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.
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.
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.
As I commented in the November 2020 Blog: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)https://www.sec.gov/news/public-statement/peirce-roisman-andeavor-2020-11-13,. . .
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.
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.