Federal regulators fined the Chicago Board Options Exchange (CBOE) $6 million, saying its staff interfered with its three-year investigation of short-selling at a member firm in an unprecedented breakdown of trading supervision.
The settlement, which calls for immediate remedial actions, is the first ever assessed by the U.S. Securities and Exchange Commission for violations related to regulatory oversight, according to a statement. On June 7, an administrative law judge ruled that CBOE member OptionsXpress Inc., a unit of Charles Schwab Corp. (SCHW), helped facilitate sham transactions that violated U.S. securities laws known as Regulation SHO.
While actions against traders and investors are common at the SEC, exchanges enjoy legal protections in their capacity of self-regulatory organizations. In the CBOE’s case, oversight suffered when it transferred responsibility for Regulation SHO enforcement from one department to another in 2008, the SEC wrote.
During the investigation of OptionsXpress, it became apparent that CBOE staff didn’t know enough about the law to adequately enforce it, according to the SEC statement. Not only did they fail to detect violations, they “took misguided and unprecedented steps” to assist the firm that was under investigation.
As part of its response to the SEC inquiry, the CBOE said in January it planned to exclude trading industry directors from its board, bringing its governance in line with other exchange operators.
“This settlement marks a significant step in putting the SEC matter behind us,” CBOE said in an e-mailed statement. “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.”
Gail Osten, a spokeswoman for the Chicago-based market operator, declined to comment beyond the statement. CBOE said in a filing in February that it expected to pay as much as $10 million to settle the SEC’s investigation.
OptionsXpress says it did nothing wrong. Stephen Senderowitz, a lawyer representing OptionsXpress, yesterday disputed the interpretation of events in the June 7 ruling by Brenda P. Murray, the chief administrative judge for the SEC. He said OptionsXpress is reviewing the decision for the purposes of an appeal.
“We believe the evidence at trial demonstrated that OptionsXpress at all times acted consistent with all regulations and bought in the shorts and delivered securities as required,” Senderowitz said in an e-mailed statement. “The firm was in touch with regulators regarding the transactions, no one was harmed, and the transactions were neither novel nor exotic.”