By Hal M. Bundrick It is the first time in history that an exchange has been fined for a deficiency in regulatory oversight, as the Securities and Exchange Commission charged the Chicago Board Options Exchange (CBOE) with "systemic breakdowns" in their regulatory and compliance responsibilities as a self-regulatory organization. The SEC said the penalties included a failure to enforce or "even fully comprehend" rules established to prevent abusive short selling. The CBOE agreed to pay a $6 million penalty and implement significant reforms to settle the charges. 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." The Commission also claims that the CBOE 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." Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit, added, "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." The SEC order stated "With the benefits of operating an exchange come certain regulatory responsibilities. In order to exist as a registered national securities exchange or securities association, an exchange or association must fulfill certain well-established regulatory obligations as a self-regulatory organization ("SRO"). An SRO must comply with, and enforce its members' compliance with, the federal securities laws and rules, as well as its own rules. In this regard, an SRO must conduct surveillance of trading on its exchanges and examine the securities-related operations of its members."