SEC Charges JP Morgan Affiliates $151m

The Securities and Exchange Commission charged J.P. Morgan Securities LLC (JPMS) and J.P. Morgan Investment Management Inc. (JPMIM) – both affiliates of JPMorgan Chase & Co. (JP Morgan) – in five separate enforcement actions for failures including misleading disclosures to investors, breach of fiduciary duty, prohibited joint transactions and principal trades, and failures to make recommendations in the best interest of customers.

Without admitting or denying the findings in the SEC’s orders, the two affiliates agreed to pay more than $151 million in combined civil penalties and voluntary payments to investors to resolve four of the ­actions. The SEC did not impose a penalty in one of the actions, taken against JPMS, because JPMS cooperated in the investigation and undertook remedial measures.

“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,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “With today’s settlements, which include multiple self-reports and large voluntary payments to harmed investors, JP Morgan is being held accountable for its regulatory failures.”

Conduit Private Funds Action (JPMS)

The SEC’s order finds that JPMS made misleading disclosures to brokerage customers who invested in its “Conduit” private funds products, which pooled customer money and invested it in private equity or hedge funds that would later distribute to the Conduit private funds shares of companies that went public. The order finds that, contrary to the disclosures, a JP 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 JP Morgan took months to sell the shares. As part of the resolution of this enforcement action, JPMS 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.

In addition to imposing the civil penalty, the SEC’s order finds that JPMS violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and imposes a cease-and-desist order and a censure. The order notes that JPMS, through counsel, self-reported to SEC staff that certain investors had complained as a result of the failure to promptly sell certain shares. The investigation was conducted by Ming Ming Yang, David Zetlin-Jones, Brian Fitzpatrick, and Lee A. Greenwood of the Asset Management Unit.

Portfolio Management Program Action (JPMS)

The SEC’s order finds that, between July 2017 and October 2024, JPMS failed to fully and fairly disclose the financial incentive it and some of its financial advisors had when they recommended JPMS’s own Portfolio Management Program over third-party managed advisory programs offered by JPMS. During the relevant period, assets under management in the program’s strategies grew from approximately $10.5 billion to more than $30 billion.

The SEC’s order finds that JPMS violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder and imposes a cease-and-desist order, censure, and a $45 million penalty. The investigation was conducted by Jessica Neiterman, Marie DeBonis, John Farinacci, Virginia M. Rosado Desilets, and Brianna Ripa of the Asset Management Unit with assistance from trial attorney Rua Kelly of the Boston Regional Office.

Clone Mutual Funds Action (JPMS)

The SEC’s order finds that, between June 2020 and July 2022, JPMS recommended certain mutual fund products, called Clone Mutual Funds, to its retail brokerage customers when materially less expensive ETF products that offered the same investment portfolios were available. According to the order, when recommending the Clone Mutual Funds, JPMS and its registered representatives failed to consider these cost differences and failed to have a reasonable basis to believe that their recommendations were in the best interest of the customers. The order finds that approximately 10,500 customers made approximately 17,500 purchases of the Clone Mutual Funds during this period based on JPMS’s recommendations.

The SEC’s order finds that JPMS violated Regulation Best Interest and imposes a cease-and-desist order and a censure. The SEC did not impose a civil penalty 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 approximately $15.2 million. The investigation was conducted by Emmy E. Rush and Steven G. Rawlings of the New York Regional Office, with the assistance of Mr. Farinacci.

Joint Transactions Action (JPMIM)

The SEC’s order finds that, in March 2020, JPMIM caused $4.3 billion in prohibited joint transactions, which advantaged an affiliated foreign money market fund for which it served as the delegated portfolio manager over three U.S. money market mutual funds it advised.

The SEC’s order finds that JPMIM caused violations of Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder and imposes a cease-and-desist order and a $5 million civil penalty. The investigation was conducted by Salvatore Massa, Brian Kudon, Mr. Fitzpatrick, and Mr. Greenwood of the Asset Management Unit.

Principal Trades Action (JPMIM)

The SEC’s order finds that, between July 2019 and March 2021, JPMIM engaged in or caused 65 prohibited principal trades with a combined notional value of approximately $8.2 billion. Principal trades are generally prohibited to avoid undisclosed conflicts of interest unless certain conditions are met or the SEC provides exemptive relief. The SEC’s order finds that, to conduct these trades, a JPMIM portfolio manager directed an unaffiliated broker-dealer to buy commercial paper or short-term fixed income securities from JPMS, which JPMIM then purchased on behalf of one of its clients.

The SEC’s order finds that JPMIM caused JPMS to violate Section 17(a)(1) of the Investment Company Act, violated Sections 206(3) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and caused certain clients to violate Rule 38a-1 of the Investment Company Act. The order imposes a cease-and-desist order, a censure, and a $1 million civil penalty. The order notes that, upon learning about the principal trades, JPMIM notified the SEC staff and promptly provided documents, communications, and other information on a voluntary basis. The investigation was conducted by Mr. Massa, Mr. Kudon, Mr. Fitzpatrick, and Mr. Greenwood of the Asset Management Unit.

The Conduit Private Funds, Portfolio Management Program, Joint Transactions, and Principal Trades actions were supervised by Andrew Dean and Corey Schuster, Co-Chiefs of the Asset Management Unit. The Clone Mutual Funds action was supervised by Sheldon L. Pollock, Associate Regional Director in the New York Regional Office.

Source: SEC