NYSE Euronext Fine, Automated Systems, Cyprus: Compliance

NYSE Euronext, the biggest U.S. exchange operator, will pay $5 million to resolve regulatory claims that the New York Stock Exchange violated rules by giving certain customers a head start on trading information.

The NYSE sent data through two proprietary feeds to paying customers before relaying the information to the so-called consolidated feed, which distributes trade and quote data to the public, the Securities and Exchange Commission said in an administrative order filed Sept. 14. Investigators are conducting similar reviews of other exchanges, according to two people with knowledge of the probes, which aren’t public.

The SEC penalty, the first of its kind against an exchange, comes as lawmakers and regulators question whether retail investors are being harmed in an increasingly fragmented marketplace of high-speed, computer-driven trading. NYSE’s practice was discovered in the SEC’s investigation of the so-called flash crash of May 2010, in which $862 billion was erased from equity prices in 20 minutes before recovering.

The practice violated Regulation NMS, which obliges exchanges to give the public fair access to market information, the SEC said. The NYSE violated SEC rules “over an extended period of time” starting in 2008 by failing to monitor the speed of its proprietary feeds compared to the consolidated feed, the agency said in its order.

The violations stemmed from technology issues in NYSE’s Open Book Ultra and PDP Quotes proprietary data feeds, according to the SEC.

“The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel,” NYSE Euronext Chief Executive Officer Duncan Niederauer said in a statement. The company, which operates exchanges in the U.S. and Europe, will “ensure that our market operates with the utmost fairness and transparency,” he said.

While the SEC has previously faulted exchanges for misconduct by employees, the Sept. 14 action marks the first time the agency has fined an exchange for having faulty systems that violated securities rules.

The SEC action follows the Nasdaq Stock Market’s flubbed initial public offering of Facebook Inc. in May and Bats Global Markets Inc.’s withdrawal of its IPO after a technology glitch in March, both of which undercut investor confidence that exchanges are in command of their technology systems. The agency is considering a new rule to mandate that exchanges and possibly brokers employ adequate automated systems to operate their markets and related platforms, according to Dave Shillman, an executive in the SEC’s trading and markets division.

The SEC penalty, the first of its kind against an exchange, comes as lawmakers and regulators question whether retail investors are being harmed in an increasingly fragmented marketplace of high-speed, computer-driven trading. The NYSE’s practice was discovered in the SEC’s investigation of the so-called flash crash of May 2010, in which $862 billion was erased from equity prices in 20 minutes before recovering.

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Compliance Policy

SEC May Apply New Automation Rule to Brokers, Shillman Says

The U.S. Securities and Exchange Commission may include large brokers and dark pools in a planned rule aimed at ensuring that regulated securities markets have adequate technology systems, an SEC official said.

The SEC is working to turn policies on how exchanges manage their automated systems into regulations in the wake of a $440 million Knight Capital Group Inc. trading loss triggered by a software malfunction last month.

The commission’s so-called automation review policy program was established after the 1987 market crash to ensure exchanges and clearing agencies have the capacity to handle sudden surges in trading. The initiative evolved to encompass the security of automated systems and make sure the technology wouldn’t fail during or after a crisis, according to David Shillman, associate director in the SEC’s division of trading and markets.

The aim now is “to codify that,” and make the standards clearer, Shillman said Sept. 13 at a conference in New York sponsored by the Futures Industry Association and Options Industry Council. Minimum standards for automated systems, which currently cover exchanges and clearinghouses, “could be applied to other market participants” including brokers and dark pools, he said.

Shillman said he expects the automation review policy, or ARP, program to be discussed during a roundtable meeting about technology the SEC is holding in Washington on Oct. 2.

SEC Chairman Mary Schapiro said in a March 2011 speech that compliance with the ARP guidelines should be made mandatory.

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Investment Advisers Face Tougher Bonus Rules From EU Regulator

Companies that advise retail consumers on their investments face tougher bonus rules from the European Union’s top markets regulator.

Bonuses for salespeople should “reflect the fair treatment of clients” to reduce incentives for poor sales practices, the European Securities and Markets Authority said in a consultation paper on its website today. Firms should include factors such as “compliance with regulatory requirements” when calculating variable bonuses for staff, ESMA said.

Payouts for managers at financial firms have been under scrutiny from regulators and lawmakers since the fall of Lehman Brothers Holdings Inc. in 2008.

Special Section: Cyprus Talks

EU Ministers Postpone Talks on Liikanen Bank Structure Group

European Union finance ministers postponed a discussion on possible bank structure rules until next month after separate talks on supervision of lenders overran their time.

Ministers are now set to discuss the matter at their next meeting in October, Michel Barnier, the EU’s financial services chief, told reporters after a meeting in Nicosia, Cyprus, on Sept. 15.

Barnier has asked Bank of Finland Governor Erkki Liikanen to lead a high-level group that will propose options for better separation of retail banking and other investment activities. While the group is scheduled to deliver its report on Oct. 2, Cyprus, which holds the rotating presidency of the EU, had called for a preliminary discussion Sept. 15 in Cyprus.

Europe Bides Time on Spain, Relies on ECB to Soothe Markets

European governments put off decisions on aid for Spain and a loosening of Greece’s loan terms, counting on the European Central Bank’s bond-buying pledges to provide interim relief from market turmoil.

