JPMorgan subsidiary to pay $2.75M for operating as unregistered broker-dealer

Neovest was acquired by JPMorgan Chase in 2005. The provider of order and execution management system (OEMS) services agreed to a censure and to cease and desist as part of the settlement, from which one SEC commissioner dissented.

The details: Prior to its acquisition by JPMorgan Chase, Neovest had been registered as a broker-dealer under Neovest Trading with the SEC and the Financial Industry Regulatory Authority (FINRA) since 1996. JPMorgan deregistered and dissolved Neovest Trading in December 2006, continuing to provide its services as a wholly owned subsidiary of JPMorgan Holdings, according to the SEC’s complaint.

During this time, Neovest “continued to receive the same transaction fees from Destination Brokers for executed equity and option orders routed through the OEMS Platform. Given Neovest Trading’s dissolution and the nature of these fees, those Destination Brokers were instructed by Neovest to instead pay the transaction fees directly to J.P. Morgan Securities, an affiliated registered broker-dealer,” the SEC explained. “… J.P. Morgan Securities in turn transferred all the transaction fees it received from the Destination Brokers to Neovest. Through this payment structure, Neovest continued collecting transaction-based compensation for its OEMS Platform after Neovest Trading deregistered, until August 2018.”

The SEC further alleged Neovest deprived customers of certain protections by deregistering and that the company replicated its authentication database containing the personal information of customers without the proper supervision required of registrants.

“Today’s charges underscore the SEC’s commitment to securing the important investor protections that flow from broker-dealer registration,” said Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit, in a press release.

Neovest neither admitted nor denied the SEC’s findings.

“We are pleased to put this matter behind us,” said a JPMorgan spokesman.

Commissioner dissent: Hester Peirce released a statement in coordination with the announcement of the settlement in which she stated the enforcement action “misapplies the statutory definition of ‘broker.’”

“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,” Peirce stated. She criticized the SEC’s proceedings as “legally deficient” and said the case adds more confusion to an area where the SEC has struggled to provide clarity.

“That a firm receives transaction-based compensation in connection with securities-related activities may indicate that it is ‘engaged’ in a ‘business,’ but absent a showing that that business is the effecting of securities transactions on behalf of others, transaction-based compensation does not make a firm a broker,” she said.