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.