This is a twist that we haven't seen since the SEC went after the NASD. The SEC has charged the Chicago Board Options Exchange (CBOE) and an affiliate for various
systemic breakdowns in their regulatory and compliance functions as a
self-regulatory organization, including a failure to enforce or even fully
comprehend rules to prevent abusive short selling.
CBOE agreed to pay a $6 million penalty and
implement major remedial measures to settle the SEC's charges. The financial
penalty is the first assessed against an exchange for violations related to its
regulatory oversight. Previous financial penalties against exchanges involved
misconduct on the business side of their operations.
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. An SEC
investigation found that CBOE failed to adequately police and control this conflict
for a member firm that later became the subject of an SEC enforcement
action. CBOE 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.
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.
"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," said Andrew J. 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."
