(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Exchange Charged with Failure to Enforce Compliance Rules

The SEC instituted a settled enforcement action against the National Stock Exchange for its failure to enforce compliance by exchange dealers with certain exchange rules from 1997 through 2003. At the same time, the SEC also instituted a settled administrative proceeding and civil action against the exchange's president and chief executive officer, David Colker, for his failure to enforce compliance with an exchange rule. Specifically, the SEC found that the exchange violated Exchange Act Section 19(g) by failing until 2004 to conduct surveillance for violations of its customer priority rule. This provision is an investor protection measure that prohibits exchange dealers from trading securities for their own accounts ahead of marketable customer orders. As a result, the exchange allegedly failed to detect many transactions in which exchange dealers traded ahead of customer orders.

The SEC also found that the exchange and Mr. Colker did not enforce the exchange's market order exposure rule in a manner consistent with the rule's language. The market order exposure rule required exchange dealers to provide customer market orders with the opportunity for price improvement whenever the spread between the national best bid and offer was greater than the minimum price variation. According to the SEC, at Mr. Colker's direction, the exchange did not file a proposed rule amendment with the SEC seeking approval for its limited enforcement of the market order exposure rule as required.

Linda Chatman Thomsen, director of the SEC's Division of Enforcement, said that "self-regulatory organizations must vigorously enforce their own rules and the federal securities laws, and this settlement will further safeguard investors by strengthening the exchange's regulatory functions." Antonia Chion, an associate director in the Enforcement Division, added that "SROs and their senior management must be scrupulous in ensuring that business concerns do not interfere with their regulatory obligations and judgment."

As part of the settlement, the exchange, without admitting or denying the findings in the SEC's order, consented to a censure and to an order to cease and desist from future violations. The SEC also ordered the exchange to undertake substantial remedial measures to improve its regulatory and governance functions. In particular, the exchange agreed to separate its regulatory functions from its business functions by, among other things, appointing an independent chief regulatory officer to supervise the exchange's day-to-day regulatory affairs. The exchange also agreed to implement automated daily surveillance for potential violations and to conduct regulatory audits of the exchange's compliance programs. Mr. Colker consented, without admitting or denying the findings in the SEC's order, to a censure order and to the entry of a final district court judgment imposing a $100,000 civil penalty. Under the terms of the SEC's order, Mr. Colker and his successors will have no future role in the exchange's regulatory functions.