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.