CBOE toughens trader rules, following SEC fine last year

Reuters

By Tom Polansek

CHICAGO, March 5 (Reuters) - CBOE Holdings Inc, which was fined $6 million last year for failing to properly police its own marketplace, will implement tighter rules for traders to help prevent fraud, according to a regulatory filing on Wednesday.

The changes align CBOE rules with other exchanges and are not linked to the fine imposed by the U.S. Securities and Exchange Commission last year, CBOE spokeswoman Gail Osten said. In an email, she said the exchange operator "did it to make supervision and control more effective."

CBOE, which operates the Chicago Board Options Exchange, will require trading firms to write down how they supervise each of their business activities and to send CBOE an annual report on regulatory compliance.

The firms, known as trading permit holders (TPH), also must inspect each of their offices at least once every three years, according to a SEC filing.

CBOE implemented the measures because it did not "have a comprehensive rule that directly addresses the obligation of every TPH to properly supervise its business and employees," according to the filing.

The SEC in June charged that the Chicago Board Options Exchange and an affiliate had "systematic breakdowns in their regulatory and compliance functions as a self-regulatory organization." The financial penalties were the first ever against a U.S. exchange for violating the duty to self-police a marketplace.

The SEC approved CBOE's new rules because the agency believed they would help trading firms "prevent fraudulent and manipulative acts and practices and improve investor protection by requiring TPHs to clearly delineate their supervisory obligations," according to the filing.

The measures are a "good first step towards preventing fraud," said Andrew Stoltmann, a Chicago-based securities lawyer.

"These are really basic, rudimentary requirements that should have been in place decades ago," he said. "What matters is whether the CBOE is serious about policing its members or whether these steps were just taken to placate and mollify the SEC."

Under federal securities laws, exchanges have responsibilities as "self-regulatory organizations" to monitor and oversee their markets.

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securities trade group asked the SEC to end the self-regulatory status of stock exchanges, saying the structure was outdated and created conflicts of interest that could be avoided by appointing an independent supervisor.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

Later that month, the Chicago Board Options Exchange barred regulatory staff from receiving compensation tied to the company's soaring stock price "to reinforce the independence" of the division.

Shares of CBOE on Wednesday were up 1.2 percent at $57.25.

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