August 8, 2013 / 8:01 PM / 6 years ago

CBOE bars regulatory staff from receiving stock-based pay

Aug 8 (Reuters) - The Chicago Board Options Exchange, which paid a $6 million fine in June for failing to properly oversee its own marketplace, has barred regulatory staff from receiving compensation tied to the company’s soaring stock price.

CBOE Holdings Inc, operator of the exchange, disclosed the new policy in a filing with the Securities and Exchange Commission this week.

“The decision to remove employees in our regulatory services division from our stock-based compensation program was made in an effort to reinforce the independence of this division,” CBOE spokeswoman Gail Osten said on Thursday.

The change was unrelated to the SEC fine, the first ever levied against a U.S. exchange for violating the duty to self-police a marketplace, she said.

The new policy comes amid a broader outcry against the longstanding tradition within U.S. financial markets of exchanges overseeing their own markets.

The largest U.S. securities trade group last week asked the SEC to end the self-regulatory status of stock exchanges, saying that the structure is outdated and creates conflicts of interest that could be avoided by appointing an independent supervisor. {ID:nL1N0G21V0]

Some of the problems the SEC uncovered within CBOE’s regulatory division were related to the inadequate self-policing of optionsXpress, a large CBOE client brokerage now owned by Charles Schwab, and CBOE’s failure to properly enforce short-sale rules.

“The CBOE may be especially sensitive right now because they’ve recently been fined by the SEC,” said Neal Wolkoff, a former chief executive of the American Stock Exchange and ELX Futures Exchange. “They may be taking a highly conservative point of view.”

At exchanges, regulatory staff have two functions: ensuring that new rules or changes to market structure follow company and government regulations, and policing markets, Wolkoff said.

The relationship between the staff’s actions and the company’s share price is uncertain, he said.

If regulatory staff fine an exchange’s biggest member firm, for example, it’s not clear whether that would hurt a company or help it by burnishing its reputation, Wolkoff said.

CBOE said this week it recorded $800,000 in accelerated stock-based compensation to recognize the remaining value of stock grants awarded to employees of its regulatory division who will no longer be eligible to receive equity-based compensation.

It was not clear how many of CBOE’s 160 regulatory staff were eligible for stock-based compensation under the old rules.

CBOE’s shares have soared nearly 64 percent this year and hit a record high of $51.12 on Aug. 2.

The new policy sets Chicago-based CBOE apart from cross-town rival CME Group Inc, the world’s largest futures exchange operator, which offers stock-based compensation to employees in all areas of the company.

CME does not believe there is a conflict in offering stock-based compensation to regulatory staff, spokeswoman Laurie Bischel said. Its disciplinary fines do not count as exchange revenue but are reserved to offset the cost of customer protection programs, she said.

Stock-based compensation is typically linked to long-term stock performance, and it usually takes years before any one year’s stock-based pay is fully vested.

IntercontinentalExchange Inc declined to discuss the details of its compensation programs but said they comply with regulatory requirements. International Securities Exchange, a U.S. stock-options market owned by Deutsche Boerse AG , does not offer stock-based compensation, a spokeswoman said.

Other exchanges, including NYSE Euronext and Nasdaq , did not immediately respond to requests for comment.

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