Finance ministers meeting in Cyprus last week pressed for a fresh set of reforms to rebuild confidence in Spain’s economic management and said the fate of Greece’s 240 billion-euro ($315 billion) rescue program won’t be decided until late October, possibly at a crisis summit of leaders.

The central bank, which helped drive the euro to a four-month high by stepping up rhetoric to fight Europe’s debt turmoil, warned that it has only bought time for governments to deliver the deficit-cutting and growth-boosting steps needed to stabilize the economy.

Finance ministers will inaugurate the European Stability Mechanism on Oct. 8 and pay in the first two equity installments of 32 billion euros by the end of October, making the fund “fully operational,” Luxembourg Prime Minister Jean-Claude Juncker said after chairing the meeting on Sept. 14.

European officials said Spain will unveil new reforms by the end of the month based on recommendations made in July that cover areas such as a possible increase in the retirement age, a shift from labor to consumption taxes and the deregulation of closed professions.

Spain, already drawing on 100 billion euros to repair its banking system, wants the lightest possible conditions on a European credit line or loan program that would also enable the ECB to buy bonds to bring down its borrowing costs.

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Schaeuble Says EU Bank Oversight Plan Risks Backlash

German Finance Minister Wolfgang Schaeuble said the European Union risks a backlash from financial markets if it takes longer than expected to set up a common bank supervisor for the 17-nation euro area.

The European Central Bank is due to take on bank oversight duties next year under proposals from the European Commission, the EU’s regulatory arm. EU leaders called for a single bank supervisor in June as a condition of allowing euro-area banks direct access to the region’s firewall funds.

“My concern is always that there is the risk to raise expectations with financial-market participants that can’t be fulfilled later,” Schaeuble told reporters Sept. 14 on his way into a meeting of European finance chiefs in Nicosia, Cyprus. “I don’t see the possibility of a direct bank capitalization from the European Stability Mechanism as of January 1.”

Germany has broadly backed the banking union plans, while emphasizing the need for national regulators to monitor most of the euro area’s more than 6,000 banks. The U.K. has voiced concerns that it and other non-euro nations might be drowned out of financial rulemaking if the plan goes through as offered.

Schaeuble’s call for careful deliberations, along with strong conditions for countries whose banks receive aid, contrasted with France’s plea for speed. French Finance Minister Pierre Moscovici said EU leaders agreed to the clear aim of a rapid setup.

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Asmussen Says There Is No Time to Rest on Reform in Europe

European Central Bank Executive Board member Joerg Asmussen urged euro-area governments not to use the recent respite in financial markets as a reason to relax their growth-boosting efforts.

“I want to stress there is no time to rest,” he told a news conference in Cyprus following a meeting of European finance chiefs. “It is up first and foremost for governments to do their homework at the national level and the EU level.”

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Frieden Warns of Crisis Return If EU Reform Drive Is Relaxed

Luxembourg Finance Minister Luc Frieden urged euro-area governments not to put off the steps needed to spur their economies and rebuild the confidence of investors.

Market turmoil could quickly return unless countries such as Spain and Greece maintain the pressure for reform, Frieden said in an interview in Nicosia, Cyprus, Sept. 14 after a meeting of European finance chiefs.

“It’s clear that a new element can come at any moment that will ignite the crisis again,” Frieden said. “That’s why it’s important to know as soon as possible, and the sooner the better, in all the individual cases, Greece, Spain, what the next steps are and there has to be intensive work on this.”

The comments underscore concerns that the calm in financial markets since the European Central Bank unveiled its bond-buying program could lull political leaders into a false sense of security that undermines efforts to cut budget deficits and boost economic growth.

Compliance Action

French Regulator Appeals Exane, Boussard Case, Les Echos Says

France’s Autorite des Marches Financieres is fighting the decision of its sanctions committee to fine Exane SA 500,000 euros ($656,000) and clear Emmanuel Boussard, Les Echos reported.

The appeal was filed July 11, the newspaper reported.

The regulator asked the committee to impose a maximum fine of 1.5 million euros against Exane, according to Les Echos. Boussard has been cleared by the Paris court, the newspaper said.


E-Book Publishers’ $69 Million Accord With States Approved

A U.S. judge granted preliminary approval to a $69 million settlement between 49 states and three U.S. publishers over alleged price fixing of electronic books.

U.S. District Judge Denise Cote in New York gave initial approval to the accord with Hachette Book Group, HarperCollins Publishers LLC and Simon & Schuster Inc. and all the states but Minnesota.

The District of Columbia, U.S. Virgin Islands, Northern Mariana Islands and Puerto Rico also joined in the settlement.

Hachette agreed to pay $31.7 million; HarperCollins, $19.6 million; and Simon & Schuster, $17.8 million, Cote said in an order signed Sept. 13 and made public Sept. 14. The judge scheduled a fairness hearing for Feb. 8.

The states sued alleging the publishers unlawfully agreed to fix the prices of electronic books, violating U.S. antitrust law.

In a separate case, the U.S. sued Apple Inc. and five publishers in April, charging that they conspired to limit e-book price competition. Cote approved a settlement with Hachette, HarperCollins and Simon & Schuster in that case earlier this month, saying it was in the public interest.

The U.S. suit against Apple and the publishers Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, and Pearson Plc’s Penguin Group remains in effect, according to a statement by Texas.

The case is Texas v. Hachette Book Group Inc., 1:12-cv-06625, U.S. District Court, Southern District of New York (Manhattan).

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