Published on Jul 14th, 2021 |

 

SEC Charges Electronic Trading Platform | SEC Release

 

On June 29th, 2021, the SEC announced that Neovest, Inc. failed to register as a broker-dealer in violation of the federal securities laws. Neovest, Inc. is a provider of an order and execution management system (OEMS) and this is the SEC’s first case charging an OEMS for operating as an unregistered broker-dealer.

What went wrong you may ask?

  • Prior to it’s acquisition by JPMorgan Chase, Neovest engaged in this activity through their registered broker-dealer, Neovest Trading, Inc.
    • Once acquired by JPMorgan Chase, Neovest withdrew its broker-dealer registration, but continued to operate as an unregistered broker-dealer OEMS.
  • Neovest still played a role in routing options by determining when they were available to its customers by entering into agreements with the destination brokers.
  • They also received transaction-based compensation.
  • Customers were deprived of their protections associated with registration which included inspections and examinations.
  • Replication of a database containing customer authentication information and failure to exercise any supervision over the customer’s use of the database was another issue.

The SEC made this an emphasis to their overall goal of protecting investors and staying true to their commitment towards it. They further clarified that Neovest willfully violated Section 15(a) of the Securities Exchange Act of 1934.

To view the document pertaining to the violation click HERE. To view the full SEC Release on the charge click HERE!

 

Commissioner Hester M. Peirce Releases Statement on Neovest, Inc.

Do you think Neovest, Inc. was fully responsible for this wrongdoing?

The Commissioner disagreed with the ruling on Neovest, Inc.

To better digest her remarks, below will be important takeaways from her Public Statement:

  • Neovest was not engaged in broker activity.
    • Its web-based order and execution management system that facilitated the exchange of information between customers and brokers showed they were not engaged.
  • The Order Instituting Proceedings (OIP) stated that it was the customer that “directly routed its orders to buy and sell equities and options” not Neovest.
    • The customer also selected the broker-dealer regarding where the order would be sent.
  • Neovest did not provide any recommendations toward trading strategies or specific securities that ended in any routing decisions, as the OIP had no findings of this appear.
    • The OIP also found that Neovest did not handle any customer funds in connections with securities transactions or that it negotiated or executed trades.
  • Order and execution management system (OEMS) was never examined and the OIP provided minimal information on how they went about their legal analysis.
    • The OIP did not explain their reasoning behind why Neovest facilitated the transmission of orders created by customers.
    • Also, the OIP did not find anything about Neovest marketing itself as offering brokerage services.
    • As a result of the findings from the OIP, Commissioner Hester M. Peirce believes there was not enough information found to enforce a violation of Section 15(a)1).

Commissioner Hester M. Peirce proceeds to strengthen her argument on why Neovest should not have been charged throughout the remaining public statement, and states additional examples.

Interested in learning more about her remarks? Do you agree with her viewpoint? To view the full statement, click HERE!

 

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To help provide clarity, Vigilant is a full-service Investment Management Solutions Firm.

Vigilant offers core solutions that you can find here below:

  • Compliance Solutions
    • Investment Adviser
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    • Broker Dealer