CBOE Charged for Regulatory Failures (with Barrentine Comment)

The Chicago Board Options Exchange ("CBOE") agreed to pay $6 million in the settlement of an SEC enforcement action. In its press release relating to the settlement, the SEC stated that this was the first time the SEC had assessed a financial penalty against an exchange for violations related to the exchange's regulatory oversight, and characterized previous monetary penalties against exchanges as relating to "misconduct on the business side of their operations."

While the SEC's action against CBOE included a number of regulatory and compliance failures, the most serious charge against CBOE alleged that it assisted a member firm that was being investigated by the SEC. Indeed, the SEC's press release characterizes CBOE as "interfering with the SEC investigation" of the member. The Order portrays CBOE as failing to put its interests as a regulator ahead of its business interests and for allowing the line between business and regulation to become "blurred."

In settling the SEC's charges, CBOE also agreed to a long list of what the press release refers to as "major remedial measures." These include many already completed initiatives, together with a number of additional undertakings, including providing for the autonomy and independence of the regulatory function and regulatory staff decision making, providing annual training for regulatory and much of the business staff, conducting a gap analysis, reporting to OCIE for a five-year period as to surveillances, investigations, and disciplinary actions, employing a chief compliance officer, and developing a risk-based audit plan for CBOE's regulatory division. In addition, both CBOE's CEO and its Chief Regulatory Officer must provide numerous certifications as to CBOE's satisfaction of the many undertakings and, for a five-year period, as to the reasonableness of its policies, procedures and internal controls across numerous requirements.

Barrentine Comment: While the SEC's action may have been motivated in part by CBOE's inability to navigate the conflicts between its business and regulatory obligations, it also seems likely that the decision to seek a multimillion dollar fine and extensive remedial measures was motivated by CBOE's status as a publicly traded, for-profit company. It is likely that the SEC believes that getting the attention of a for-profit company requires penalties that have an economic bite to them. It also seems likely that the SEC wanted to put the remaining, also for-profit, exchanges on notice that they should expect their regulatory programs to be held to a higher standard than before. While the Order offers obvious lessons for other exchanges, we also recommend it to broker-dealers and advisers. Most significantly, all exchanges should measure their operations against the facts recited in the Order, while exchanges, broker-dealers and advisers might also contemplate how well they address many of the issues raised in the Order, including, independence and authority of the compliance program, training, confidentiality, and gaps in regulatory coverage and oversight. Regulated entities might also consider whether any of the required remedial procedures listed near the Order's end (starting on page 23) might be of value to their own compliance programs, particularly as such procedures relate to potential conflicts of interest.

See: Order; Press Release.