July 29, 1998
Roslyn G. Daum, Esq.
Choate, Hall & Stewart
53 State
Street
Boston, Massachusetts 02109
Re: Grant of
No-Action Relief to Evare, LLC
Dear Ms. Daum:
Based on the facts and representations set forth in
your letter dated July 27, 1998, the staff of the Division of
Market Regulation (the "Division") will not recommend enforcement action to the
Commission under Section 15(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") if Evare, LLC or its employees ("Evare") engage in the activities
described in your letter, without registering as a broker-dealer in accordance
with Section 15(b) of the Exchange Act. According to your letter, Evare
proposes to offer an on-line communication system (the "System") linking
professional money managers, broker-dealers, and custodians that would enable
managers to obtain quotes from, and enter orders with, broker-dealers, and to
communicate information to custodians for settlement of trades. We note in
particular Evare's representations that Evare will not (i) hold or have access
to or handle managers' funds or securities; (ii) recommend [*2] or endorse specific securities; (iii)
become involved (other than by routing messages) with the financial services
offered by broker-dealers, including, among others, the opening, maintenance,
administration, or closing of accounts, or the solicitation, processing or
facilitation of transactions of any kind relating to accounts; (iv) directly or
indirectly make any statement about, or endorsement or recommendation of any
kind of, any broker-dealer to any manager; or (v) receive compensation based,
directly or indirectly, on the size, value, or occurrence of securities
transactions.
This position is based on the facts presented and the
representations made to the staff in your letter, and any different facts or
conditions might require a different response. Furthermore, this response only
expresses the staff's position on enforcement action and does not purport to
express any legal conclusions on the question presented.
We understand
that Evare may permit distribution agents to
resell access to the System to managers and broker-dealers. This letter does not
address whether any such distribution agent would be required to register as a
broker-dealer in accordance with Section 15(b) of [*3] the Exchange Act.
Pursuant to 17
CFR § 200.81(a), this letter and your request for this relief ordinarily would
become publicly available "as soon as practicable" after this letter is sent or
given to you. In your letter, however, you request confidential treatment of
this matter. Under 17 C.F.R. § 200.81(b), the staff may grant confidential
treatment of this matter to you, if the staff determines that the request for
confidentiality is "reasonable and appropriate." Because we believe that your
request is reasonable and appropriate, the staff has agreed to grant
confidentiality for a period of 120 days from today's date or until such earlier
date as the information contained in this letter is first publicly announced by
Evare.
Sincerely,
Catherine McGuire
Chief Counsel
CHOATE, HALL & STEWART
A
PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
EXCHANGE PLACE
53 STATE STREET
BOSTON, MASSACHUSETTS 02109-2891
TELEPHONE (617) 248-5000
FACSIMILE (617) 248-4000
TELEX
49615860
1934 Act/15(a)
July 27, 1998
Catherine McGuire,
Esq.
Office of Chief Counsel
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Evare, LLC
[*4]
Dear Ms. McGuire:
This letter is submitted on behalf of our client,
Evare, LLC, a Massachusetts limited
liability company ("Evare"). We respectfully request that
the staff of the Division of Market Regulation (the "Staff') advise Evare that the Staff will not recommend
that the Securities and Exchange Commission (the "Commission") take enforcement
action against Evare if it provides an on-line
communication system which may be used by registered brokers to communicate with
certain investors in the manner described below without registering as a
broker-dealer under Section 15(a) of the Securities Exchange Act of 1934 (the
"Exchange Act").
Description of the System
Evare proposes to establish and operate
a PC desktop application (the "System") n1 through which various parties may
connect through the Evare HUB to existing broker/dealer
trade execution systems in order to communicate with those systems on-line. The
Evare System will integrate services
which are already available from the broker/dealer which is contacted. The
System will therefore offer whatever services and features are available from a
participant broker/dealer system. Other than desktop consolidation and a
standardized [*5]
presentation format, Evare will not offer any services or
features beyond those that are offered by the particular broker/dealer system in
question. Beyond consistency of the user interface, n2 the System will not have
a unique operation which is characteristic of itself
n1 The name of the
application framework which will be provided to Managers will be the Evare Desktop. The Evare HUB will be called the Evare Transaction Network.
n2
All communications through the System will be through formats which will be
defined in the Evare System HUB, consistent with the
restrictive criteria used by participating Broker systems.
