Two J.P. Morgan wealth management subsidiaries have agreed to pay $267 million and admit wrongdoing to settle charges that they failed to disclose conflicts of interest to clients, the Securities and Exchange Commission announced Friday.
In a parallel action, JPMorgan Chase Bank agreed to pay an additional $40 million penalty to the U.S. Commodity Futures Trading Commission (CFTC).
An SEC investigation found that the firm’s investment advisory business, J.P. Morgan Securities LLC (JPMS), and nationally chartered bank JPMorgan Chase Bank N.A. (JPMCB) preferred to invest clients in the firm’s proprietary investment products without properly disclosing this preference.
“Firms have an obligation to communicate all conflicts so a client can fairly judge the investment advice they are receiving,” said Andrew J. Ceresney, Director of the SEC Enforcement Division, said in a statement.
These J.P. Morgan subsidiaries failed to disclose that they preferred to invest client money in firm-managed mutual funds and hedge funds, and clients were denied all the facts to determine why investment decisions were being made by their investment advisors, Ceresney said.
According to Ceresney, JPMorgan’s disclosure failure affected thousands of investors across JPMorgan’s wealth management business for a number of years.
“This case underscores our continued focus on rooting out undisclosed conflicts. Here the undisclosed conflicts were pervasive,” Ceresney said during a media conference call about J.P. Morgan enforcement actions. “J.P. Morgan failed to disclose its preferences in discretionary wealth management accounts, for its own mutual funds and hedge funds, and for third-party managed hedge funds that shared fees with them. Advisors must fully disclose conflicts of interests like these.”
J.P. Morgan was acting as a commodity trading advisor under CFTC’s statute and, as such, the bank had certain fiduciary obligations, according to CFTC enforcement director Aitan Goelman.
“You are allowed as a fiduciary to invest in your own products, to prefer your own products … but what the bank was not permitted to do was keep those preferences secret,” Goelman said during a conference call.
According to the SEC’s order instituting a settled administrative proceeding, J.P. Morgan Securities failed to disclose numerous conflicts of interest to certain wealth management clients from 2008 to 2013.
Those conflicts, among others, included:
- The failure to disclose its preference for J.P. Morgan-managed mutual funds for retail investors in a unified managed account program known as the Chase Strategic Portfolio that was sold through Chase Bank branches.
- The failure to disclose that the availability and pricing of services provided to JPMS by another J.P. Morgan affiliate was tied to the amount of Chase Strategic Portfolio assets invested in J.P. Morgan proprietary products.
- The failure to disclose that certain J.P. Morgan-managed mutual funds purchased for Chase Strategic Portfolio 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.
The SEC’s order also found that JPMorgan Chase Bank failed to disclose several conflicts of interest to certain high-net-worth and ultra-high net worth clients of JPMorgan’s U.S. Private Bank and certain clients of Chase Private Client who invested in J.P. Morgan Investment Portfolio, a discretionary managed account program available to affluent Chase Bank clients:
- From early 2011 to early 2014, the bank failed to disclose that it preferred JPMorgan-managed mutual funds for clients with JPMorgan U.S. Private Bank discretionary managed accounts, including purchasers of Global Access Portfolio funds, and to clients of Chase Private Client who invested in J.P. Morgan Investment Portfolio.
- From 2008 to early 2014, the bank failed to disclose that it preferred JPMorgan-managed hedge funds for clients with U.S. Private Bank discretionary management accounts, including purchasers of Global Access Portfolio funds.
- From 2008 to 2015, the bank failed to disclose its preference to invest certain clients in third-party-managed hedge funds that shared management or performance fees with a bank affiliate.
JPMS and JPMCB admitted the facts set forth in the SEC’s order and acknowledged the conduct violated the federal securities laws. The subsidiaries agreed to jointly pay $127.5 million in disgorgement, $11.815 million in prejudgment interest, and a $127.5 million penalty.
JPMS agreed to be censured, and both subsidiaries agreed to cease and desist from further violations.
Darin Oduyoye, a J.P. Morgan spokesman, said in a statement: “We have always strived for full transparency in client communications, and in the last two years have further enhanced our disclosures in support of that goal. The disclosure weaknesses cited in the settlements were not intentional and we regret them. We remain confident in our investment process and are proud of the way we manage money.”
Labaton Sucharow LLP, which represents SEC whistleblowers, announced today that one of its clients reported the securities violations that led to the SEC’s enforcement action against J.P. Morgan.
During the SEC’s media call, both Ceresney and Goelman could not confirm the role of a whistleblower in this case.
“We don’t comment on the origins of the case or assistance we get provided by on the case,” he said.
Goelman also said there are “strict confidentiality provisions when it comes to whistleblowers.”
Jordan A. Thomas, chair of Labaton Sucharow’s Whistleblower Representation Practice, represented the whistleblower, said a J.P. Morgan executive brought the bank’s wrongdoing to the attention of the SEC and cooperated in the agency’s investigation.
“My client never wanted to be a whistleblower, but believed the best way to protect J.P. Morgan clients and improve the sales culture of the organization—while avoiding retaliation and blacklisting—was to report these violations to the SEC,” Thomas said in a statement.
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