On December 18, 2015, the SEC announced settled administrative proceedings against J.P. Morgan Securities LLC (“JPMS”) and JPMorgan Chase Bank, N.A. (“JPMCB”), the wealth management businesses of JPMorgan Chase & Co. (“JPMorgan”), for failing to disclose conflicts of interest arising from preferences for JPMorgan-managed mutual funds (“Proprietary Mutual Funds”), JPMorganmanaged hedge funds and third-party-managed hedge funds that shared client fees with a JPMorgan affiliate.
According to the SEC’s order, from May 2008 to 2013, JPMS failed to disclose: (1) its preference for Proprietary Mutual Funds for retail investors in Chase Strategic Portfolio (“CSP”), a retail unified managed account program; (2) that the availability and pricing of services provided to JPMS by an affiliate was tied to the amount of CSP assets that JPMS invested in Proprietary Mutual Funds; and (3) that certain Proprietary Mutual Funds offered a less-expensive share class, but would generate less revenue for a JPMS affiliate, than the share class that JPMS chose for CSP clients. The SEC also stated that JPMS did not implement its written policies and procedures to ensure adequate disclosure of the conflicts of interest addressed in the order. In addition, the SEC’s order found that, among other things, from February 2011 until January 2014, JPMCB did not disclose a preference for Proprietary Mutual Funds in account documentation for its high net worth clients serviced through J.P. Morgan Private Bank.
The SEC’s order found that JPMS violated Sections 206(2), 206(4) and 207 of the Advisers Act and Rule 206(4)-7 thereunder, and JPMCB violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. JPMS and JPMCB admitted the facts set forth in the SEC’s order and acknowledged that the conduct violated federal securities laws. The JPMorgan subsidiaries agreed to 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.
The SEC order is available at: https://www.sec.gov/litigation/admin/2015/33-9992.pdf.