On December 18, 2015, the Securities and Exchange Commission (SEC) announced that two JPMorgan Chase & Co. wealth management subsidiaries admitted wrongdoing and will pay $307 million to settle allegations that they put customers’ funds into the bank’s own investment products, which generated fees for JPMorgan, without disclosing the conflict of interest to clients.
“Firms have an obligation to communicate all conflicts so a client can fairly judge the investment advice they are receiving,” SEC Enforcement Division Director Andrew J. Ceresney stated in a press release. “These J.P. Morgan subsidiaries failed to disclose that they preferred to invest client money in firm-managed mutual funds and hedge funds, and clients were denied all the facts to determine why investment decisions were being made by their investment advisors.”
The JPMorgan subsidiaries will pay $267 million to settle charges by the SEC, including $127.5 million in disgorgement, $11.815 million in pre-judgment interest, and a $127.5 million penalty. The $127.5 million penalty represents a record for the SEC against an asset manager; the agency’s previous record was $100 million for Alliance Capital Management, according to various news reports. They will pay an additional $40 million to resolve a parallel action brought by the Commodity Futures Trading Commission.
According to the SEC order, in May 2008, J.P. Morgan Securities, LLC (JPMS), a registered investment advisor and broker-dealer, launched its Chase Strategic Portfolio (CSP), a unified managed account program for distribution to its customers. The SEC alleged that from May 2008 through 2013, JPMS breached its fiduciary duty to its clients by failing to disclose that it designed and operated CSP with a preference for JPMorgan-managed mutual funds. The SEC further alleged that JPMS failed to disclose that there was an economic incentive to invest CSP assets in JPMorgan-managed mutual funds as a result of discounted pricing for services provided to JPMS by an affiliate and that less expensive mutual fund share classes were available.
Similarly, the SEC alleged that JP Morgan Chase Bank, N.A. (JPMCB) did not satisfy its disclosure duty to its clients by failing to disclose that from 2011 to 2014 it had a preference for JPMorgan-managed mutual funds, that from 2008 to 2014 it had a preference for JPMorgan-managed hedge funds, and that from 2008 to August 2015 it had a preference for third-party-managed hedge funds that shared their management and/or performance fees with an affiliate. JPMCB acts as the investment manager for certain discretionary portfolios offered to clients of J.P. Morgan Private Bank and Chase Private Bank, both of which typically serve affluent, high-net-worth and ultra-high net worth clients.
Keywords: securities litigation, SEC, JP Morgan, JPM, conflicts
—Lance C. McCardle, Fishman Haygood, L.L.P., New Orleans, LA