More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- 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.
JPMorgan Chase has agreed to pay $920 million to settle charges brought in a coordinated global settlement regarding the bank’s trading losses in the London Whale case.
JPMorgan will pay a $200 million penalty to the Securities and Exchange Commission for misstating financial results and lacking effective internal controls, and $720 million to the U.K. Financial Conduct Authority, the Federal Reserve and the Office of the Comptroller of the Currency.
JPMorgan has also agreed to admit guilt in the charges brought by the SEC, which include misstating financial results and lacking effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses.
The SEC previously charged two former JPMorgan traders with committing fraud to hide the massive losses in one of the trading portfolios in the firm’s chief investment office (CIO).
The SEC’s subsequent action against JPMorgan faults its internal controls for failing to ensure that the traders were properly valuing the portfolio, and its senior management for failing to inform the firm’s audit committee about the severe breakdowns in CIO’s internal controls.
Along with the penalty and admitting the facts underlying the SEC’s charges, JPMorgan Chase has publicly acknowledged that it violated the federal securities laws.
George Canellos, co-director of the SEC’s Division of Enforcement, said in a Thursday statement announcing the settlement that “JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses.”
While grappling with how to fix its internal control breakdowns, he continued, “JPMorgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”
According to the SEC’s order instituting a settled administrative proceeding against JPMorgan, the Sarbanes-Oxley Act of 2002 established important requirements for public companies and their management regarding corporate governance and disclosure.
Public companies such as JPMorgan are required to create and maintain internal controls that provide investors with reasonable assurances that their financial statements are reliable, and ensure that senior management shares important information with key internal decision makers such as the board of directors.
“JPMorgan failed to adhere to these requirements, and consequently misstated its financial results in public filings for the first quarter of 2012,” the SEC states.
According to the SEC’s order, in late April 2012 after the portfolio began to significantly decline in value, JPMorgan commissioned several internal reviews to assess, among other matters, the effectiveness of the CIO’s internal controls. From these reviews, senior management learned that the valuation control group within the CIO, whose function was to detect and prevent trader mismarking, was woefully ineffective and insufficiently independent from the traders it was supposed to police.
Among the facts that JPMorgan has admitted in settling the SEC’s enforcement action include:
- The trading losses occurred against a backdrop of woefully deficient accounting controls in the CIO, including spreadsheet miscalculations that caused large valuation errors and the use of subjective valuation techniques that made it easier for the traders to mismark the CIO portfolio.
- JPMorgan senior management personally rewrote the CIO’s valuation control policies before the firm filed with the SEC its first quarter report for 2012 in order to address the many deficiencies in existing policies.
- By late April 2012, JPMorgan senior management knew that the firm’s Investment Banking unit used far more conservative prices when valuing the same kind of derivatives held in the CIO portfolio, and that applying the Investment Bank valuations would have led to approximately $750 million in additional losses for the CIO in the first quarter of 2012.
- External counterparties who traded with CIO had valued certain positions in the CIO book at $500 million less than the CIO traders did, precipitating large collateral calls against JPMorgan.
- As a result of the findings of certain internal reviews of the CIO, some executives expressed reservations about signing sub-certifications supporting the CEO and CFO certifications required under the Sarbanes-Oxley Act.
- Senior management failed to adequately update the audit committee on these and other important facts concerning the CIO before the firm filed its first quarter report for 2012.
- Deprived of access to these facts, the audit committee was hindered in its ability to discharge its obligations to oversee management on behalf of shareholders and to ensure the accuracy of the firm’s financial statements.
The SEC’s investigation is continuing.
Check out Former Merrill Head John Thain Defends Wall Street Compensation on ThinkAdvisor.