The parties
utilizing the System will be limited to (a) professional money managers
("Managers"), who will use the System to obtain pricing and other information n3
from brokers and may use the System to initiate securities transactions with and
through the brokers, (b) registered broker-dealers ("Brokers"), who will (i)
supply to Evare, for retransmission to Managers,
the pricing and other information (which will be made available to participating
Managers but not to other Brokers), and (ii) engage in securities transactions
with and for those Managers [*6] which
have established accounts with the Brokers, and (c) custodians ("Custodians"),
who will have access to specific types of information from Evare, which will be delivered directly
into the databases of such Custodians, so as to permit the Custodians to hold
securities and maintain related records for the Managers. n4 (As used in this
letter, "customers" refers to Managers, Brokers, and Custodians who contract
with Evare to use the System.) Retail
investors would not have access to the System.
n3 The funds managed by
these Managers will also have access to this information.
n4 In parallel
with but separate from the operation of the System, Evare will also offer to Managers a
package of both services and software, consisting of a record-keeping system for
investment accounts. This desktop record-keeping service will automatically be
updated through a link to the System in order to provide managers with portfolio
pricing information, communication of relevant information to Custodians, and
recording of completed transactions.
While Evare expects that Managers and Brokers
will use the System for securities transactions, Evare will not be directly or
indirectly involved [*7] in the
transactions, leaving all aspects of such transactions, including the decision
whether to engage in such transactions, up to the Managers and Brokers. The
nature of the communication engaged in by a user of the System will not be
controlled by Evare, n5 and Evare will not edit or modify the
content of the communications made on the System, nor will it filter, evaluate,
or comment upon any communications. No user will be bound by the System to any
particular purchase or sale price, nor will any user be bound to enter into
transactions with any person that is not approved by it, or indeed into any
securities transactions whatsoever. In short, no entity can be forced to trade
with any other entity simply because it is using the System. There will be no
mechanism within the System for routing orders to the best quotes. Any follow-up
on a transaction will be the responsibility of the Managers, Brokers, and
Custodians involved, using whatever means they determine, and such follow-up
will not be undertaken by the System. Evare will be completely passive with
regard to the communications made within the System, providing only a
pass-through communication service among Managers, Brokers, [*8] and Custodians. The System is thus
extremely similar to a telecommunications provider.
n5 As previously
noted, all communications through the System will fit within specific defined
formats.
Price quotes and access to a particular Broker's system will be
provided and controlled by the Broker and will be identified to Managers by
Broker. n6 Brokers will not be required to provide any particular types or
quantities of information, nor will any Broker be able to limit, restrict, or
view information provided by any other Broker. Through the System, Managers will
be able to communicate with Brokers to negotiate and engage in the purchase and
sale of securities, in the same manner that such individuals would communicate
with each other over a telephone or in person. In order to place an order with a
Broker for the purchase or sale of a security, a Manager first will be required
to have an account with that Broker. n7 Brokers will be free to accept or refuse
any account on whatever grounds the Broker determines. Evare will not regulate or control any
aspect of the transactions between Managers and Brokers; among other things,
pricing will be negotiated directly between Brokers and [*9] Managers. There will be no requirement that
interactions between participating Brokers and Managers be conducted via the
System. Brokers and Managers will be free to deal with each other in any way and
through any medium they see fit. Managers will not be allowed to engage in
transactions with each other through the System, however.
n6 All
participants in the System will be identified; no anonymous participation will
be allowed.
n7 Managers will not be able to view price quotations
through the System except from Brokers with whom they have pre-existing
accounts. The System will permit the Managers to see a list of participating
Brokers and will also permit the Managers to take the first step to initiate the
opening of new accounts with participating Brokers. However, since the actual
opening of new accounts will be controlled by the Brokers, the requirements and
procedures established by the Brokers will vary from Broker to Broker. No
special fee will be charged by Evare for opening an account with a
Broker through the System, although Evare will charge its normal usage fee
(as described below) for such communications, just as with any other
communication through the System. [*10]
Communications with Custodians using the System will be in support of
purchase and sale transactions involving Managers for which the Custodians
provide services. Information concerning completed purchases and sales will
automatically flow through the System to a Custodian providing services to a
Manager involved in such a transaction, allowing the Custodian to take
appropriate action with respect to securities held for the Manager. n8 Although
the System may therefore be used to facilitate settlement of transactions, Evare itself will play no role
whatsoever in such settlement. Settlements of any transactions effected through
the System will be done directly between the parties to each transaction and
through their Custodians, and Evare will not be responsible for or
guarantee payment or delivery. Evare will neither handle securities
nor transmit funds.
n8 The Evare System HUB will track and audit
all communications conforming to the transaction protocols which pass through
it. Settlement instructions will be initiated by a Manager and will be
communicated through the Evare System HUB at the completion of a
trade.
