- Within 30 days, the Exchange will appoint a specially-configured Regulatory Oversight Committee to review and assess the performance of the Exchange's regulatory programs and make recommendations to the Board of Governors about regulatory, compliance and enforcement matters.
- The Exchange will engage a consultant to conduct a comprehensive review of its trading floor surveillance and enforcement programs and recommend changes to enable the Exchange to better carry out its regulatory responsibilities. The Exchange has selected Neal Sullivan, partner in the law firm of Bingham McCutcheon, to serve in this role. Mr. Sullivan, in conjunction with a team of several other Bingham McCutcheon lawyers, will begin work promptly.
- Over the next several years, the Exchange will periodically report to the SEC on its work and will certify compliance with the terms of the settlement.
Under the terms of the settlement order, the Chicago Stock Exchange neither admits nor denies the SEC findings, which primarily relate to the Exchange's trading in NASDAQ stocks during the period from 1998 through late 2001.
The Chicago Stock Exchange cooperated with the Securities and Exchange Commission throughout its investigation. As a result of the investigation and prior to announcement of the settlement, the Exchange began the development and implementation of a series of initiatives to enhance its surveillance and enforcement programs, all of which required a substantial investment of additional financial and human resources.
"As a self-regulatory organization, we must ensure that our surveillance and enforcement programs receive the highest priority," said David A. Herron, chief executive officer of the Chicago Stock Exchange. "We will continue to work diligently to enhance our surveillance and enforcement measures and are committed to upgrading our programs to address SEC concerns."
The Exchange already has put in place several surveillance and enforcement initiatives, including the following:
- The Exchange enhanced its automated surveillance exception reports to reduce the reliance on manual procedures and to upgrade its capacity to automatically monitor trading activity and identify rule violations. These enhanced reports use more sophisticated exception report filters to avoid false positive results and more streamlined data analysis processes.
- The Exchange prepared and implemented enhanced surveillance and enforcement procedures and sanctioning guidelines to provide a written framework for its regulatory efforts.
- The Exchange's Market Regulation Department conducted a comprehensive assessment of surveillance and enforcement staffing levels, resulting in a 30 percent increase in staffing from 2001 to 2002. This increase occurred despite a decrease in the Exchange's overall trading activity and a reduction in its overall employee headcount.
- The Market Regulation staff held comprehensive, multi-day specialist education programs covering a wide range of regulatory issues and conducted special member meetings and training sessions devoted to specific topics, such as limit order display rule requirements.
The Exchange believes that these and other measures implemented over the past year, when coupled with the work that will be performed under the terms of the SEC settlement, will address the SEC's concerns. Nevertheless, the Exchange will take whatever steps are necessary to ensure that strong surveillance systems and enforcement procedures are in place.
