May 8 The U.S. Securities and Exchange
Commission needs to rethink how it supervises financial
marketplaces that police themselves such as the New York Stock
Exchange and Nasdaq, an SEC commissioner said on Wednesday.
So-called "self regulatory organizations (SROs)," which
include the stock exchanges, need "robust oversight," SEC
Commissioner Luis Aguilar said in a speech published ahead of an
SEC outreach conference. Federal securities law allows such
organizations to develop their own rules, subject to SEC
approval, and enforce them.
Recent developments such as automated trading and the
proliferation of new exchanges in markets where Wall Street's
self regulatory organizations operate are among the concerns
that warrant a "closer working relationship" between these
organizations and the SEC, Aguilar said.
Conflicts of interests between the organizations and
members, market operations and shareholders, may lead exchanges
and other organizations to be "less inclined to enforce rules
vigorously," especially if it means disciplining members who are
"financially supportive," Aguilar said.
"In the past, there have been instances where SROs have
favored one member or customer over another; for example, by
sharing market data with paying subscribers before releasing
such data to the public," said Aguilar in the prepared remarks.
CBOE said this week that it expects to be fined as much as
$10 million and to be required to beef up compliance and
regulatory programs to settle a probe related to the company's
oversight of brokerage OptionsXpress [ID: L2N0DP2JQ].It would be
only the second fine ever by the SEC of a financial exchange.
The SEC's website lists more than 30 self-regulatory
organizations including the National Securities Clearing Corp.,
the Depository Trust Co., the CBOE Futures Exchange, and the
Chicago Board of Trade.
While Aguilar said many SROs "work diligently" to meet their
obligations, the SEC has been required to act in situations
where that has not been the case. He cited a string of
enforcement actions by the SEC dating to 1999.
The most recent of the cases he cited concern the SEC's
civil charges against NYSE, a unit of NYSE Euronext in
2012 for compliance failures that gave some customers an
improper advantage on trading information. A $5 million penalty
imposed in the case marked the first financial penalty by the
SEC against an exchange, Aguilar noted. [ID: nL1E8KE7HI]
Aguilar also cited the SEC's sanctions against units of
Direct Edge Holdings LLC in 2011, saying the stock exchange
company's weak internal controls led to millions of dollars in
trading losses and a systems outage.
"Obviously, these events undercut investor confidence,"
Aguilar said. While SROs must have "dedicated compliance
resources" as the first line of defense, the SEC must be ready
to step in to instill public confidence in the securities
industry, Aguilar said.