Neovest Dissent Pushed Into The SEC Shadows

June 30, 2021

Just going by the recently published SEC Order settling the federal regulator's case against Neovest, Inc., you'd think that the show of hands was five in favor and none against. As in unanimous. But it wasn't. It seems to have been a Majority Decision. Which is okay. But "okay" doesn't mean that you avoid all reference to any Dissent in the Order. Publishing a Dissent as a standalone document sort of defeats the purpose -- and sure as hell screws up the context. Wall Street regulation should not operate part in the light and part in the dark. It's difficult for those of us who practice law in this area to divine the messages hidden in a regulatory penumbra. It's even more difficult for those who are not lawyers and regulated by the SEC.

The SEC Neovest Order

Without admitting or denying the findings in an SEC Order Instituting Administrative and Cease-and-Desist Proceedings and Imposing Sanctions, Respondent  Neovest, Inc. consented to the entry of an SEC Order In the Matter of Neovest, Inc., Respondent (Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Sanctions, '34 Act Rel. No. 92285, Admin. Proc. File No. 3-20375 / June 29, 2021) (the "SEC Order") As alleged in the SEC Order:

Neovest, headquartered in Orem, Utah, is a subsidiary of JPMorgan Chase & Co. Neovestmarkets itself as "the premier broker-neutral electronic trading solution," consisting of an order and execution management system and several other complementary products and functionalities, including access to real-time market data. From March 1996 through December 2006, Neovest was registered as a broker-dealer with the Commission and FINRA. 

As alleged in the "Summary" portion of the SEC Order:

1. This proceeding involves violations of the broker-dealer registration requirements by Neovest, Inc. ("Neovest"), a company that provides an order and execution management system ("OEMS") and real-time market data to mostly institutional investors and asset managers. 

2. The regulatory regime applicable to broker-dealers is a cornerstone of the U.S. federal securities laws and provides important safeguards to investors and market participants. Registered broker-dealers are subject to comprehensive regulation under the Exchange Act and under the rules of each self-regulatory organization ("SRO") of which the broker-dealer is a member, including recordkeeping, reporting, and supervisory obligations, Commission and SRO inspection and examination, as well as general and specific requirements aimed at addressing certain conflicts of interest, and requiring policies and procedures reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules, including, without limitation, safeguarding customer information and preventing identity theft, all of which are critical to the fair and orderly functioning of the securities markets. 

3. From March 1996 through December 2006, Neovest was registered as a broker-dealer with the Commission and the Financial Industry Regulatory Authority ("FINRA"). After JPMorgan Chase & Co. ("JPMorgan Chase") acquired Neovest in September 2005, Neovest deregistered with the Commission and FINRA in December 2006. Nonetheless, Neovest continued to operate as a broker-dealer by engaging in the business of effecting securities transactions for others through the receipt of transaction-based compensation for its OEMS services and its solicitation of customers for those services. By engaging in these activities without being registered as a broker-dealer with the Commission, Neovest violated Section 15(a) of the Exchange Act. 

In accordance with the terms of the settlement, the SEC Order imposed upon Neovest a Cease-and-Desist, a Censure, and a $2,750,000 civil money penalty. 

Also READ: "SEC Charges Electronic Trading Platform for Operating As An Unregistered Broker-Dealer" (SEC Release), which asserts in part that: "The Securities and Exchange Commission today announced that Neovest Inc., a provider of an order and execution management system (OEMS) that facilitates electronic trading, has agreed to pay a $2.75 million penalty for its failure to register as a broker-dealer in violation of the federal securities laws.  This is the SEC's first case charging an OEMS provider for operating as an unregistered broker-dealer. "

So far so good.

Except, so far, not so good.

SEC Commissioner Peirce Dissents

No sooner were the SEC Order and the SEC Release published then this hit the SEC's website:  Statement Regarding Neovest, Inc. by SEC Commissioner Hester M. Peirce In Commissioner Peirce's Statement, we learn at the inception:

A majority of the Commission has found that Neovest, Inc. violated Section 15(a)(1) of the Exchange Act of 1934 by failing to register as a broker.

This enforcement action misapplies the statutory definition of "broker," further muddies an already confusing landscape created by prior staff no-action letters issued to firms engaged in very similar businesses, and will likely deter technological innovation in financial services.

