## Facts

- Wedbush Securities Inc. was a large broker-dealer providing market access, including sponsored access that allowed customers to route orders directly to trading venues using Wedbush’s market participant identifier and non-Wedbush platforms.
- From July 2011 through at least January 2013, Wedbush provided such access to dozens of firms and thousands of individual traders.
- Wedbush was aware its sponsored-access model posed regulatory risk, including prior customer-related misconduct and prior regulatory concerns about Wedbush’s short-sale controls and a large sponsored-access customer.
- Although customers using non-Wedbush platforms executed attestations that Wedbush had “direct and exclusive control” over risk settings, in practice some sponsored-access customers could set or change risk parameters without Wedbush’s knowledge or consent.
- Wedbush delegated certain market-access controls and supervisory procedures to other broker-dealers without adequate due diligence or ongoing review.
- Wedbush’s pre-trade controls were deficient because many customer orders did not pass through Wedbush systems before reaching trading venues, limiting Wedbush’s ability to apply credit/capital limits and error-prevention controls.
- Wedbush’s short-sale controls were deficient where incorrect “easy-to-borrow” inputs were used, undermining Regulation SHO compliance and allowing improper short sales.
- Wedbush lacked effective controls to prevent or detect customers’ reactivation of order routes after Wedbush directed that routes be closed, including for intermarket sweep order routing.
- Wedbush did not implement adequate controls to prevent or detect wash sales and layering, and failed to file suspicious activity reports regarding trading with characteristics of such activity.
- Wedbush relied on sponsored-access customers to approve individual traders and did not maintain effective controls to prevent disabled traders from obtaining new trader identifiers.
- Wedbush’s president certified Rule 15c3-5 compliance based on an internal audit that did not address market-access controls, reflecting weaknesses in internal oversight.

## Issues

1. Whether Wedbush violated Exchange Act Rule 15c3-5 by failing to establish, document, and maintain risk management controls and supervisory procedures reasonably designed to manage financial and regulatory risks from market access and sponsored access.
2. Whether Wedbush failed reasonably to supervise persons subject to its supervision, given its reliance on customers, platform providers, and other broker-dealers for core controls.
3. Whether Wedbush’s compliance certification process for Rule 15c3-5 was deficient in a manner supporting violations of the Exchange Act’s supervisory and control requirements.

## Decision

- The SEC instituted cease-and-desist and administrative proceedings and resolved them through settlement as to Wedbush.
- The SEC found that Wedbush failed to establish, document, and maintain risk management controls and supervisory procedures reasonably designed to manage risks associated with its market-access business, in violation of Exchange Act Rule 15c3-5.
- The SEC found supervisory failures tied to Wedbush’s delegation of core control functions without adequate diligence and oversight.
- The SEC ordered Wedbush to cease and desist from committing or causing future violations of Rule 15c3-5 and related provisions.
- The SEC imposed remedial sanctions, including a civil monetary penalty and undertakings to improve market-access controls, typically including independent compliance review.

## Legal Principles

- A broker-dealer providing market access must maintain documented, reasonably designed pre-trade risk controls and supervisory procedures to address financial exposure, regulatory compliance, and erroneous order risks under Exchange Act Rule 15c3-5.
- Responsibility for required market-access controls is functionally non-delegable; reliance on customer or vendor attestations does not substitute for broker-dealer control over risk settings.
- “Exclusive control” requires that the broker-dealer, not sponsored-access customers or third-party platforms, can set, modify, and enforce risk parameters and disable routes and identifiers.
- Controls must be reasonably designed in light of the scale, complexity, and known risks of the market-access business, including prior compliance warnings and customer-related incidents.
- Reasonable supervision requires active oversight, including due diligence and ongoing review where functions are performed by third parties, and governance processes must support accurate compliance certifications.

## Conclusion

The SEC concluded that Wedbush’s sponsored-access model lacked broker-controlled, reasonably designed pre-trade and supervisory controls required by Rule 15c3-5, and it imposed a cease-and-desist order and sanctions to remediate control, supervision, and governance failures in market-access compliance.


In re Wedbush Sec. Inc., Admin. Proc. File No. 3-15913 (S.E.C. Nov. 20, 2014)