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June 11, 2013 at 10:07 AM
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.”
