JPMorgan Admits It Didn’t Tell Clients About Conflicts

23 Dec 2015 | Author: | No comments yet »

CFTC orders JPMorgan Chase Bank to pay $100 million for failure to disclose conflicts of interest.

WASHINGTON — JPMorgan Chase is paying $307 million to settle federal charges of failing to reveal conflicts of interest from steering clients into certain investments tied to its businesses. Regulators said that JP Morgan Securities and its nationally chartered bank, JPMorgan Chase Bank, steered retail investors towards the firm’s own investment products without properly disclosing that preference.

The bank admitted wrongdoing, an unusual move in such cases, and has agreed to pay $267m to the Securities and Exchange Commission (SEC) and $40m to the US Commodity Futures Trading Commission (CFTC). “Firms have an obligation to communicate all conflicts so a client can fairly judge the investment advice they are receiving,” said Andrew Ceresney, director of the SEC enforcement division. That included placing investors in more expensive proprietary mutual funds, and showing a preference for third-party-managed hedge funds that made payments to a JPMorgan affiliate, it said. New York-based JPMorgan is paying a $127.5 million penalty in the settlement with the SEC and another $127.5 million in restitution plus $11.8 million in interest. According to the SEC between 2008 and 2013 the bank failed to properly disclose its preferences to both retail mutual fund customers and high net worth clients. Specifically, JPMCB failed to fully disclose its preference for investing its client funds in certain commodity pools or exempt pools, namely hedge funds and mutual funds managed and operated by an affiliate and subsidiary of JP Morgan Chase & Co. (Proprietary Funds).

Aitan Goelman, the CFTC’s director of enforcement, said: “Investors are entitled to know if a bank managing their money favors placing investments in its own proprietary funds or other vehicles that generate fees for the bank. JPMorgan has admitted to facts set forth in the Order and acknowledged that its conduct violated the Commodity Exchange Act and/or related Regulations.

As demonstrated by the enforcement actions made public today, we and our regulatory partners will aggressively pursue financial institutions that fail to provide adequate disclosures to clients.” “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,” said a JP Morgan spokesman. “The disclosure weaknesses cited in the settlements were not intentional and we regret them.” The CFTC Order requires JPMCB to pay a $40 million civil monetary penalty, to pay disgorgement in the amount of $60 million, and to cease and desist from further violations as charged.

Since at least 2008, JPMCB has preferred to invest IM Accounts and GAP private fund assets in Proprietary Funds and has expected that a significant percentage of relevant portfolio assets will be invested in Proprietary Funds. Morgan advisors “willfully” violated federal securities laws related to required disclosures and that the two bank subsidiaries “admitted” the allegations and “acknowledged” the actions violated federal laws. Even as the SEC has responded to growing criticism by saying more settlements will require violators to admit wrongdoing in addition to paying large fines, the practice remains sporadic and out of the ordinary. If a manager declined to pay retrocessions, JPMCB typically sought an alternative manager with a similar investment strategy who was willing to pay JPMCB retrocessions.

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