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Regulation and Compliance > Federal Regulation > SEC

JPMorgan Subsidiary to Pay $2.75M for Failing to Register as BD

By Jeff Berman

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What You Need to Know

  • In an unusual move, SEC Commissioner Hester Peirce said she disagrees with the majority decision.
  • After JPMorgan Chase acquired Neovest in 2005, Neovest deregistered with the SEC and FINRA in 2006.
  • Neovest’s failure to register as a BD deprived its clients of protections associated with registration and violated securities laws.

The Securities and Exchange Commission ordered JPMorgan Chase subsidiary Neovest to pay a $2.75 million penalty for allegedly failing to register as a broker-dealer, in violation of federal securities laws.

The move represents the first case of the SEC charging an order and execution management system (OEMS) provider for operating as an unregistered BD, the SEC said Tuesday. The firm withdrew its BD registration after JPMorgan acquired it.

In an unusual move, SEC Commissioner Hester M. Peirce said in a statement that she disagrees with the majority decision of the Commission.

“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,” Pierce argued.

According to the SEC order, electronic trading platform Neovest allows clients to route orders for stocks and options to more than 360 customer-selected destination brokers for execution.

The SEC censured Neovest and found that it “willfully violated” Section 15(a) of the Securities Exchange Act of 1934.

Without admitting or denying the SEC’s findings, Orem, Utah-based Neovest consented to the SEC’s order and agreed to cease and desist from committing or causing any violations and any future violations of Section 15(a) of the Exchange Act, and to pay the $2.75 million penalty, the SEC said.

“Neovest has taken a number of steps to enhance its security measures in recent years and remains a leading broker-neutral electronic trading platform,” a JPMorgan spokesman told ThinkAdvisor. “There is no evidence that client data was compromised in any way,” he added.

More Details

From March 1996 through December 2006, Neovest was registered with the SEC and Financial Industry Regulatory Authority through its registered BD, Neovest Trading.

After JPMorgan Chase & Co. acquired Neovest in September 2005, Neovest deregistered with the SEC and FINRA in December 2006, according to the SEC order.

The SEC alleged that, although Neovest withdrew its BD registration after it was acquired, it continued to operate the OEMS as an unregistered BD by, among other things, participating in the order-taking and order-routing process and soliciting customers and destination brokers through the firm’s website and direct outreach at industry conferences and trade shows.

Neovest played a role in determining the routing options that were available to its customers by entering into agreements with the destination brokers, according to the SEC.

According to the order, in exchange for its OEMS services, Neovest also continued to receive transaction-based compensation by having payments from destination brokers redirected to J.P. Morgan Securities, a registered BD, which then transferred the proceeds to Neovest.

The SEC also alleged that Neovest’s failure to register as a BD deprived its clients of protections associated with registration, including inspections and examinations by the SEC and the requirement to establish policies and procedures to safeguard client information.

As detailed in the order, during the period that Neovest failed to register, the firm allegedly replicated a database containing customer authentication information, including user names and passwords, to one of its most active clients and failed to exercise any supervision over that client’s use of the database.

“According to the SEC’s order, Neovest circumvented the regulatory regime that grants broker-dealers the privilege of operating in our markets,” Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit, said in a statement. “Today’s charges underscore the SEC’s commitment to securing the important investor protections that flow from broker-dealer registration.”

SEC headquarters in Washington (Photographer: Andrew Harrer/Bloomberg)

Jeff Berman

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