SEC Punishes NYSE and Two Affiliates with $4.5 Million Penalty

The U.S. Securities and Exchange Commission announced an enforcement action last week against the New York Stock Exchange and two affiliated exchanges for failing to self regulate themselves in accordance with Commission-approved exchange rules and federal securities laws. The NYSE agreed to settle the charges by retaining an independent consultant and pay a penalty of $4.5 million along with its affiliated routing broker Archipelago Securities.

Emphasizing the responsibilities of self-regulation Andrew J. Ceresney, director of the SEC's Division of Enforcement said, "We will hold exchanges accountable if they fail to have rules governing their operations or fail to follow them."

Ceresney further said, "The SEC regulates exchanges, in part, by reviewing rules proposed by the exchanges that govern exchange activities and allow market participants to decide how and where to place orders."

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Exchanges like the NYSE are considered as SROs or self-regulatory organizations and are required to comply both their own rules as well as federal securities laws. They have to file all proposed rules and changes thereof with the Commission, which invites public comment upon such changes or rules before finalizing them.

According to the SEC, the NYSE and two affiliate exchanges repeatedly engaged in violation of exchange rules or engaged in business practices that required a rule, when none were in effect. For example, the NYSE exchanges used an error account maintained at Archipelago Securities despite not having any rule in effect that allowed them to maintain and use such an account to trade out of securities positions taken on as a result of their operations.

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Antonia Chion, an associate director in the SEC's Division of Enforcement, said, "The order highlights instances where the exchanges conducted business without a rule in place due to weak or inadequate policies and procedures … In other instances, the exchanges did not operate in compliance with their effective rules."

Chion said, "Both failures reflect a troubling lack of compliance with the requirements and obligations imposed on securities exchanges."

The violations detailed in the order of the SEC took place at different periods between 2008 and 2012.

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