J.P. Morgan Chase Settles SEC and CFTC Charges Alleging Client Steering for $307M

J.P. Morgan Chase & Co. (JPM) will pay $307M to resolve Securities and Exchange Commission and Commodity Futures Trading Commission charges accusing two of its units of not telling wealthy clients about certain conflicts of interest. The JPM businesses are J.P. Morgan Securities LLC, its wealth management investment advisory business that offers investment products to clients that have a net worth of $250K – $5M, and JPMorgan Chase Bank N.A., its U.S. private bank that deals with clients that have a $5M net worth or greater.

According to the agreement, the investment advisory service did not tell wealth management customers that its Chase Strategic Portfolio, which is a program for wealth management customers, favored mutual funds managed by the firm. For several years, the program put about $10 billion of $32.6 billion in proprietary funds, and until the earlier part of 2012, at least 47% of the assets were in such funds.

The private bank also showed a similar preference toward the bank’s products. It was not until 2011 that it told clients that language in its disclosures noting that it preferred managers affiliated with JPM had been “mistakenly” removed. The language was not put back until last year.

The SEC said that such prioritizing of certain funds affected asset allocation and fund management selection and created conflicts of interest. Also, said the regulator, clients were not given all of the information to make informed investment choices. As another example, the investment advisory firm did not disclose that for clients that had discretionary managed accounts with the private bank, it preferred getting them involved in mutual funds under its management. The bank is accused of not putting into place the needed procedures and policies in writing that could have prevented these violations from happening.

As part of its settlement with the SEC, JPM is admitting to violating securities laws by not notifying its wealth managed customers that it favored putting their money in its own hedge funds and mutual funds, as well as third-party supervised-hedge funds that shared fees with the firm. Of the over $300 million settlement, $127.5 million will go to the SEC as a penalty and $11.8 million is prejudgment interest, while the other $127.5 million is disgorgement. This deal was arrived at earlier in the year but the announcement was delayed. The for this was is that JPM was trying to tone down restrictions that came with the agreement, which would put a cap on its ability to raise funds for clients, such as hedge funds.

This week, the SEC voted to let the bank continue to raise the funds. However, JPM must retain an independent consultant to examine its policies about private offerings, issue a yearly report from that consultant, and get senior executives more involved in resolving issues.

In a parallel case, J.P. Morgan will pay the CFTC a $40M penalty and $60M in disgorgement.

Our securities law firm represents high net worth clients with financial loss claims, including against JPM and its numerous subsidiaries. Contact The SSEK Partners Group today.

Read the SEC Order (PDF)

Read the CFTC Order (PDF)