Two affiliates of JPMorgan Chase & Co. have been charged and penalized in a series of Securities and Exchange Commission enforcement actions, according to AdvisorHub.
J.P. Morgan Securities LLC (JPMS) and J.P. Morgan Investment Management Inc. (JPMIM) were charged in five separate actions. They included misleading disclosures to investors, breach of fiduciary duty, prohibited joint transactions and principal trades, and failures to make recommendations in the best interest of customers.
The affiliates did not admit or deny the SEC’s findings but agreed to pay more than $151 million in combined civil penalties and voluntary payments to investors to resolve four of the actions. The SEC did not impose a penalty in one action against JPMS because the firm cooperated in the investigation and undertook remedial measures.
“JP Morgan’s conduct across multiple business lines violated various laws designed to protect investors from the risks of self-dealing and conflicts of interest,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “With today’s settlements, which include multiple self-reports and large voluntary payments to harmed investors, JP Morgan is being held accountable for its regulatory failures.”
One of the SEC’s actions involved Conduit private funds. JPMS was found to have made misleading disclosures to brokerage customers who invested in its Conduit private funds products, which pooled customer money and invested it in private equity or hedge funds that would later distribute to the Conduit private funds shares of companies that went public.
“The order finds that, contrary to the disclosures, a JP Morgan affiliate exercised complete discretion over when to sell and the number of shares to be sold,” the order found. “As a result, investors were subject to market risk, and the value of certain shares declined significantly as JP Morgan took months to sell the shares.”
JPMS agreed to make a voluntary payment of $90 million to more than 1,500 Conduit investor accounts and to pay a civil penalty of $10 million, which will also be distributed to Conduit investors.
Along with the civil penalty, the SEC imposed a censure and a cease-and-desist order for violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. The order notes that JPMS, through counsel, self-reported to SEC staff that certain investors had complained as a result of the failure to promptly sell certain shares.
In another case, the SEC determined that JPMS failed to fully and fairly disclose the financial incentive that it and its financial advisors had when recommending proprietary Portfolio Management Program over third-party managed accounts. The order said the firm did not disclose that it could earn more through the in-house program because they did not have to share a portion of the fees with outside money managers. That allowed them to charge clients more while still offering a lower fee than the third party-managed program, according to the settlement.
“The opportunity to charge a higher wrap fee for PM Program strategies creates a financial incentive for JP Morgan Securities and its financial advisors to recommend the PM Program,” the SEC said.
The commission also said that between June 2020 and July 2022, JPMS recommended certain mutual fund products, called Clone Mutual Funds, to its retail brokerage customers when materially less expensive ETF products that offered the same investment portfolios were available. JPMS and its registered representatives failed to consider these cost differences when recommending the funds and failed to have a reasonable basis to believe that their recommendations were in the best interest of the customers, in violation of Regulation Best Interest.
In the fourth action, the SEC said JPMIM caused $4.3 billion in prohibited joint transactions, which advantaged an affiliated foreign money market fund for which it served as the delegated portfolio manager over three U.S. money market mutual funds it advised. For these violations of Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder, a cease-and-desist order and a $5 million civil penalty were imposed.
In the fifth action, the SEC found that JPMIM engaged in or caused 65 prohibited principal trades with a combined notional value of approximately $8.2 billion. It was alleged that to conduct these trades, a JPMIM portfolio manager directed an unaffiliated broker-dealer to buy commercial paper or short-term fixed income securities from JPMS, which JPMIM then purchased on behalf of one of its clients.
The SEC’s order finds that JPMIM caused JPMS to violate Section 17(a)(1) of the Investment Company Act, violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and caused certain clients to violate Rule 38a-1 of the Investment Company Act. The order imposes a cease-and-desist order, a censure, and a $1 million civil penalty.
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