On 18 December 2015, JPMorgan Chase Bank, N.A. ("JPMCB") and J.P. Morgan Securities LLC ("JPMS") reached a civil settlement with the SEC resolving allegations that they failed to disclose certain conflicts of interest related to investment programs in which they and several other bank entities and affiliates (collectively, or as applicable, "JPMorgan") invested on behalf of high net worth customers. In addition to agreeing to pay a total of $267 million to the SEC, including disgorgement of profits, prejudgment interest and a civil monetary penalty, JPMCB and JPMS agreed to pay an additional $40 million to the Commodity Futures Trading Commission because some of the investments at issue involved commodities. As part of the settlement with the SEC, JPMCB and JPMS acknowledged that the conduct at issue violated the federal securities laws and agreed to the censure of JPMS.
JPMorgan offered high net worth clients investment programs that invested funds in various portfolios. For various periods from 2008 until early 2014, depending on the investment program at issue, JPMorgan did not disclose conflicts of interest arising from its preference for investing customers' funds in proprietary JPMorgan-managed mutual funds and hedge funds for which JPMorgan would earn management fees, as well as for investing in hedge funds managed by third parties that shared fees with JPMorgan. In addition, JPMorgan did not disclose that certain of its funds could have invested in products that would have charged lower fees than the investment types chosen. During the relevant periods, as much as 50% of customers' investments were invested in proprietary JPMorgan funds, though toward the end of the relevant period this proportion decreased to levels as low as approximately 30%. After the relevant periods, JPMorgan amended its disclosures for these investment programs to note its preference for investing in its own proprietary funds. The settlement here provides that JPMorgan's failure to disclose the conflicts described above constituted willful civil violations by JPMS of provisions of the federal securities laws relating specifically to investment advisers and by JPMCB of provisions prohibiting misrepresentations or omissions in securities transactions more generally. The SEC considered favorably JPMorgan's cooperation with the SEC and remedial actions related to the implementation of policies concerning the disclosure of conflicts of interest. For certain of the investment programs at issue, JPMorgan did disclose that it had a conflict of interest when it invested client funds in its own proprietary funds because those investments increased the revenue that JPMorgan received, and it also disclosed how clients' assets were allocated between proprietary and third-party investment funds.
But the SEC determined that those disclosures were not sufficient because they still did not disclose that JPMorgan preferred to invest its clients' assets in the company's proprietary funds. This settlement against JPMorgan demonstrates the heightened sensitivity of market regulators to any potential conflicts of interest; financial institutions and other companies should pay close attention.
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