CBOE hit with $6 million fine by SEC for regulatory failures

Helped member firm optionsXpress fill out responses to SEC

 The SEC’s order found that not only did CBOE fail to adequately detect violations and investigate and discipline one of its members, but it also took misguided and unprecedented steps to assist that same member firm when it became the subject of an SEC investigation in December 2009.  CBOE failed to provide information to SEC staff when requested, and went so far as to assist the member firm by providing information for its Wells submission to the SEC.  The CBOE actually edited the firm’s draft submission, and some of the information and edits provided by CBOE were inaccurate and misleading.  The SEC brought its enforcement action against the firm in April 2012, and an administrative law judge recently rendered an initial decision in that case.

 According to the SEC’s order, CBOE had a number of other regulatory and compliance failures at various times between 2008 and 2012.  CBOE failed to adequately enforce its firm quote and priority rules for certain orders and trades on its exchange as well as rules requiring the registration of persons associated with its proprietary trading members.  CBOE also provided unauthorized “customer accommodation” payments to some members and not others without applicable rules in place, resulting in unfair discrimination.  And CBOE and affiliate C2 Options Exchange failed to file proposed rule changes with the SEC when certain trading functions on their exchanges were implemented.

 The SEC’s order finds that CBOE violated Section 19(b)(1) and Section 19(g)(1) of the Securities Exchange Act as well as Section 17(a) and Rule 17a-1 when it failed to promptly provide information requested by the SEC that the exchange kept in the course of its business, including information related to the member firm that was under SEC investigation for Reg. SHO violations.  CBOE and C2 agreed to settle the charges 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.  C2 also agreed to a censure and cease-and-desist order and significant undertakings. 

 After the SEC began its investigation, CBOE and C2 responded by engaging in voluntary remedial efforts and initiatives.  In reaching the settlement, the SEC took into account these remediation efforts and initiatives.  CBOE reorganized its Regulatory Services Division, and hired a chief compliance officer and two deputy chief regulatory officers.  CBOE updated written policies and procedures, increased the regulatory budget and the hiring of regulatory staff, implemented mandatory training for all staff and management, and hired a third-party consultant to review its Reg. SHO enforcement program.  CBOE also conducted a “bottom-up” review of its Regulatory Services Division’s independence, began a “gap” analysis to determine whether CBOE or C2 needed to file any additional rules, and reviewed all of CBOE’s regulatory surveillances and the exchange’s enterprise risk management framework.  After the SEC expressed concern about an accommodation payment to a member, CBOE hired outside counsel to investigate and self-reported additional instances of financial accommodations to other members.  After considering CBOE’s remedial efforts, the SEC determined not to impose limitations upon the activities, functions or operations of CBOE pursuant to Section 19(h)(1) of the Exchange Act.

The SEC’s investigation was conducted by Market Abuse Unit members Paul E. Kim and Deborah A. Tarasevich and Structured and New Products Unit member Jill S. Henderson with assistance from market surveillance specialist Brian Shute and trading strategies specialist Ainsley Kerr.  The case was supervised by Market Abuse Unit Chief Daniel M. Hawke.

 

CBOE response:

CBOE Statement on SEC Administrative Proceedings, June 11, 2013.

Our ability to work effectively and cooperatively as co-regulators with the SEC is central to our role as an SRO. In addition to working proactively with the SEC throughout its investigation, we voluntarily launched our own exhaustive, internal assessment of regulatory and compliance practices across our entire organization, assisted by third-party consultants and independent outside counsel. All actions either required or recommended by the SEC, as well as those resulting from our rigorous self-review, have been or are now being implemented. This
settlement marks a significant step in putting the SEC matter behind us, but our commitment to maintaining the very highest standards in regulation and compliance will be carried forward throughout our organization.

 

 
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