring it, and if you don’t have a way of stopping that trader from blowing through that limit, then that’s not an effective process and you don’t have an effective control.

Joe Sisti:  That’s typically where we start Evan, isn’t it? I mean, I think of an onboarding. The client is one of the first things we look at and documentation around that varies at the firms that we have had engagements with in the past. Sometimes it’s really an involved process, where you really get the sense that there are a lot of players involved. In other points, they have typical, preset limits based on the tiers at which they set firms.

As I think about the world that we’re living in now, remotely, the beauty is the vast majority of this stuff can be done remotely. And, while typically, Evan, we’ve been onsite and spent two or three days at every firm where we’ve had an engagement, I think it’s fair to say that we can conduct interviews with the key stakeholders remotely as well.

Evan Rosser:  I wouldn’t underestimate the value of meeting with clients in person on site, but the vast majority of the work that we do as consultants is completed remotely. We can review policies and procedures, and in this instance around credit and capital limits, we can review meeting agenda and governance documents. We can review meeting minutes and we can follow up with you on questions we have about those documents, so that we clearly understand your firm’s 15c-3-5 program.

At the end of that effort, we can produce a report of recommendations that would enhance your existing controls, address gaps or inconsistency in your policies and procedures, and ensure that you are testing your market access controls as expected. If this sounds like something that would be helpful to your firm, that you might be interested in, please reach out to us for a consultation by calling (804) 965-5400, or contact us through our website, www.oysterllc.com, or join us for our next Market Access Rule podcast, where we will focus on more detailed aspects of compliance with the rule, specifically post-trade surveillance, periodic testing, and the annual certification process. Thank you again for listening and we hope you’ll join us for our next podcast.

 

About The Authors

Joe Sisti has more than 30 years of both front / back office experience in the Financial Services Industry.  His expertise and experience spans broker-dealer operations, compliance, relationship management, client integrations and conversion events.  Joe has worked multiple engagements with broker-dealers, clearing firms, and registered investment advisors, performing a varying scope of services including operational risk and readiness assessments, branch audits, compliance support, remediation projects and both trade and supervisory procedure reviews.

Evan Rosser is an experienced and respected securities industry professional with over 25 years of experience managing complex securities investigations for NASD/FINRA and providing compliance expertise to both broker-dealers and investment advisors.  Evan has served as CCO for both investment advisors and broker-dealers, as well as providing compliance support to numerous broker-dealers and registered investment advisors.

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