None of Evare's customers will have any
proprietary interest [*11] in or
control of Evare or the operation of the System,
and Evare has no ownership or other
interest in any entities that might be customers of Evare, nor are Evare and any customer
under common control. All transactions will be consensual and no customer will
be required to trade at any time. The price at which any security may be
purchased or sold may be negotiated between a Manager and a Broker at the time
of purchase, and no customer will be forced to purchase or sell, or offer to
purchase or sell, any particular securities or any specific quantity or type of
securities.
Evare will charge flat fees to each of
its customers. Fees will not be dependent on the occurrence of a transaction
through the System and will not be based on or otherwise relate to the size or
value of any transaction effected through the System. Brokers and Managers will
be charged a flat annual license fee for access to the System, as well as a
usage fee for each interaction with the System, which will be determined by the
cost to Evare of providing access to the System
(i.e. how long the transaction takes, equipment charges, line access fees, and
other costs of doing business). n9 The basis for this usage [*12] fee will be the same, regardless of the
nature of the interaction with the System - a Manager who wishes to interact
with the System in order to check pricing information will be charged upon the
same basis as will a Manager who connects to the System in order to place an
order with a Broker. In the event that a Broker or Manager has been provided
with access to and use of the System through a distribution agent (such as a
bank or other financial institution which is permitted through an agreement with
Evare to resell access to the System),
all license and transaction fees will be billed to the distribution agent
pursuant to Evare's agreement with that agent. A
distributor will be free to realize a profit by marking up these fees pursuant
to agreement with its customers. n10 Custodians will also be charged the same
usage fee for interactions with the System. Evare will not participate in any
profits that are so derived by distributors. All fees charged by Evare will be based upon Evare's operating overhead and the
expense of maintaining the System, plus recapture of start-up costs and a
market-driven profit.
n9 No fee will be charged, and no services will be
provided, with respect to transactions that are effected outside of the System,
even if the transaction is based upon information obtained through the system.
Managers will be permitted (but not required) to notify Custodians through the
System of transactions that are effected outside of the System. In such an
instance, the charge imposed would be on the same basis as all other usage fees,
with no additional fee charged because the transaction was effected outside of
the System. The fee charged would be equal to the fee that would have been
charged on account of notification of Custodians had the transaction been
effected in the System. [*13]
n10 Conversely, a distributor would also be permitted to charge its
customers less than the fees paid by the distributor to Evare, if a distributor wished to
subsidize its customers' access to the System as a service to those customers.
Registration as a Broker-Dealer
Section
3(a)(4) of the Exchange Act defines a broker as "any person engaged in the
business of effecting transactions in securities for the account of others."
Similarly, Section 3(a)(5) defines a dealer as "any person engaged in the
business of buying and selling securities for his own account." Evare does not meet these definitions.
Evare will not be engaged in the
purchase or sale of securities for its own account or for the account of others.
Evare will not arrange such
transactions, through the matching of bids and offers or otherwise, and it will
not require any party to engage in any transaction. All transactions that take
place through the System will be executed by the parties to that transaction.
Evare will simply be providing the
medium through which information relating to securities may be exchanged and
negotiations for the purchase and sale of securities may take place.
Evare will not be engaged [*14] in any of the traditional roles of a
broker or dealer in a securities transaction. Specifically, Evare will not advise or comment upon
any possible or proposed transaction; participate in negotiations between the
parties to a transaction; assist investors with the closing of a transaction by
providing or completing documentation or through referrals to attorneys,
accountants, or other related professionals; handle, receive, or direct any
funds or securities involved in a transaction; or hold itself out as providing
any securities-related services other than the provision of a communications
network as described above. Moreover, Evare will be not compensated in the
form of "commissions" tied to the size or value of any transaction. Fees paid to
Evare will be predetermined flat annual
and usage fees that will compensate Evare for use of its communications
network. Evare will not charge a "value-added"
fee based on the size or value of any transaction that is consummated through
the System or that is consummated as a result of any information found on the
System.
Each Broker will be responsible for the accuracy of all
materials relative to the services of such Broker that are viewed [*15] through the System. Evare and its employees will not be
allowed to describe the brokerage services of any Broker to a Manager. In
addition, Evare and its employees will not
recommend or endorse specific securities. Neither Evare nor its employees will take part
(other than by permitting messages to flow through the System) in the financial
services offered by any Broker, including the opening, maintenance,
administration, or closing of brokerage accounts, or the solicitation of trades,
nor will they provide assistance in resolving problems, discrepancies or
disputes involving brokerage accounts or related securities transactions. Evare also will not answer questions or
engage in negotiations involving brokerage accounts or related securities
transactions. Evare will not accept orders, select
among broker-dealers or route orders for customers to markets for execution; all
decisions concerning broker-dealer or market selection will be made by the
Managers and Brokers. Evare will not handle customer funds or
securities related to securities orders transmitted to a Broker or effect
clearance and settlement of customer trades. n11 Evare will not extend credit to any
Manager for the purpose [*16] of
purchasing securities through or carrying securities with, any Broker.
n11 Although, as discussed above, the System may be used by Managers to
facilitate the settlement process by way of communications between the parties
to a transaction and their Custodians, Evare itself will play no role in
effectuating settlements.
