The SEC filed charges against J.P. Morgan Securities (JPMS) and J.P. Morgan Investment Management (JPMIM), both affiliates of J.P. Morgan Chase & Co. (J.P. Morgan), in five separate enforcement actions for noncompliance, including misleading disclosures to investors, breach of fiduciary duty, prohibited joint transactions, principal trades, and failures to recommend in the best interest of clients, according to the regulator’s statement.
“Without admitting or denying the findings in the SEC orders, both subsidiaries 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 against JPMS, as it cooperated in the investigation and implemented corrective measures,” the statement says.
Action on Private Conduit Funds (JPMS)
The SEC order finds that JPMS made misleading disclosures to brokerage clients who invested in its “Conduit” private fund products, which pooled client funds and invested in private equity or hedge funds that later distributed shares of companies that went public to the Conduit private funds.
The order determined that, contrary to disclosures, a J.P. Morgan affiliate exercised full discretion over when and how many shares to sell. “As a result, investors were exposed to market risk, and the value of certain shares significantly declined while J.P. Morgan delayed selling them,” the SEC explains.
As part of resolving 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 $10 million civil penalty, which will also be distributed to Conduit investors.
In addition to imposing the civil penalty, the SEC order states that JPMS violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and orders a cease-and-desist and a censure. The order notes that JPMS, through its attorneys, self-reported to SEC staff that certain investors had complained due to delays in selling certain shares.
Action on the Portfolio Management Program (JPMS)
The SEC order concludes that between July 2017 and October 2024, JPMS failed to fully and fairly disclose the financial incentive that both JPMS and some of its financial advisors had when recommending the JPMS Portfolio Management Program over third-party advisory programs offered by JPMS.
The SEC states that during the relevant period, assets under management in program strategies grew from approximately $10.5 billion to more than $30 billion.
“The SEC order finds that JPMS violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, imposing a cease-and-desist, censure, and a $45 million penalty,” the statement says.
Action on Cloned Mutual Funds (JPMS)
The SEC order finds that between June 2020 and July 2022, JPMS recommended certain mutual fund products, called Cloned Mutual Funds, to its retail brokerage clients, even though significantly less expensive ETFs offering the same investment portfolios were available. According to the order, when recommending Cloned Mutual Funds, JPMS and its registered representatives did not consider these cost differences or have a reasonable basis to believe that their recommendations were in clients’ best interest. The order states that approximately 10,500 clients made about 17,500 purchases of Cloned Mutual Funds during this period based on JPMS‘s recommendations.
The SEC order finds that JPMS violated Regulation Best Interest and imposes a cease-and-desist and censure. However, no civil penalty was imposed because JPMS promptly self-reported the issue to SEC staff, conducted an internal investigation, cooperated extensively, and, among other corrective measures, voluntarily reimbursed approximately $15.2 million to affected clients.
Action on Joint Transactions (JPMIM)
The SEC order states that in March 2020, JPMIM caused $4.3 billion in prohibited joint transactions, benefiting a foreign money fund affiliate for which it acted as a delegated portfolio manager instead of the three U.S. money market mutual funds it advised.
“The SEC 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 and a $5 million civil penalty,” the statement adds.
Action on Principal Trades (JPMIM)
The SEC order finds that between July 2019 and March 2021, JPMIM executed or caused 65 prohibited principal trades with a combined notional value of approximately $8.2 billion. Principal trades are generally prohibited to prevent undisclosed conflicts of interest unless certain conditions are met or the SEC grants an exemption. The order states that to conduct these trades, a JPMIM portfolio manager instructed an unaffiliated broker-dealer to purchase commercial paper or short-term fixed-income securities from JPMS, which JPMIM then purchased on behalf of one of its clients.
