A subsidiary of JPMorgan Chase will pay an $18 million fine to the Securities and Exchange Commission (SEC) for allegedly violating the agency’s whistleblower protection rule in hundreds of settlement agreements with clients and customers.
The details: From 2020-23, J.P. Morgan Securities required 362 clients receiving settlements or credits worth between $1,000 and $165,000 to sign confidentiality agreements containing language prohibiting them from affirmatively reporting any related misconduct by the bank to government or regulatory agencies, the SEC alleged.
The agreements prohibited the sharing of any information about the settlement and its underlying facts and all information regarding the account at issue, the SEC said.
The language of the agreements did allow clients to respond to questions from the SEC but not to report misconduct to the agency themselves. In some cases, JPMorgan reported the nature of the disputes to the Financial Industry Regulatory Authority, but “reporting to FINRA does not in any way mitigate the language in the release that impeded clients from reporting potential securities law violations to the commission,” the SEC said in its order.
The fine is the largest levied by the SEC against a firm for violating its whistleblower protection rule (Rule 21F-17), topping the $10 million penalty it announced against investment firm D.E. Shaw & Co. in September.
Compliance considerations: The SEC has been cracking down on nondisclosure agreements with employees that contain provisions blocking them from reporting misconduct to the agency.
“Whether it’s in your employment contracts, settlement agreements, or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” said Gurbir Grewal, director of the agency’s Division of Enforcement, in a press release Tuesday. “But that’s exactly what we allege J.P. Morgan did here. For several years, it forced certain clients into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC. This either-or proposition not only undermined critical investor protections and placed investors at risk but was also illegal.”
In response to the SEC informing the bank its contracts allegedly violated the whistleblower protection rule, JPMorgan revised the language in the settlement agreements to alert clients they were not prohibited from disclosing information to any governmental or regulatory authority.
JPMorgan also informed clients who had signed the settlement agreements they are not prohibited from communicating directly or providing information to any governmental or regulatory authority.
Firm response: “We take our regulatory obligations seriously and promptly took action to resolve this issue,” a spokesperson for JPMorgan said.
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