By Rodney F. Tonkovic, J.D.
For the first time, the SEC has charged an electronic trading platform for operating as an unregistered broker-dealer. Neovest, a JPMorgan Chase subsidiary, provides an order and execution management system through which customers can route orders for stocks and options. According to the Commission, Neovest operated as a broker-dealer without being registered, by effecting securities transactions for others through the receipt of transaction-based compensation for its services and its solicitation of customers for those services. To settle the charges, the firm agreed to pay a $2.75 million penalty (In the Matter of Neovest, Inc., Release No. 34-92285, June 29, 2021).
Neovest. Neovest, Inc. offers a "broker-neutral electronic trading solution," consisting of an order and execution management system ("OEMS") and other complementary products and functionalities, including access to real-time market data. The OEMS allows customers to route orders for stocks and options to customer-selected destination brokers for execution. Prior to 2006, Neovest provided its services through its registered broker-dealer Neovest Trading, Inc., and the transaction fees received for those services were paid directly to Neovest Trading.
Transaction-based fees. Neovest Trading was registered as a broker-dealer with the Commission and FINRA from 1996 until 2006. In September 2005, Neovest was acquired by JPMorgan Chase, which withdrew Neovest Trading's registration effective December 2006.
After its acquisition by JPMorgan, Neovest continued to receive the same transaction fees for orders routed through the OEMS platform. The destination brokers were instructed to pay transaction fees directly to JPMorgan Securities, a registered broker-dealer. JPMorgan Securities then transferred the fees to Neovest, resulting in Neovest collecting transaction-based compensation until August 2018.
In addition to the receipt of transaction-based fees, the firm also replicated a database containing customer authentication information to one of its most active customers and failed to exercise any supervision over the customer’s use or alteration of the database. This replication, which began in 2004, was not disclosed to customers until May 2018. Since Neovest was not registered during most of this period, the Commission states, customers were deprived of the protections associated with registration.
"Neovest circumvented the regulatory regime that grants broker-dealers the privilege of operating in our markets," said Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. "Today’s charges underscore the SEC’s commitment to securing the important investor protections that flow from broker-dealer registration."
Sanctions. The Commission found that Neovest willfully violated the broker-dealer registration provisions of Exchange Act Section 15(a). In addition to a cease and desist order, the firm was censured and ordered to pay a $2.75 million civil penalty.
The release is No. 34-92285.