J.P. Morgan will pay more than $150 million between its investment management and securities arms to settle a myriad of SEC charges, the regulators unveiled in several settlements Thursday.
The largest fine was $100 million, related to charges that JP Morgan Securities made misleading disclosures to brokerage customers investing in its “Conduit” products. The program allegedly took client money and invested in private equity or hedge funds customers couldn’t directly access (including distributing shares of companies that had recently committed to an initial public offering).
While the firm told clients the sales would occur “as promptly as practicable under reasonable commercial terms,” in reality, the shares were actively managed, with a division of investment management using “complete investment discretion.” This opened clients up to market risks they wouldn’t expect; allegedly, the value of some shares declined significantly from the price at which investment management received them.
Beginning in June 2022, the firm self-reported some of the alleged lapses to the commission, and by August of that year, it revised its offering documents to relay to clients that the sales of shares “may occur over an extended period of time.” In addition to setting up a $10 million Fair Fund with the commission, the firm will distribute $90 million in funds to Conduit investors in a “voluntary payment.”
A JPMorgan Chase spokesperson said the firm “strives to uphold the highest standards” for clients.
“When issues are identified, we fix them and engage with our regulators to resolve any concerns,” the spokesperson said. “We are pleased to have these matters resolved and remain dedicated to delivering an exceptional experience for our clients.”
In another of the settlements, the firm agreed to pay $45 million to end a dispute centered on its failure to disclose conflicts its advisors had when recommending an in-house portfolio manager program over third-party managers.
According to the settlement, JP Morgan Securities offered discretionary wrap fee programs in which clients paid the firm a fee for asset management, with JP Morgan agreeing not to charge transaction-based fees. One such program was the Portfolio Manager (PM) Program, in which the advisors themselves served as portfolio managers. However, clients could select other programs where the advisor did not manage the portfolio.
According to the commission, JP Morgan’s portfolio manager program was profitable, with AUM growing from $10.5 billion to more than $30 billion between 2016 and 2022.
Clients had to pay a separate fee to third-party managers while typically paying lower overall costs when using the PM Program. Since clients did not pay a separate third-party fee in the PM program, its advisors could charge a higher wrap fee while keeping the overall costs lower.
“The opportunity to charge a higher wrap fee for PM Program strategies creates a financial incentive for JP Morgan Securities and its financial advisors to recommend the PM Program over the (third-party management) programs,” the settlement read.
Typically, advisors who didn’t maintain at least $20 million after two years in the PM Program lost their chance to participate, which created a further incentive for reps. But, according to the commission, there was no disclosure about these incentives for advisors to clients before Aug. 2021 and none for the firm itself before Oct. 11, 2024.
In a separate settlement for alleged activity spanning from 2020 through July 2022, the commission argued that reps at the firm recommended certain mutual fund products to retail brokerage customers when “materially less expensive” ETF products offering the same investment portfolio were available on JP Morgan Securities’ platform.
According to the commission, about 10,516 retail clients made about 17,494 purchases of the mutual fund option during this time despite the less expensive option being available. Those clients paid about $14 million in higher fees and expenses than they otherwise may have.
While the commission charged the firm with violating several obligations of Regulation Best Interest and censured it, there was no civil penalty because JP Morgan Securities self-reported the lapse and cooperated with the commission in an investigation.
The commission also settled two sets of charges with JP Morgan Investment Management. In one, the commission argued the firm caused $4.3 billion in prohibited joint transactions, benefitting an affiliated foreign money market fund over three U.S. money market mutual funds it advised.
In the other, the SEC claimed JP Morgan Investment Management made 65 prohibited principal trades with a combined notional value of about $8.2 billion. To finalize the (typically) prohibited trades, a portfolio manager directed an unaffiliated business to buy securities from JP Morgan Securities. Investment Management then bought them on behalf of one of its clients.
The SEC fined Investment Management $5 million and $1 million to settle the charges, respectively.