I respectfully dissent.

As an initial matter, Neovest, by offering its web-based order and execution management system that facilitated the exchange of information (including order messages) between customers (mostly institutional investors and asset managers) and brokers, was not engaged in broker activity.

How the hell is there a Dissent by a sitting SEC Commissioner from any SEC Order when there is nothing in that Order disclosing a non-unanimous decision by the SEC Chair and its four Commissioners?  

The SEC's "Dissent" Problem

In "Two SEC Commissioners Dissent From The Shadows" ( Blog / November 16, 2020), I reported about an October 15, 2020, SEC Order involving the $20 million civil penalty imposed via settlement upon Respondent Andeavor LLC. I offered this observation in part:

If you read the SEC's October 15, 2020, Press Release and attendant Order, you would not have noticed anything remarkable or unusual about the documents. Accordingly, you would have assumed -- inferred -- that the SEC's Chair and its Commissioners deemed it appropriate to impose the agreed-upon sanctions and were happy to approve the Order.

And then a day passed.

And then a week.

And then about a month.

And then, on November 13, 2020, we awake to Statement of Commissioners Hester M. Peirce and Elad L. Roisman - Andeavor LLC (SEC Statements / November 13, 2020),. . .

As I commented  in the November 2020 Blog:

I applaud any SEC Commissioner who dissents from the majority's action, which often indicates that a given commissioner declines to serve in the role of a rubber stamp. Moreover, dissents replete with rationales from one of the SEC's four commissioners or Chair educate the industry and investing public as to where and how future regulatory lines might get drawn when similar fact patterns arise. 

. . .

Finally, I note my disapproval of the manner in which the Andeavor settlement was published in the SEC Release and the SEC Order -- neither document disclosed that the SEC Order was the product of a mere Majority rather than a Unanimous vote. Similarly lacking was any reference to any Dissent, which rendered Commissioners Peirce and Roisman as two disembodied voices speaking to us from the shadows. It was only a month after the fact when first light was shed on the Dissent. As a matter of form and practice, I would think it would always be advisable for SEC opinions, orders, etc. to meticulously disclose in a contemporaneous fashion the roster of those voting on a given matter at hand and the breakdown of those in support versus those in the dissent.

No-Relief is No Relief

As she often does, Commissioner Peirce raises some provocative and compelling points. I'm not going to paraphrase them further in this blog. If you're a serious Wall Street participant or investor, you should read the Dissent. Finally, it is truly encouraging to read these concluding observations in Peirce's Dissent:

A response to the concerns I have outlined might be-"Well, Neovest could have come in for no-action relief."

The problem with requiring anyone whose products and services touch the financial services industry to come in for no-action relief is that it dissuades people from applying their ingenuity to serving the securities industry.

The road to no-action relief is long and costly.

If a firm does not fall within the scope of the securities laws, why should it subject itself to that process?

Because the Commission has determined to pursue an enforcement action in an area haphazardly marked out by a long line of individually-negotiated no-action letters, service providers are only going to become more hesitant to provide novel solutions to problems market participants face.

This action likely will lead would-be innovators to conclude that they cannot enter this space until they have hired counsel, spent months engaging with our staff, and signed on to a set of inflexible conditions on their activity.

Such barriers to entry are unnecessary in and unbecoming of the world's strongest securities market.

Final Thoughts

In October 2020, when the SEC published its Andeavor Order, Donald Trump was President and the SEC was Chaired by Trump appointee Jay Clayton -- and Trump and Clayton continued in office when Commissioners Peirce and Roisman published their Dissent. Fast forward to June 2021, when the SEC published its Neovest Order, and, now, Joseph Biden is President and Gary Gensler Chairs the SEC. The issue of non-disclosure of Dissent seems more institutional at the SEC than merely a matter of politics or political persuasion. Also see: "SEC Commissioner Stein Stands Alone In Her Defense Of The Investing Public And Industry" ( Blog / May 22, 2015)

Notwithstanding my Wall Street reform bona fides, after reading the SEC's Neovest Order, I wasn't quite sure that I got the issues or agreed with the sanctions. Then again, as I always note when critiquing a regulatory settlement, if Neovest was happy to sign off on the settlement offer and write out the check, so be it -- I don't know what I don't know and it may well be that the SEC had more on the Respondent than made its way into the published Order.