Since the financial meltdown of 2008, the Securities and Exchange Commission and other federal regulators have been shoring up the federal regulations that apply to the financial services industry and cracking down on securities fraud, misrepresentation, insider trading and other violations. In the recent past, the SEC has pursued individual brokers and dealers, brokerages, multinational banks and even municipalities for irregularities or fraud in these areas. This latest announcement, however, may come as a surprise.
This week, the SEC fined the Chicago Board Options Exchange $10 million for systemic regulatory compliance failures. The CBOE, successor to the Chicago Board of Trade, is the largest options exchange in the U.S. It is regulated through the SEC but acts as a self-regulatory organization.
As part of its self-regulatory obligations, the CBOE is required to comply -- and to actively enforce compliance among its members -- with federal securities law and its own rules. Those rules must be reported to the SEC, equitably allocate member fees and dues and, essentially, ensure that all issuers, customers, brokers and dealers get a level playing field with the same information and costs.
According to the SEC, the CBOE utterly failed in those responsibilities, "including a failure to enforce or even fully comprehend rules to prevent abusive short selling," or "naked short selling," a violation of Regulation SHO of the Exchange Act.