Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, October 14, 2011

SEC Sanctions Two Electronic Exchanges for Weak Internal Controls

The SEC sanctioned two electronic stock exchanges and a broker-dealer owned by Direct Edge Holdings LLC for violations of U.S. securities laws arising out of weak internal controls that resulted in millions of dollars in trading losses and a systems outage.  EDGA Exchange Inc., EDGX Exchange Inc., and their affiliated routing broker Direct Edge ECN LLC agreed to settle cease-and-desist and administrative proceedings without admitting or denying the Commission’s findings. The exchanges and the routing broker, known as DE Route, cooperated with the SEC’s investigation and agreed to be censured and undertake remedial measures, many of which are underway, to correct the deficiencies that led to the systems problems and the violations at the all-electronic exchanges.

A comprehensive remediation plan submitted by the exchanges to the SEC staff requires the exchanges to:

  • Enhance their policies and procedures for systems development and maintenance.
  • Implement an enterprise risk management framework and information security program, including the hiring of an information security director, and enhancing their information technology control framework and underlying controls.
  • Hire a corporate training director to train employees about U.S. securities laws and the exchanges’ policies and procedures.
  • Retain outside counsel to review the circumstances leading to the two systems incidents at the exchanges.
  • Hire a chief compliance officer whose responsibilities include implementing policies and procedures reasonably designed to ensure that respondents fulfill their regulatory and compliance obligations.

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