The Securities and Exchange Commission has announced that J.P. Morgan Securities LLC (JPMS) and J.P. Morgan Investment Management Inc. (JPMIM), both affiliates of JPMorgan Chase & Co., will pay a combined $151 million to resolve a series of enforcement actions involving misconduct.
In a news release, the SEC said that the two were charged in five separate actions alleging 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 the monetary 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.”
In the largest settlement, JPMorgan will pay a $10 million civil fine and reimburse $90 million to customers who invested in Conduct private fund products, which pooled customer money to invest in private equity or hedge funds that would later distribute shares of companies that went public.
JPMS was found to have made misleading disclosures to brokerage customers who invested in the products. The SEC said the firm did not disclose it had complete discretion over when to sell and the number of shares to be sold. It said this exposed customers to market risk, including when prices fell because the bank sometimes took months to sell shares.
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 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 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 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. JPMIM violated Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder, resulting in a cease-and-desist order and a $5 million civil penalty.
The attorneys at Hyman Cotter PC include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. If your firm is facing an investigation from a regulatory agency, please contact Hyman Cotter PC at 312-291-4600 or through our online contact form.
