Philadelphia Stock Exchange Charged With Failing To Supervise Specialists

by Glen Shapiro, LawAndTax-News.com, New York

05 June 2006

The US Securities and Exchange Commission last week issued a settled cease and desist order against the Philadelphia Stock Exchange (Phlx) for its failure to prevent certain trading and order handling rule violations by its specialists from April 1999 through January 2002.

The Order, issued on Thursday, found that Phlx had several deficiencies in its surveillance programs to assure compliance with its own rules and the federal securities laws, in both its options and equities markets.

Specifically, the Commission found that Phlx had failed, in some instances, to develop programs to detect violations or, in other instances, that the programs in place were not adequate to detect such violations.

For example, certain surveillance reports used to identify potential violations improperly excluded categories of transactions from review, while other reports inappropriately limited the period of review.

The regulatory failures in connection with the options market had been previously addressed by the Commission in an order issued in September 2000, and pursuant to that order, Phlx undertook to enhance and improve its surveillance, investigative and enforcement processes with respect to options order handling rules. However, despite enhancements implemented by Phlx, significant inadequacies in Phlx's options surveillance programs persisted.

The Commission also found that Phlx had similar deficiencies in its surveillance for order handling violations in its equities market, and that Phlx inadequately surveyed for violations of equities trading rules relating to short sales, front-running, marking the close, and wash trades. Because of this inadequate surveillance, Phlx failed to detect violations by specialists.

Under the terms of the Order released last week, Phlx has undertaken to retain in 2006 and 2008 a third party auditor to conduct a comprehensive audit of Phlx's surveillance, examination, investigation, and disciplinary programs relating to trading applicable to all floor members.

Phlx has also undertaken to implement annual training program for all floor members and certain members of its regulatory staff.

Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, explained that:

"It is essential that self-regulatory organizations vigorously enforce their own rules and the federal securities laws. This settlement will help strengthen Phlx's regulatory function."

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