Marking an end to a roughly two-year long probe related to disclosure flaws, JPMorgan Chase & Co. JPM successfully settled the matter with the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). The company agreed to pay $307 million (in aggregate), while admitting to wrongdoings.
Specifically, JPMorgan’s investment advisory business J.P. Morgan Securities LLC (“JPMS”) and nationally chartered bank JPMorgan Chase Bank N.A. (“JPMCB”) were involved in the settlement.
In a statement, Andrew J. Ceresney, director of the SEC Enforcement Division, said “Firms have an obligation to communicate all conflicts so a client can fairly judge the investment advice they are receiving. These JPMorgan 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 advisers.”
The Allegations
JPMorgan had been under the SEC as well as the CFTC scanner for potential conflict of interests in the two above-mentioned divisions. The probe pertained to whether the company’s sale of in-house investment products to pension funds and wealthy clients has been inappropriately administered.
Generally, banks can generate higher fee income by selling in-house financial products to their private-banking clients. The SEC’s inquiry pertained to how investment advisors at JPMorgan had recommended financial products to their clients.
If the investment advisors are registered with the SEC, they have to adhere by the fiduciary standards that require them to recommend only those financial products that best serve clients’ interests. Most investment specialists working with JPMorgan are bound by this fiduciary standard.
However during 2008–2015, JPMorgan promoted the use of its own proprietary products instead of selecting alternatives that were better suited to client needs.
Terms & Other Details
Of the total settlement amount, JPMorgan will pay $127.5 million as fine to the SEC and $127.5 million in refund plus $11.8 million in interest. Notably, the CFTC will receive $40 million as penalty amount.
Further, as part of the settlement, JPMorgan received a conditional waiver allowing it to continue raising money for private companies including hedge funds and startups. The condition is that the company will have to hire an independent consultant to certify its plan for abiding by the rules pertaining to private fundraising.
Additionally, JPMorgan promised to desist from future violations. The SEC also reproached the company, indicating the likelihood of a sterner action in case a violation is repeated.
JPMorgan spokesman Darin Oduyoye said “The disclosure weaknesses cited in the settlements were not intentional and we regret them. 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.”
Road Ahead
JPMorgan’s settlement with the regulators puts to rest a major legal headwind stemming from its business malpractices. The company had been expanding its in-house wealth management operations even when many other global banks were pulling back.
Over the last 10 years, several banks including Citigroup Inc. C, Bank of America Corporation BAC and Morgan Stanley MS have trimmed such operations following fine for similar allegations. Nevertheless, JPMorgan, we believe, will continue to serve its clients with in-house products but with proper disclosures.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).
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