By Dow Jones Business News, February 28, 2013, 04:36:00 PM EDT
--CBOE in discussions with SEC to resolve compliance investigation
--Exchange group has earmarked $5 million for settlement of investigation
--Charge of up to $10 million "reasonably possible," CBOE says in filing
(Updates with additional detail on settlement discussions, background.)
By Jacob Bunge
The parent of the Chicago Board Options Exchange said Thursday that the cost of resolving a yearlong regulatory
investigation could rise to $10 million, double what the company has set aside to settle the matter, according to a
Settling the federal investigation into the CBOE's functions as a regulator of financial firms also could require
changes to the exchange group's compliance practices and "other remedies," CBOE Holdings Inc. ( CBOE ) officials wrote in
documents filed with the Securities and Exchange Commission, which is pursuing the inquiry.
The SEC for more than a year has been looking into the way CBOE, the biggest U.S. options exchange in terms of trading
activity, regulates the firms that do business on its markets and other exchanges. The Chicago-based exchange operator
ranks as the U.S. securities industry's second-largest self-regulatory organization, with authority to audit firms and
monitor trading activity.
The probe was launched after the SEC began investigating alleged violations of securities laws by a unit of the
Chicago brokerage firm OptionsXpress, people close to the investigation have said. CBOE served as that firm's
supervisor. OptionsXpress is now owned by Charles Schwab Corp. ( SCHW )
CBOE is cooperating with the SEC investigation and has launched its own internal investigation into compliance
operations. Over the past year, CBOE has overhauled its regulatory division, naming a new chief compliance officer
following the departure of several long-serving officials, including one of CBOE's senior executives. The exchange has
not been accused of any wrongdoing.
A spokesman for the SEC declined to comment.
Chicago-based CBOE earlier this month told investors that it had set aside $5 million as the company discussed
settling the matter with the SEC. The company on Thursday said those conversations "remain ongoing," though the amount
set aside by CBOE related to the matter has not changed, according to a spokeswoman for CBOE.
"We believe that it is reasonably possible that the Company could incur a charge in connection with this matter of up
to $10 million, and any agreement will be subject to the approval by the Commissioners of the SEC," exchange officials
wrote in Thursday's filing.
The chances of a monetary penalty above $10 million in the matter are "remote," according to the CBOE filing.
CBOE this month reported $149.5 million in net income in 2012, up 2% from the prior year.
CBOE shares settled 0.1% higher at $35.92.
If the CBOE pays a monetary penalty in the matter, it would be just the second time U.S. regulators have fined an
exchange. In September, NYSE Euronext ( NYX ) paid $5 million to settle SEC allegations that it delivered pricing data to
some customers ahead of others. The Big Board parent neither admitted nor denied the allegations.
Nasdaq OMX Group Inc. ( NDAQ ) separately has been discussing a settlement with regulators over its mismanagement of the
Facebook Inc. ( FB ) initial public offering in May 2012, the Wall Street Journal reported this month.
Write to Jacob Bunge at firstname.lastname@example.org
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