Two JP Morgan wealth management subsidiaries today agreed to pay a total of $307 million to the Securities and Exchange Commission and the Commodity Futures Trading Commission in joint enforcement actions for failure to disclose conflicts of interest to clients.
Both the CFTC and SEC charged J.P. Morgan Securities (JPMS) and JPMorgan Chase Bank (JPMCB) with, among other things, preferring to invest clients in the firm’s own proprietary investment products without properly disclosing this preference. JPMS and JPMCB have agreed to admit to the wrongdoing and pay $267 million to settle the charges. The bank will also pay $40 million to the CFTC to settle parallel charges.
According to the SEC’s order, JPMS failed to disclose numerous conflicts of interest to certain wealth management clients from 2008 to 2013:
JPMS failed to disclose its preference for JP Morgan-managed mutual funds for retail investors in a unified managed account program known as the Chase Strategic Portfolio (CSP) that was sold through Chase Bank branches.
JPMS failed to disclose that the availability and pricing of services provided to JPMS by another J.P. Morgan affiliate was tied to the amount of CSP assets invested in JP Morgan proprietary products.
JPMS failed to disclose that certain JP Morgan-managed mutual funds purchased for CSP clients offered a less expensive share class and would generate less revenue for a JPMS affiliate than the share class JPMS chose for CSP clients.
JPMS’s Forms ADV for CSP failed to adequately disclose these conflicts of interest.
JPMS failed to implement written policies and procedures reasonably designed to prevent the violations that occurred.
“Investors are entitled to know if a bank managing their money favors placing investments in its own proprietary funds or other vehicles that generate fees for the bank,” said CFTC’s Director of Enforcement Aitan Goelman. “As demonstrated by the enforcement actions made public today, we and our regulatory partners will aggressively pursue financial institutions that fail to provide adequate disclosures to clients.”
This case is believed to be the largest and highest profile enforcement action initiated by an SEC whistleblower. “Financial whistleblowers serve as an important first line of defense against wrongdoing and, as awareness of the SEC Whistleblower Program grows, records will be broken, and this groundbreaking enforcement action will seem small,” said Jordan Thomas, Chair of Labaton Sucharow’s whistleblower representation practice, who represented the whistleblower, a JP Morgan executive, in the case.