Two JPMorgan affiliates has been penalized $151 million for making unsuitable recommendations to investors and other fiduciary failures, the U.S. Securities and Exchange Commission announced.
J.P. Morgan Securities and J.P. Morgan Investment Management agreed to the penalties as part of a consent agreement under which they neither admitted to nor denied the accusations, which focused on an assortment of violations contained in five SEC complaints, according to the SEC.
The complaints were for issuing misleading disclosures to investors, breaching of fiduciary duty, entering into prohibited joint transactions and principal trades, and failing to make recommendations in the best interest of clients, the complaints said.
The regulator noted that JPMorgan cooperated with the investigations and undertook remedial actions to prevent a recurrence of the violations.
“JP Morgan’s conduct across multiple business lines violated various laws designed to protect investors from the risks of self-dealing and conflicts of interest,” Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, said in a statement. “With today’s settlements, which include multiple self-reports and large voluntary payments to harmed investors, J.P. Morgan is being held accountable for its regulatory failures.”
JP Morgan spokeswoman Kristen Chambers responded to the settlement, saying, “JPMorganChase strives to uphold the highest standards in client service around the world. When issues are identified, we fix them and engage with our regulators to resolve any concerns. We are pleased to have these matters resolved and remain dedicated to delivering an exceptional experience for our clients.”
J.P. Morgan Securities recommended mutual fund products called Clone Mutual Funds to its retail brokerage customers when less expensive ETF products that offered the same investment portfolios were available, according to the SEC.
Between June 2020 and July 2022 J.P. Morgan Securities failed “to consider the cost differences and failed to have a reasonable basis to believe that their recommendations were in the best interest of the customers,” the SEC said.
About 10,500 customers made about 17,500 purchases of the Clone Mutual Funds during this period based on J.P. Morgan Securities recommendations, the regulator said.
J.P. Morgan Securities violated Regulation Best Interest and imposes a cease-and-desist order and a censure. The SEC did not impose a civil penalty for the Clone Mutual Fund sales because JPMS promptly self-reported the issue to SEC staff, conducted an internal investigation, provided substantial cooperation, and, among other remedial measures, voluntarily repaid impacted customers about $15.2 million, the SEC said.
J.P. Morgan Investment Management made 65 prohibited principal trades with a combined value of $8.2 billion, the SEC said. Principal trades are generally prohibited to avoid undisclosed conflicts of interest unless certain conditions are met or the SEC provides exemptive relief, the SEC said. The SEC said that, to conduct these trades, J.P, Morgan Investment Management directed an unaffiliated broker-dealer to buy commercial paper or short-term fixed income securities from J.P. Morgan Securities, which J.P. Morgan Investment Management then purchased on behalf of one of its clients.
The SEC issued a cease-and-desist order, a censure, and a $1 million civil penalty. The order said that upon learning about the principal trades, J.P. Morgan Investment Management “notified the SEC staff and promptly provided documents, communications, and other information on a voluntary basis.”
In a third complaint, the SEC said it found that in March 2020 J.P. Morgan Investment Management closed $4.3 billion in prohibited joint transactions that favored an affiliated foreign money market fund. The SEC’s order imposed a cease-and-desist order and a $5 million civil penalty.
In two other complaints, J.P. Morgan Securities was accused of making misleading disclosures to brokerage customers who invested in its Conduit private funds products, and failing to fully disclose the financial incentive it and some of its financial advisors had when they recommended J.P. Morgan Securities’ Portfolio Management Program over third-party managed advisory programs offered by J.P. Morgan Securities.
The Conduit product involved pooled client money that was invested in private equity or hedge funds. The complaint said that, contrary to its disclosures, a J.P. Morgan affiliate exercised complete discretion over when to sell and the number of shares to be sold.
“As a result, investors were subject to market risk, and the value of certain shares declined significantly as J.P. Morgan took months to sell the shares,” the SEC said. As part of the resolution of this enforcement action, J.P. Morgan Securities agreed to make a voluntary payment of $90 million to more than 1,500 Conduit investor accounts and to pay a civil penalty of $10 million, which will also be distributed to Conduit investors, the SEC said.
The order said J.P. Morgan Securities self-reported to SEC staff that certain investors had complained.
In the fifth complaint that charged the firm with failing to fully disclose the financial incentive it and some of its financial advisors had when they recommended J.P. Morgan Securities’ Portfolio Management Program over third-party managed advisory programs offered by J.P. Morgan Securities, the SEC imposed a cease-and-desist order, censure, and a $45 million penalty.
Staff writer Tracey Longo contributed to this article.