More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
A week after a Goldman Sachs executive’s resignation over allegations the Wall Street firm places its interests over those of its clients, the unsealing of a 2009 arbitration agreement paints an unflattering picture of Goldman’s crosstown rival JPMorgan. The Kansas City Business Journal broke the news that arbitrators found the New York bank had breached a 2003 revenue-sharing agreement with the asset management firm American Century in order to suppress the firm’s value and make it a cheap acquisition target.
The panel awarded American Century $373 million last summer, and JPMorgan paid $384 million (with interest added) after a Missouri judge upheld the decision in December. The findings and decisions were made public this week following a request by the Business Journal to unseal the case. American Century sought redress against JPMorgan in 2009, alleging JPMorgan had breached an agreement to market its funds in their Retirement Plans Service joint venture.
Instead, the arbitrators found, JPMorgan gave incentives to its salespeople to promote its own funds and went so far as to misrepresent the risk profile of American Century funds.
A damning e-mail the Business Journal quotes in the ruling against the bank references Jes Staley, currently the head of Morgan’s investment banking division, saying Staley’s objective was to consolidate the two firms and “control their distribution” for the purpose of “gaining control at a minimum price.”
JPMorgan issued a statement saying that “since the arbitrators found in favor of American Century, JPMorgan’s point of view and arguments are not represented in the decision,” and declined to comment further.
The arbitrators and court addressed the legal issues, but at a time when the moral standing of financial institutions has fallen in public opinion, the ethical issues at stake should not go uncommented on.
JPMorgan’s behavior, according to the panel’s findings, was both overbearing and undercutting. The firm owned a 41% stake in American Century (down from 45% ownership when the firms first wed in 1998). While it is not uncommon for smaller firms to seek partnership with a larger, more resourceful firm, this case makes clear that a larger firm, if it does not act with integrity, can push its weight around in a manner that is contrary to the junior partner’s interests.
If JPMorgan was seeking to weaken its junior partner to acquire it later more cheaply, it did so by breaching the responsibilities owed to American Century via their joint venture agreement and the additional fiduciary duty Morgan had as a member of American Century’s board of directors (as reported by the Business Journal).
Unfair trade practices usually involve the creation of market structures, such as a monopoly, aimed at driving competitors out of business. But as this case shows, the dominant party can achieve a similar result through a bear-hug embrace.
Another clear-cut issue is deceit. To the extent that Morgan misrepresented the qualities of American Century’s funds, the firm engaged in unethical competitive behavior. (This is in contrast to selling one’s own funds on the basis of their superior qualities, without trashing competing funds.)
And to the extent that Morgan gives incentives to its sales force to sell proprietary funds rather than best-in-class funds, its customers have reason to question whose interests come first: the bank’s or their own.