SEC Charges National Stock Exchange and Its CEO, David Colker, for Failure to Enforce Exchange Rules
NSX Consents to Censure, Cease-and-Desist Order, Structural Overhaul to Insulate Regulatory Functions, Retention of Consultant, and $1 Million Fund for Regulatory Auditor
Colker Consents to Censure and $100,000 Penalty
FOR IMMEDIATE RELEASE
Washington, D.C., May 19, 2005 The Securities and Exchange Commission today instituted a settled enforcement action against the National Stock Exchange (NSX) for its failure to enforce compliance by NSX dealers with certain exchange rules from 1997 through 2003. At the same time, the SEC instituted a settled administrative proceeding and civil action against NSX’s president and chief executive officer, David Colker, for his failure to enforce compliance with an NSX rule.
Specifically, the SEC found that NSX violated Section 19(g) of the Securities Exchange Act of 1934 (Exchange Act) by failing until 2004 to conduct surveillance for violations of its customer priority rule, an important investor protection that prohibited NSX dealers from trading securities for their own accounts ahead of marketable customer orders. As a result, NSX failed to detect hundreds of thousands of transactions in which NSX dealers traded ahead of customer orders.
The SEC also found that NSX and Colker did not enforce NSX’s market order exposure (MOE) rule in a manner consistent with the rule’s language. The MOE rule required NSX dealers to provide customer market orders with the opportunity for price improvement whenever the spread between the national best bid and offer was greater than the minimum price variation. In 1997, when the minimum price variation decreased from 1/8 to 1/16 of a point, NSX continued enforcing the rule at spreads of 1/4 point or greater instead of at 1/8 point or greater. At Colker’s direction, NSX did not file a proposed rule amendment with the SEC seeking approval for its limited enforcement of the MOE rule, although NSX was required to do so. Colker made this decision, in part, because he wanted to avoid exposing a proposed rule amendment to a public notice-and-comment process. Consequently, public customers lost opportunities for potential price improvement on thousands of market orders executed on NSX from 1997 to 2003.
Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, said, “Self-regulatory organizations must vigorously enforce their own rules and the federal securities laws. This settlement will further safeguard investors by strengthening NSX’s regulatory functions.”
Antonia Chion, an Associate Director of Enforcement, added, “SROs and their senior management must be scrupulous in ensuring that business concerns do not interfere with their regulatory obligations and judgment.”
As part of the settlement, NSX, without admitting or denying the findings in the SEC’s Order, consented to a censure, an order to cease and desist from future violations of certain rule-filing, record-keeping, and other SRO provisions of the federal securities laws, and an order to undertake substantial remedial measures to bolster its regulatory and governance functions. In particular, NSX agreed to separate its regulatory functions from its business functions by, among other things, appointing an independent chief regulatory officer to supervise NSX’s day-to-day regulatory affairs. NSX also agreed to implement automated daily surveillance for potential violations of several NSX and Exchange Act order-handling rules, and to earmark $1 million for two separate regulatory audits of NSX’s surveillance, examination, investigation, and disciplinary programs over a three-year period.
Colker consented, without admitting or denying the findings in the SEC’s Order and Complaint, to the imposition of a censure and, subject to court approval, to the entry of a final judgment in the U.S. District Court for the Northern District of Illinois ordering him to pay a $100,000 civil penalty. Under the terms of the SEC’s Order, Colker and his successors will have no future role in NSX’s regulatory functions.
Antonia Chion, Associate Director
Division of Enforcement
Yuri B. Zelinsky, Assistant Director
Division of Enforcement
Litigation Release 19229
Administrative Proceeding Release No. 34-51714