The U.S. Securities and Exchange Commission said Thursday that it has significant concerns about the use of certain brokerage account structures that could be used to facilitate a variety of financial crimes, and may expose firms to other risks, too.

The SEC is warning brokers that the master/sub-account trading model carries numerous risks including possibly facilitating money laundering, insider trading, market manipulation, account intrusions, unregistered broker-dealer activity, and excessive leverage.

In these sorts of structures a customer opens a master account with a broker and then divides it into various sub accounts for use by individual traders, or groups of traders. The SEC is worried that, in some instances, the sub-accounts may be divided to such an extent that the master account customer and the firm where the account is held might not know the identity of the traders in the sub-accounts, and that this could allow unscrupulous traders to avoid regulatory scrutiny.

“Although master/sub-account arrangements have legitimate business purposes, some customers may use them as vehicles for illegal activity, or in an attempt to avoid or minimize regulatory obligations and oversight,” said Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations, whose staff issued the alert.

“When a broker-dealer offers master/sub-accounts, this includes an obligation to reasonably design controls and procedures that address the types of risks that we identify in this report. Our national examination staff intends to scrutinize the controls and procedures at broker-dealers that offer market access to master/sub-account customers,” di Florio added.

The alert includes suggestions for brokers to address concerns arising from trading in sub-accounts and to comply with SEC rules, which require broker-dealers to have controls and procedures to limit risks associated with offering market access, including those with master/sub-accounts.

It notes that this could include procedures such as: verifying the identities of all traders authorized to use accounts, using fingerprints if appropriate, background checks and interviews, and periodically checking the names of such traders through criminal and other databases; monitoring trading patterns in both the master account and sub-accounts for indications of insider trading, market manipulation, or other suspicious activity; physically securing information of customer or client systems and technology; tracking incidents of attempted hacking; determining that such traders have received training, including training on market trading rules; and regularly reviewing the effectiveness of all controls and procedures around sub-account due diligence and monitoring.

IE