More On Legal & Compliancefrom The Advisor's Professional Library
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The New York Stock Exchange and two affiliated exchanges agreed Thursday to pay a $4.5 million penalty to the Securities and Exchange Commission for their failure to comply with the responsibilities of self-regulatory organizations (SROs) to conduct their business operations in accordance with Commission-approved exchange rules and the federal securities laws.
Wholly owned subsidiaries of IntercontinentalExchange Inc., NYSE, NYSE Arca, NYSE MKT, and Archipelago Securities have consented to the SEC’s order without admitting or denying the findings and agreed to collectively pay the $4.5 million penalty.
The NYSE exchanges also agreed to settle the SEC’s charges by retaining an independent consultant.
Andrew Ceresney, director of the SEC’s enforcement division, said on a call with reporters that “exchanges play a pivotal role in our national market system… and that role comes with significant responsibility.” Thursday’s action against the exchanges, he said, as well as prior ones over the last few years, “are all part of the SEC’s broader focus on market structure investigations.”
SEC Chairwoman Mary Jo White told ThinkAdvisor in a recent interview, “it’s a high priority for the [SEC] staff and Commission to really view the range of equity market structure issues.”
The SEC regulates exchanges, in part, “by reviewing rules proposed by the exchanges that govern exchange activities and allow market participants to decide how and where to place orders,” Ceresney said in a statement announcing the action. “We will hold exchanges accountable if they fail to have rules governing their operations or fail to follow them.”
As the SEC explained, as SROs, the NYSE exchanges are required to conduct their operations in accordance and compliance with their own rules as well as the federal securities laws. They are required to file all proposed rules and rule changes with the Commission, which publishes them for public comment, before they take effect. This transparency enables all participants trading on the exchanges to understand how their orders are processed and executed.
According to the SEC’s order instituting settled administrative proceedings, the NYSE exchanges repeatedly engaged in business practices that either violated exchange rules or required a rule when the exchanges had none in effect. For example, all of the NYSE exchanges used an error account maintained at Archipelago Securities to trade out of securities positions taken on as a result of their operations despite not having rules in effect that permitted them to maintain and use such an account.
In another example, NYSE Arca failed to execute a certain type of limit order under specified market conditions despite having a rule in effect that stated that NYSE Arca would execute such orders.
“The order highlights instances where the exchanges conducted business without a rule in place due to weak or inadequate policies and procedures,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement, in the statement. “In other instances, the exchanges did not operate in compliance with their effective rules. Both failures reflect a troubling lack of compliance with the requirements and obligations imposed on securities exchanges.”
The violations detailed in the SEC’s order occurred from 2008 to 2012.
In addition, the SEC’s order finds that NYSE Arca accepted midpoint passive liquidity orders in sub-penny amounts for National Market System stocks trading at over $1 per share, in violation of Rule 612(a) of Regulation NMS.
The SEC’s order further finds that Archipelago Securities failed to establish and maintain policies reasonably designed to prevent the misuse of material, nonpublic information in connection with error account trading.
Archipelago Securities also violated and failed to give the SEC timely notice of its violation of the net capital rule, a federal securities law provision intended to ensure that brokers and dealers remain solvent and can meet their financial obligations.
Check out Andrew Ceresney, SEC’s Enforcer: The 2014 IA 25 Profile on ThinkAdvisor.