According to The Wall Street Journal, sources say that the CFTC is probing into whether J.P. Morgan Chase (JPM) engaged in product steering by inappropriately directing private banking clients to its own hedge funds. Its investigation is also scrutinizing Highbridge Capital Management LLC, which is owned by the bank. The CFTC wants to know why a significant chunk of Highbridge’s assets is from J.P. Morgan’s private banking assets and whether this was beneficial to the alternative investment management firm during the economic crisis.
Although banks can sell in-house investments, advisers are only allowed to recommend these investments if they are in the best interests of clients or, at a minimum,suitable for their portfolios and needs.
J.P. Morgan purchased Highbridge in 2009. The firm’s returns were solid for years until the financial crisis, which is when investors sought to take out billions of dollars from its biggest hedge fund. To keep investors from leaving, Highbridge offered incentives, such as lower fees.
J.P. Morgan’s private banking clients still hold significant investments in Highbridge funds. However, a J.P. Morgan spokesman who spoke to The Wall Street Journal said that 95% of hedge fund investments from the financial institution’s private banking clients are in funds that have no connection to Highbridge.
It’s important that banks deal with conflicts of interest properly and not push their products before the interests of clients. Meantime, regulators are becoming more involved in overseeing this area.
WSJ reported that in regulatory filings, J. P. Morgan admitted that it has received subpoenas, requests, and other inquiries from government agencies about the possibility of conflicts of interest when selling proprietary products. The bank is cooperating with authorities.
Meantime, CFTC is exchanging information about its probe with the Indiana Securities Division and the Securities and Exchange Commission, which are also looking into the firm and its activities.
CFTC probes JPMorgan for alleged client steering: WSJ, Reuters, September 9, 2015