$6 mn fine represents first-ever action against an exchange related to self-regulatory function
In its first action ever against an exchange for a lack of regulatory oversight, the SEC charged the Chicago Board Options Exchange (CBOE) for a failure to ‘enforce or even fully comprehend’ rules regarding abusive short-selling.
The SEC fined the CBOE $6 mn and ordered it to implement ‘major remedial changes’ in relation to alleged illegal naked short-selling by OptionsXpress, a unit of Charles Schwab Corp, through the CBOE as far back as 2008. The CBOE, as a self-regulatory organization (SRO) like other exchanges, is tasked with enforcing federal securities laws to regulate trading by exchange members, receiving some legal protections in return.
‘Not only did CBOE fail to adequately detect violations and investigate and discipline one of its members, but it also took misguided and unprecedented steps to assist that same member firm when it became the subject of an SEC investigation,’ the SEC says in a press release. The ‘CBOE failed to provide information to SEC staff when requested, and went so far as to assist the member firm by providing information for its Wells submission to the SEC.’
The negligence on the part of the CBOE began when the exchange transferred responsibilities for enforcing securities law from one department to another, according to the exchange. The new staff knew too little about the securities law known as Regulation SHO to enforce it, the SEC says. The commission said it discovered a series of other violations during its investigation.
‘CBOE had a number of other regulatory and compliance failures at various times between 2008 and 2012,’ the SEC says in the release. ‘CBOE failed to adequately enforce its firm quote and priority rules for certain orders and trades on its exchange as well as rules requiring the registration of persons associated with its proprietary trading members. CBOE also provided unauthorized ‘customer accommodation’ payments to some members and not others without applicable rules in place.’
The action, says the SEC, is the first ever against an SRO in relation to its regulatory functions. Other actions have been taken in relation to the business side of SROs, including the $10 mn fine levied against NASDAQ last month for violating securities laws out of ‘poor systems and decision-making’ in relation to the software problems that prompted losses among brokers during the IPO of Facebook last year.
‘The proper regulation of the markets relies on SROs to aggressively police their member firms and enforce their rules as well as the securities laws,’ says Andrew Ceresney, co-director of the SEC’s division of enforcement. ‘When SROs fail to regulate responsibly the conduct of their member firms as CBOE did here, we will not hesitate to bring an enforcement action.’