Any firm or individual who has recently been on the receiving end of a disciplinary sanction, or even a difficult and expensive regulatory inquiry, from the Chicago Board Options Exchange (CBOE) may take some solace in something of a pleasant irony: This month the CBOE agreed to pay a $6 million fine to settle charges brought against it by the SEC. Specifically, the SEC alleged that, among other regulatory and compliance failures, the CBOE did not effectively enforce Regulation SHO, despite repeated red flags indicating that its members were participating in abusive short-selling behaviors.7 In its accompanying press release, the SEC announced that the financial penalty against the CBOE was “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.” As part of the settlement, the CBOE agreed to significant undertakings to improve its systems and programs, including engaging outside counsel and independent consultants in a variety of areas.
Interestingly, while the CBOE conducts its own market surveillance and enforcement functions, at this point in time, most exchanges do not, relying instead on FINRA to perform those tasks. The most recent exchange to make the switch is Direct Edge, the third-largest stock exchange in the United States.8 Under an outsourcing arrangement completed last month, FINRA will add market surveillance to the examination and disciplinary services that it already provides to Direct Edge. With this addition, FINRA’s CEO Richard Ketchum noted that its surveillance systems “will soon cover 90 percent of the listed equities market.”