This is a better explanation:
http://www.greencompany.com/blog/index.php?postid=79
and this is from a FINRA letter to BRoker Dealers dated 2/8/2011
Master/Sub-Account Relationships
Master/sub-account relationships raise a host of regulatory issues for firms and carry the risk that the firm does not know the identity of its âcustomerâ as required by federal securities laws, including the Customer Identification Program (CIP) provisions of the Bank Secrecy Act, and FINRA Rule 3310. In some situations, despite the fact that there is an intermediary master account, a
firm may be required to recognize a sub-account as a separate customer of the firm. FINRA examiners closely review firmsâ procedures for determining the beneficial ownership of each account within a master/sub-account structure in accordance with the guidance published in Regulatory Notice 10-18. FINRA examiners will review firmsâ systems for monitoring, detecting and reporting suspicious activity in master/sub-account structures, whether or not the sub-account should be considered the firmâs customer for CIP purposes.
FINRA examiners also will focus on whether the firm is properly monitoring transactions in master/sub-account structures for potentially manipulative activity and reporting that activity, as appropriate, on a Suspicious Activity Report (SAR). In a recent enforcement action, FINRA sanctioned a firm for failing to adopt risk-based procedures to verify the identity of sub-account holders, even though these customers lived overseas in high-risk jurisdictions and could freely execute trades for their own profit, and also for failing to adopt effective procedures for detecting suspicious activity.16 FINRA examiners also will assess whether the master account is acting as an unregistered broker-dealer. Further, if sub-accounts are represented as individual proprietary traders of the master, examiners will determine whether such proprietary traders are required to be registered and will also review the relationships to determine whether such traders should be recognized as separate customer accounts.
Master/sub-account relationships have also raised issues under other FINRA and SEC rules, such as margin rules and books and records requirements. If a determination is made during the course of an examination that the beneficial ownership of the sub-accounts is different from that of the master account, the sub-accounts would need to be recognized as separate customers and firms could encounter significant net capital charges for under-margined accounts and significant SEA Rule 15c3-3 reserve formula implications. See Regulatory Notice 10-18 for additional information.
