[ by Howard Haykin ]

It's not every day that an SRO, or Self-Regulatory Organization, is fined for regulatory failures.  If fact, it had never happened until this week. 

On Monday, the SEC  fined and sanctioned the Chicago Board Options Exchange ("CBOE") and its affiliate, C2 Options Exchange ("C2").  Previous financial penalties against exchanges involved misconduct on the business side of their operations.

Besides having to pay a $6 million civil penalty - peanuts, you say? - CBOE's Board of Directors, CBOE and C2 engaged in remedial efforts and were ordered by the SEC to undertake major initiatives that are detailed in no fewer than 30 categories.  OUCH!

Was CBOE's Actions So Egregious?   You don't have to read between the lines to know that SEC officials are furious and hugely disappointed in CBOE. 

Andrew Ceresney, Co-Director of SEC Enforcement:  proper market regulation is reliant upon aggressive policing of member firms by SROs and enforcement of both SRO rules and securities laws.  "When SROs fail to regulate responsibly the conduct of their member firms, as CBOE did here, we will not hesitate to bring an enforcement action."

Daniel Hawke, Chief of SEC Enforcement's Market Abuse Unit:  expressed disappointment at 'CBOE's failures'.  "The public depends on SROs to provide a watchful eye on their exchanges and market activities occurring through them.  They must have strong compliance cultures and adequate and dedicated compliance resources to ensure that they do not stray from their bedrock obligation to provide rigorous self-regulation."

[ C-I Note:  To read about specific violations allegedly committed by CBOE and C2, go to:  C-I's WWW posting on 6/12/13: "CBOE, C2 Catch Flack, Fines Following optionsXpress Failures". ]

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

REMEDIAL EFFORTS.     CBOE and C2 took the following steps immediately upon being told by SEC staffers about the noted regulatory issues.   CBOE and C2

• Implementing a mandatory annual training program for all staff responsible for surveillance, investigation, examination and discipline.
  ►  Sessions scheduled over course of the year.
  ►  Agenda covers rules applicable to each staff member's responsibilities, and includes obligations re: recordkeeping and confidentiality of information.
  ►  Training Coordinator appointed with supporting staff to facilitate and implement the training program.
  ►  Baseline training program for each regulatory staff member, to be monitored and recorded for supervisor review;

• Providing mandatory formal training for entire staff and management, covering the following.
  ►  Regulatory independence;
  ►  Rules, obligations for SROs;
  ►  Compliance with federal securities laws and regulations;
  ►  Compliance with CBOE/C2 rules, COIs, recordkeeping, and confidentiality of information.

• Assigned 'subject matter' experts in:  (i) Reg. SHO;  (ii) Net Capital;  (iii) Customer Protection;  (iv)  Sections 9, 10, 11 and 11A of the Exchange Act;  and, (v) Rule 15c3-5.

• Updated & formalized WSPs for regulatory independence and confidentiality of regulatory information.

• Formal Written Policy prohibiting:
  ►  Use of any exchange (CBOE, C2, and CBSX) error account pending formal rule authority;
  ►  Payments to any trading permit holder in connection with trading on CBOE, C2, or CBSX not made pursuant to an exchange rule;
  ►  Any action that has effect of changing amount or kind of fee paid by trading permit or privlige holders under applicable fee schedules for CBOE, C2, or CBSX.

• Amended rule filing policies requiring that CBOE and C2 staff to consult with their Legal Divisions prior to offering services and products to trading permit holders ("TPH's") and other market participants  - so as to: (i)  determine whether rule change is necessary;  and, (ii) comply with requirements of Exchange Act, including that their rules are not designed to permit unfair discrimination among its trading permit holders and other market participants.

• Expanded charter for the Regulatory Oversight Compliance Committee ("ROCC"), incorporating compliance with CBOE’s obligations as an SRO;
• Expanded charter for Audit Committee to include oversight of the compliance function, and expansion of its enterprise risk management oversight.

• Hiring of a Chief Compliance Officer (“CCO”)  to be responsible for establishing WSPs reasonably designed to ensure that CBOE fulfills its compliance obligations, among other things.

• Hiring of 2 Deputy Chief Regulatory Officers ("CROs") and Reorganization of the Regulatory Services Division to:
  ►  enhance independence of CBOE’s regulatory staff;
  ►  provide that regulatory staff continue to have sole discretion as to what matters to investigate and prosecute;
  ►  generally insulate regulatory staff from commercial interests of CBOE/C2 and their members.

• Stepped increases in CBOE Regulatory Budgets that includes increased headcounts:  a 52.8% increase from 2011 to 2012, plus an additional 46.6% increase from 2012 to 2013;  to include increased headcount in Regulatory Services Division from 99 approved positions in October 2011 to 169 approved positions by April 2013.

• Engagement of 3rd-party consultant in October 2011 to:
  ►  Review CBOE’s Reg. SHO surveillances, practices and procedures, and training;
  ►  Recommend changes needed to strengthen CBOE’s Reg. SHO enforcement program and procedures.

C-I Note:  The self-prescribed remedial efforts are quite extensive.  But, in fact, they're just the tip of the iceberg.  In Parts 2 and 3, we'll lay out 30 additional categories of steps mandated by the SEC.

For further details, go to:   [ SEC Order Against CBOE and C2 Options Exchange ]. 
            -   SECURITIES EXCHANGE ACT OF 1934 Release No. 69726 / June 11, 2013
            -   ADMINISTRATIVE PROCEEDING File No. 3-15353