The Staff has previously granted no-action
relief regarding broker-dealer registration to electronic communications systems
similar to the System that link investors to broker-dealers, subject to
compliance with several conditions. Like the System, the systems described in
Charles Schwab & Co., Inc. (available November 27, 1996) and
Quick America Corporation (available June 18, 1993) involved the electronic
communication of information relating to the possible purchase and sale of
securities, without matching offers and bids on securities or otherwise
brokering securities transactions. The arrangements discussed in Charles
Schwab and Quick America expressly contemplated the use of on-line
communications systems to connect a broker with its customers without
registration of the on-line systems or their employees as broker-dealers.
The Staff [*17] has
also granted no-action relief in Trade Point of America, Inc.
(available February 18, 1998) and InvestScape, Inc.
(available May 21, 1997), which dealt with the establishment of independent
communication terminals to allow customers with existing accounts with a broker
to contact that broker in order to check pricing information and communicate
orders. The Evare System is substantially similar
to such communication terminals, with the only essential difference being that a
Manager would have its choice of Brokers to contact through the Evare System, provided that the Manager
has an account with such Brokers, rather than having only a direct link to a
single broker. The Evare System similarly will be
completely passive as to the investment decisions made by a Manager, merely
permitting Managers to use the System as a communication mechanism.
The
Staff has also recently considered a slate of electronic systems used by
registered broker-dealers to match offers and bids on securities, take orders
for the purchase or sale of securities, or otherwise to arrange for securities
transactions. The System differs significantly from such electronic trading
systems in that Evare will [*18] not be involved in the taking of orders
for the purchase or sale of securities, matching bids to purchase and sell
securities, or otherwise "effecting transactions" in securities. All
arrangements for the sale or purchase of securities will be made without
participation or oversight by Evare, and the System will not
establish the parameters for such transactions.
Accordingly, the System
is substantially different from other systems that the Staff has found to be
within the scope of the broker-dealer definitions. For example, in Sidney
Schwartz (available March 17, 1979), the proposed system required those
offering to sell securities to enter firm offers into the system. Those offers
could then be accepted by any other customer of the system at the offered price.
Accordingly, the system performed the function of executing the transaction,
rather than requiring that execution be effected by the registered
broker-dealer.
By contrast, the System merely permits Brokers and
Managers to engage in transactions upon terms that they directly negotiate with
each other, without requiring any party to enter into a transaction with any
other party. While transactions may (but are not required [*19] to) occur through the System, Evare will have no part in the
structure or execution of such transactions, nor will the System regulate the
manner in which Evare's customers select who to enter
into such transactions with or any of the terms of those transactions. Thus,
Evare will not perform any brokerage
functions for its customers, but will merely provide a forum for Brokers and
Managers to communicate regarding potential securities transactions.
The
fee structure contemplated by Evare does not substantively differ
from that permitted by the Staff in Charles Schwab, which proposed to
charge each on-line service provider a flat fee for each order transmitted,
rather than for each order that results in an executed transaction. As set forth
above, Evare will charge a flat annual fee and
a usage fee. The usage fee will be determined on the same basis regardless of
the type of interaction with the System or the size of any transaction, and the
amount of the usage fee will vary only due to the cost to Evare of providing access to the
System. The Evare fee, based upon each interaction
with the System, is thus similar to the Schwab fee based upon each order
transmitted.
Accordingly, [*20] we
believe that Evare should not be subject to
registration under the Exchange Act as a broker-dealer.
Conclusion
In view of the foregoing, we request on
behalf of our client that the Staff indicate that it will not recommend that the
Commission take any action if Evare provides the on-line
communication system described above without registering as a broker-dealer
under Section 15(a) of the Exchange Act.
In accordance with the
procedures outlined in Securities Act Release No. 6269 (December 5, 1980) we
have enclosed seven extra copies of this letter for the convenience of the
Staff.
We respectfully request a response as soon as practicable and if
possible within 30 days of your receipt of this letter. If you have any comments
or questions relating to this request, or if you anticipate formulating a
response not consistent with our interpretation, please contact the undersigned
at (617) 248-5000.
Very truly yours,
Roslyn G.
Daum