Broker-dealers are being advised to take note of the Securities and Exchange Commission’s enforcement actions involving more expensive products when serving their own clients, Financial Advisor reports.
The SEC was already expected to sharpen its focus on violations of Regulation Best Interest, which requires advisors to act in the customer’s best interest when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities.
But one industry expert said a recent case involving two JPMorgan Chase & Co. affiliates is a reminder to firms to be especially vigilant when it comes to recommending more expensive versions of investment products.
The SEC said that J.P. Morgan Securities LLC and J.P. Morgan Investment Management Inc. will pay a combined $151 million to resolve a series of enforcement actions involving misconduct and breach of fiduciary duty, including making misleading disclosures about their investment products.
J.P. Morgan Securities was alleged to have sold clone mutual funds to 10,500 retail clients when less expensive identical exchange-traded funds were available. The SEC said that clients were charged more than $14 million in higher fees and expenses.
“This is the first time the SEC has brought Reg BI charges against a firm for the recommendation of more expensive non-complex products when less-expensive alternatives [existed],” said Parnham Nasseri, president of InvestorCOM, a compliance firm that specializes in technology solutions. Nasseri added that the case demonstrated the need to have a clear and consistent system-wide documentation of reasonably available alternative funds and their prices.
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.”
“When issues are identified, we fix them and engage with our regulators to resolve any concerns,” a spokesperson for J.P. Morgan said at the time.
Nassen said firms should be mindful of the implications of the JPMorgan case and cited an analysis by his firm of whether measurements of best interest can be documented and improved.
“We examined two years of recommendation data from financial professionals using our PeerCompare technology, and the results of our analysis show that automating the analysis and documentation can make a positive impact on helping the industry improve outcomes,” Nasseri told Financial Advisor.
He said brokers should prepare for further regulatory actions like those taken against the JPMorgan affiliates as more identical ETFs are added to brokerage platforms
Nassen stressed the importance of broker-dealers automating the recommendation process when they are adding a significant number of new products. He said this will help them quickly analyze the options and alternatives available for certain funds so that advisors can determine whether a particular product is in the client’s best interest.
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.
