J.P. Morgan has agreed to a settlement with regulators over allegations of improper supervision of brokers who sold syndicate preferred stock, according to Advisor Hub.
The Financial Industry Regulatory Authority disclosed that it has censured and fined J.P. Morgan $350,000 in the matter, and ordered it to pay almost $1.7 million in disgorgement as well as $157,500 in restitution to affected clients. A letter of acceptance, waiver and consent details the actions covering the period from January 2017 to December 2018 that led to the enforcement action.
FINRA states at least 15 J.P. Morgan brokers or teams recommended short-term trades in around 1,000 syndicate stocks, which generated at least $1.67 million in sales concessions collected from the issuers and $157,000 in commissions from customers. The revenue was split between the firm and the brokers.
According to FINRA, the brokers sold the securities within 180 days even though they are meant to be held long-term, and in some cases exchanged one syndicate preferred stock for another. “Trading in syndicate preferred stock is subject to potential abuse where representatives recommend the purchase and short-term sale of the security, collecting a sales concession in the process,” FINRA said. “This practice is especially concerning if the representative then recommends that the customer purchase a different syndicate preferred stock, again receiving a front-end sales concession.”
The authority noted that these income-generating securities represent a substantial business for J.P. Morgan, and that brokers placed 149,000 syndicate stock trades with a principal value of $23 billion during the period in question.
The AWC letter stated that the firm’s electronic surveillance system did not have any alerts to specifically target preferred stock activity, though it did identify short-term trading in syndicate stock in some instances.
FINRA determined that most of the customers’ short-term trades were not detected, including those by one broker who recommended more than 150 purchases of syndicate preferred stock in multiple customer accounts. The broker recommended the customers sell the position after holding it for less than 180 days, and in some cases, as little as 30 days.
A person close to the company told AdvisorHub that JPMorgan will reimburse the affected clients and has enhanced policies and supervisory procedures for trading preferred stock.
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