SEC Charges the CBOE for Regulatory Failures

In the Matter of Chicago Board Options Exchange, Incorporated and C2 Options Exchange, Incorporated, Admin Proc. File No. 3-15353.  On June 11, 2013, the SEC announced it filed settled administrative proceedings against the Chicago Board Options Exchange (“CBOE”) and an affiliate for failures in their regulatory and compliance functions.  The CBOE is a self-regulatory organization (“SRO”) which is required to enforce the federal securities laws as well as its own rules to regulate trading on its exchange.  SROs must manage the conflict that exists between their regulatory obligations and their business interests and the interests of their members.  According to the SEC’s Order, the CBOE demonstrated was not able to effectively enforce Reg. SHO and had an ineffective surveillance program.  The CBOE also fell short in its regulatory and compliance responsibilities in several other areas during a four-year period.  According to the SEC’s order, the CBOE moved its surveillance and monitoring of Reg. SHO compliance from one department to another and the transfer of responsibilities negatively impacted the enforcement program. The CBOE failed to take action against any firm for Reg. SHO violations as a result of its own surveillance or complaints from third parties.  According to the Order, the CBOE lacked a fundamental understanding of Reg. SHO in that its investigators never received any formal training and the CBOE never ensured that investigators read the relevant rules.  In addition, the SEC’s order found that the CBOE assisted a same member firm when it became the subject of an SEC investigation.  The CBOE failed to provide information to SEC staff when requested, and even aided the member firm by providing information for its Wells submission to the SEC.  The CBOE also edited the firm’s draft Wells submission.

According to the Order, the CBOE had other regulatory and compliance issues including providing unauthorized “customer accommodation” payments to some members and not others without applicable rules in place, resulting in unfair discrimination. And the 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 the 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.

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