Risk & Compliance

SEC Censures AMEX for Lax Controls

The American Stock Exchange is cited for inadequate regulatory and compliance programs.
Stephen TaubMarch 23, 2007

The Securities and Exchange Commission has censured the American Stock Exchange for failing to enforce compliance with securities laws and rules, as well as failing to comply with its record-keeping obligations. In addition, the SEC instituted administrative proceedings against Salvatore F. Sodano, AMEX’s former chairman and chief executive officer, for allegedly failing to enforce compliance with the same laws and rules.

The commission elaborated that since at least 1999, AMEX has been warned that its surveillance, investigatory, and enforcement programs were inadequate. The regulator noted that AMEX previously agreed to the issuance of a September 11, 2000, order that, in part, directed the exchange to enhance and improve its regulatory programs. Even so, AMEX’s surveillance programs for options-order handling continued to be inadequate, said the charge.

In addition, the SEC noted that when AMEX surveillance programs detected rule violations, officials failed to investigate the violations properly. The SEC added that officials at the exchange “improperly excused violations, and failed to pursue adequately disciplinary actions” for rule violations. “Today’s action against the Amex demonstrates that the Commission will be vigilant in making certain that SROs (self-regulatory organizations) fulfill their regulatory responsibilities,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a statement.

The commission censured AMEX and ordered it to cease and desist from violating certain exchange rules. The SEC also ordered AMEX to file a rule proposal with the commission to enhance its trading systems so that specialists systemically will be prevented from violating AMEX’s customer priority rules, enhance training programs to better acquaint staff members with compliance procedures, and retain an auditor to conduct three biennial audits of AMEX’s regulatory efforts. AMEX consented to the order without admitting or denying the SEC’s findings.

In a separate, related proceeding against Sodano, the SEC’s Division of Enforcement alleged that AMEX’s regulatory problems resulted in large part from Sodano’s failures to make regulation an AMEX priority, to put in place an oversight structure to monitor compliance, and to dedicate sufficient resources to regulation. These failures were particularly significant regarding AMEX’s options market because Sodano, according to the SEC, “knew the Amex had been previously sanctioned” by the commission for its inadequate options regulation in the September 2000 order. “Senior management of a self-regulatory organization play a critical role in establishing a culture of compliance and are ultimately responsible for ensuring that the organization is meeting its regulatory objectives,” said SEC associate director Scott W. Friestad in a statement.

In a third proceeding, the SEC issued an order against Richard Robinson, a former AMEX vice president responsible for overseeing AMEX’s regulatory surveillance programs for the derivatives and options markets. The commission found that Robinson was a cause of AMEX’s violations by failing to oversee properly the exchange’s surveillance program for derivatives and options, by failing to maintain properly AMEX investigative files, and by signing and submitting an affirmation to the commission on behalf of AMEX that contained inaccurate representations relating to AMEX’s regulatory program.

Without admitting or denying the commission’s findings, Robinson consented to the issuance of an order directing him to cease and desist from causing violation of certain exchange rules.