The Chicago Board Options Exchange (CBOE) has agreed to pay a $6 million fine imposed by the Securities and Exchange Commission for regulatory and compliance breakdowns that allowed “abusive” short selling.
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The SEC said in a statement Tuesday that the penalty marks the first time a major exchange was cited for violations related to its regulatory oversight.
Previous fines levied against exchanges were related to misconduct on the business side of their operations, the SEC said.
Last month, the SEC reached a $10 million settlement with the Nasdaq OMX Group (NDAQ) for violations related to the Nasdaq’s botched handling of Facebook’s (FB) initial public offering. It was the largest fine ever against a U.S. exchange.
The SEC said the allegations against the CBOE included “a failure to enforce or even fully comprehend rules to prevent abusive short selling.” As part of the settlement, the CBOE neither admitted nor denied the charges.
The CBOE has agreed to put in place "major remedial measures" to prevent the problems from happening again, according to the SEC.
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The SEC explained that all exchanges face “an inherent conflict” between their roles as self-regulators and the business interests of the exchange and its members. An SEC investigation found that the CBOE failed to meet that standard in connection with a member firm that was subsequently hit with an SEC enforcement action.
“CBOE put the interests of the firm ahead of its regulatory obligations by failing to properly investigate the firm’s compliance with Regulation SHO and then interfering with the SEC investigation of the firm,” the SEC statement said.
The SEC said there were “numerous red flags” that CBOE members were participating in abusive short selling. Short sellers bet that a stock price is going to fall.
The SEC’s 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.”
The CBOE said in a statement that it worked "proactively" with the SEC during the investigation.
"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," the statement said. "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."
Shares of CBOE Holdings, the CBOE’s parent company, closed down 40 cents, or 0.95%, at $41.81.