SEC Sanctions Chicago Stock Exchange and Requires Improvement of Surveillance and Enforcement Programs


Washington, D.C., September 30, 2003 -- The Securities and Exchange Commission today instituted and simultaneously settled an administrative enforcement action against the Chicago Stock Exchange, finding that the Exchange failed to enforce certain of its trading rules. The Exchange consented to the entry of an order imposing a censure and requiring the Exchange to cease and desist from further violations of the federal securities laws and to comply with significant undertakings designed to enhance the Exchange's oversight of order handling by its members.

Stephen M. Cutler, Director of the Commission's Division of Enforcement, stated, "This case demonstrates that the Commission is and will continue to be vigilant and aggressive in ensuring that self-regulatory organizations fulfill their regulatory obligations."

Mary E. Keefe, Regional Director of the Commission's Midwest Regional Office, stated, "The Chicago Stock Exchange significantly expanded its trading volume without a commensurate expansion of its surveillance and disciplinary capabilities. As this case demonstrates, self-regulatory organizations must spend the necessary resources to improve and increase their surveillance and disciplinary capabilities to match any increase in activities conducted through their facilities."

The Commission's order includes findings that the Exchange neither admits nor denies. Specifically, the Commission found that the Exchange's surveillance program failed adequately to detect violations by its members of the firm quote rule, trading ahead prohibitions and the limit order display rule from 1998 through 2001. For instance, until early 2001, the Exchange's surveillance for intermarket firm quote rule violations was ineffective because it relied solely on telephone complaints alleging such violations. In another instance, from approximately June 1998 through August 2001, the Exchange failed to conduct any surveillance for intra-day trading ahead violations. In addition, the Commission found that even when the Exchange detected such violations, it often failed to take appropriate disciplinary actions against the individuals and/or firms that committed the violations. For instance, one Exchange co-specialist violated the firm quote rule up to 76 times in a 12-month period, yet the Exchange took no disciplinary action against this individual. This same individual traded ahead of customer orders on 37 occasions during the same period with no disciplinary consequences. These deficiencies were first detected by an inspection by the staff of the Commission's Office of Compliance Inspections and Examinations. The Commission found that the Exchange violated Section 19(g) of the Securities Exchange Act of 1934, which requires exchanges to enforce compliance by its members with the provisions and rules of the Exchange Act and with the exchanges' own rules.

Among the undertakings required by the settlement are: (i) the creation by the Exchange of a Regulatory Oversight Committee comprised almost exclusively of individuals with no material business relationship with the Exchange, which Committee will regularly advise the Exchange's Board of Governors about regulatory, compliance and enforcement matters and assist the Board in monitoring the design, implementation and effectiveness of the Exchange's compliance programs; (ii) the engagement of an Independent Consultant to conduct a comprehensive review of the Exchange's trading floor surveillance and enforcement programs and provide recommendations to the Exchange; and (iii) the filing of various certifications by the Exchange's officials confirming its ongoing compliance with its statutory obligations.

The Commission reiterates the importance of self regulatory organizations to fulfill their obligations in enforcing their rules. In particular, Section 6(b) of the Exchange Act requires a registered national securities exchange to be organized and have the capacity to be able to carry out the purposes of the Exchange Act and to comply and enforce compliance by its members with the Exchange Act, the rules and regulations thereunder, and the rules of the Exchange.

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SEC Press Contact: Peter K.M. Chan (312) 353-7410



Last modified: 9/30/2003