More On Legal & Compliancefrom The Advisor's Professional Library
- Scope of the Fiduciary Duty Owed by Investment Advisors A fiduciary obligation goes beyond the suitability standard typically owed by registered representatives of broker-dealer firms to clients. The relationship is built on the premise that the advisor will always do the right thing for the person or entity receiving advice.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Securities and Exchange Commission on Tuesday charged the Chicago Board Options Exchange for various systemic breakdowns in its regulatory and compliance functions as a self-regulatory organization, including a “failure to enforce or even fully comprehend” rules to prevent abusive short selling.
Without admitting or denying the SEC’s findings, CBOE agreed to pay $6 million, accept a censure and cease-and-desist order, and implement significant undertakings.
The SEC says the financial penalty is the first assessed against an exchange for violations related to its regulatory oversight.
The SEC notes that self-regulatory organizations (SROs) must enforce the federal securities laws as well as their own rules to regulate trading on their exchanges by their member firms. In doing so, they must sufficiently manage an inherent conflict that exists between self-regulatory obligations and the business interests of an SRO and its members.
But an SEC investigation found that CBOE failed to adequately police and control this conflict for Charles Schwab's optionsXpress, which later became the subject of an SEC enforcement action. CBOE, the SEC says, “put the interests of the firm ahead of its regulatory obligations by failing to properly investigate the firm’s compliance with Regulation SHO and then interfering with the SEC investigation of the firm.”
Andrew Ceresney, co-director of the SEC’s Division of Enforcement, said in a statement announcing the fine that “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. 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.”
Daniel Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added in the same statement that “CBOE’s failures in this case were disappointing. The public depends on SROs to provide a watchful eye on their exchanges and market activities occurring through them. They must have strong compliance cultures and adequate and dedicated compliance resources to ensure that they do not stray from their bedrock obligation to provide rigorous self-regulation.”
According to the SEC’s order instituting settled administrative proceedings, CBOE demonstrated an overall inability to enforce Reg. SHO with an “ineffective surveillance program that failed to detect wrongdoing despite numerous red flags that its members were engaged in abusive short selling. CBOE also fell short in its regulatory and compliance responsibilities in several other areas during a four-year period.”
According to the SEC’s order, CBOE moved its surveillance and monitoring of Reg SHO compliance from one department to another in 2008, and the transfer of responsibilities adversely affected its Reg SHO enforcement program. After that transfer, CBOE did not take action against any firm for violations of Reg SHO as a result of its surveillance or complaints from third parties, the SEC states.
Reg SHO requires the delivery of equity securities to a registered clearing agency when delivery is due, generally three days after the trade date (T+3), the SEC explained. "If no delivery is made by that time, the firm must purchase or borrow the securities to close out that failure-to-deliver position by no later than the beginning of regular trading hours on the next day (T+4). CBOE failed to adequately enforce Reg SHO because its staff lacked a fundamental understanding of the rule. CBOE investigators responsible for Reg SHO surveillance never received any formal training. CBOE never ensured that its investigators even read the rules. Therefore, they did not have a basic understanding of a failure to deliver."
Check out Schwab to Close Broker-Dealer BrokersXpress on AdvisorOne.