Electronic Trading Platform Settles SEC Fees For Failed Registration – Corporate / Commercial Law
United States: Electronic Trading Platform Settles SEC Fees For Failed Registration
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An operator of an Order and Execution Management System (“OEMS”) that facilitates e-commerce paid the SEC’s fees for not registering as a broker. According to the SEC, this is the first-ever SEC enforcement action against an OEMS provider for trading without registering as a broker.
In the order, the SEC said the entity managing the platform was initially registered as a broker, but withdrew its brokerage registration after it was acquired by another company. The SEC found that the platform continued to charge transaction fees to its client-selected brokers. The SEC said the platform replicated its authentication database to set up a local server for one of its most active and oldest customers, suggesting this may have created a loss of customer privacy. .
The SEC concluded that the platform’s clients were deprived of the protections derived from regulation over a registered entity, including (i) heightened oversight, (ii) written policies and procedures regarding the protection of client information, and (iii ) SEC or other regulatory body inspection or review. As a result of its findings, the SEC determined that the platform violated Section 15 (a) (“Registration of all persons using foreign exchange facilities to transact; exemptions”) of the Exchange Act.
To settle the charges, the platform agreed to (i) cease and desist from any future violations, (ii) censorship, and (iii) a civil fine of $ 2.75 million.
In a statement on the outcome of the case, SEC Commissioner Hester M. Peirce dissented, saying the findings were not sufficient to establish a violation of Section 15 (a) ( 1) of the SEA. Ms Peirce said the ordinance did not explain how (i) the platform’s services conduct securities transactions or (ii) how the platform engages in soliciting securities transactions. She further criticized the action for providing “little legal analysis” and for failing to assess the platform’s OEMS to determine whether it qualifies as brokerage activity. Applying the logic to other data service providers, Ms Peirce pointed out that under the ordinance, internet service providers or providers offering direct connectivity to a stock exchange could be considered businesses whose the activity consists in carrying out securities transactions on behalf of others.
Ms. Peirce expressed other concerns, including the increased weight given to transaction-based pay as a driving factor in action. She said the action introduces new uncertainty as to whether OEMS can engage in marketing activities without the SEC determining that those activities constitute solicitation. Ms Peirce explained that the action will likely lead potential innovators to decide not to enter the securities industry without hiring a lawyer, spend months communicating with SEC staff and agreeing to inflexible terms about their activities.
Comment Steven lofchie
It is a well-established law that receiving compensation based on securities transactions makes a business a “broker”.
Faced with this well-established law, Ms. Peirce argues that even though a company that receives transaction-based compensation is clearly a “business”, that does not mean that it is in the business of being a “broker”. . Whether a business is a “broker” must depend on the activities it actually carries out. If a firm does not engage in brokerage activities, the way the firm is remunerated should not require the firm to register as a broker.
The disciplinary decision does not respond to the legal challenge by Commissioner Peirce. The conclusion that the company is a “broker” is based on the following premises:
- the company was historically registered as a broker (which is true, but says nothing about the fact that it should have been required to register);
- the company invoiced a transaction fee (which is not in dispute, but does not answer the question of whether the company was engaged in brokerage);
- the business was less regulated than a registered broker (which is true, but does not answer the question of whether the business should be listed); and
- the company was engaged in the marketing of its services (which is true, but does not say anything about the fact that these services constituted brokerage).
According to the disciplinary action, the company was engaged in two activities: (i) providing an order execution and management system and (ii) providing real-time market data. The second activity should not require registration, regardless of the method of remuneration. It is also reasonably established that the first activity does not require registration when the supplier is paid on a lump sum basis, rather than on a transaction basis. But if the activity does not require registration, then why should the payment method be relevant?
It turns out that Commissioner Peirce’s questions about the assumptions made are not easy to answer.
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