The Securities and Exchange Commission fined the Chicago Board Options Exchange and an affiliate $6 million on Tuesday for what it called breakdowns in regulatory oversight, including a failure to enforce rules to prevent abusive short-selling.
The agency said the financial penalty against the exchange and its affiliate, C2 Options Exchange, was the first action related to an exchange’s responsibility to self-police its market.
The case stemmed in part from oversight of OptionsXpress, a firm now owned by Charles Schwab, which was accused by the S.E.C. of engaging in an abusive naked short-selling scheme, or selling shares before borrowing them first. An S.E.C. judge on Friday ordered OptionsXpress, its former chief financial officer and a customer to pay $4.8 million in fines and to return $4.2 million.
In a statement, the S.E.C. said: “Self-regulatory organizations 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 S.R.O. and its members. An S.E.C. investigation found that C.B.O.E. failed to adequately police and control this conflict for a member firm that later became the subject of an S.E.C. enforcement action. C.B.O.E. put the interests of the firm ahead of its regulatory obligations by failing to properly investigate the firm’s compliance†with the regulation against abusive short-selling and then interfered with the S.E.C. investigation into the firm.
The S.E.C. added that the exchange had an ineffective surveillance program that failed to detect wrongdoing despite numerous red flags that its members were engaged in abusive short-selling and also did not live up to its regulatory and compliance responsibilities in several other areas over four years.
“This settlement marks a significant step in putting the S.E.C. matter behind us, but our commitment to maintaining the very highest standards in regulation and compliance will be carried forward throughout our organization,†the exchange said in a statement.
“In addition to working proactively with the S.E.C. 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 S.E.C., as well as those resulting from our rigorous self-review, have been or are now being implemented,†it said.
