On 31 October 2024, the United States Securities and Exchange Commission issued a set of significant enforcement actions against two of J.P. Morgan’s core entities, J.P. Morgan Investment Management Incorporated and J.P. Morgan Securities Limited Liability Company, addressing a number of compliance failures, undisclosed conflicts of interest, and regulatory breaches across the company’s investment advisory practices. These orders, which require immediate cease-and-desist actions, substantial penalties, financial restitution, and extensive compliance reforms, are aimed at upholding strict standards within the financial sector, particularly in areas of investor protection and regulatory transparency. The actions target violations under the United States Investment Company Act of 1940, the United States Investment Advisers Act of 1940, the United States Securities Act of 1933, the United States Securities Exchange Act of 1934, and the United States Securities and Exchange Commission’s Regulation Best Interest. Together, these laws regulate how firms should manage investor funds, disclose risks, and ensure that financial advice is unconflicted and in the best interest of clients.
Unauthorised Principal Trades by J.P. Morgan Investment Management Incorporated
The US Securities and Exchange Commission identified numerous instances of unauthorised principal trades conducted by J.P. Morgan Investment Management Incorporated from July 2019 to March 2021. The investigation found that the company executed 65 trades where it purchased securities from its affiliate, J.P. Morgan Securities Limited Liability Company, on behalf of clients, including several registered investment companies. Although J.P. Morgan Investment Management Incorporated held an exemption from the Securities and Exchange Commission to conduct certain trades with affiliates, it failed to adhere to the required conditions, such as ensuring fair pricing and reporting these transactions to the boards overseeing the registered investment companies.
The US Securities and Exchange Commission determined that J.P. Morgan Investment Management Incorporated’s lack of sufficient internal policies and compliance controls violated Section 17(a)(1) of the United States Investment Company Act of 1940, which prohibits principal trades involving affiliated entities without specific exemptions. Furthermore, J.P. Morgan Investment Management Incorporated’s actions breached Sections 206(3) and 206(4) of the United States Investment Advisers Act of 1940, which require advisers to disclose and obtain consent before such trades are completed. To address these violations, the Securities and Exchange Commission ordered J.P. Morgan Investment Management Incorporated to revise its policies and controls to prevent recurrence, as well as to pay a financial penalty as a measure of accountability.
Liquidity Manipulation Using Domestic Funds for Foreign Fund Advantage
During the severe market instability caused by the COVID-19 pandemic in March 2020, J.P. Morgan Investment Management Incorporated structured a series of transactions to allow a foreign fund, ineligible for the United States Federal Reserve’s Money Market Mutual Fund Liquidity Facility, to benefit from liquidity intended exclusively for domestic funds. This facility was established by the Federal Reserve to aid United States-registered funds during the financial crisis, but it explicitly excluded foreign funds. J.P. Morgan Investment Management Incorporated orchestrated a series of transactions that effectively enabled the foreign fund to access liquidity indirectly, placing the domestic funds at heightened financial and regulatory risk.
The Securities and Exchange Commission determined that these actions violated Section 17(d) of the United States Investment Company Act of 1940 and Rule 17d-1, which restrict joint transactions that unfairly benefit affiliates without an exemption from the Securities and Exchange Commission. The Securities and Exchange Commission’s order requires J.P. Morgan Investment Management Incorporated to halt this practice and to strengthen its internal compliance controls to prevent similar joint transactions in the future.
Misleading Disclosures in Conduit Investments
The Securities and Exchange Commission found that between January 2019 and June 2022, J.P. Morgan Securities Limited Liability Company failed to accurately disclose its handling of distributions within its Conduit investment products. These products involved shares distributed from private equity or hedge fund investments, which were intended to be liquidated as soon as practicable. However, J.P. Morgan Securities Limited Liability Company often held these shares for extended periods—sometimes exceeding 100 days—resulting in significant exposure to market risks that clients had not anticipated. Despite disclosures suggesting timely liquidations, the actual delays increased potential losses for investors.
This conduct constituted a violation of Section 8A of the United States Securities Act of 1933, Sections 15(b)(4) and 21C of the United States Securities Exchange Act of 1934, and Section 203(e) of the United States Investment Advisers Act of 1940. These provisions collectively require financial firms to fully disclose risks and prohibit unauthorised discretionary control over client investments. The Securities and Exchange Commission’s order mandates that J.P. Morgan Securities Limited Liability Company provide financial restitution to affected investors and improve its disclosure practices to ensure clients are informed of any delays or associated risks in the future.
Undisclosed Conflicts of Interest in the Portfolio Manager Programme
Since 2017, J.P. Morgan Securities Limited Liability Company has recommended its in-house Portfolio Manager Programme to clients over external management options, providing direct financial benefit to its advisers and the company itself. However, the Securities and Exchange Commission found that the company did not sufficiently disclose this financial incentive, creating an undisclosed conflict of interest. Clients who chose the Portfolio Manager Programme were often charged higher fees, directly increasing adviser compensation.
The Securities and Exchange Commission ruled that these practices breached Section 15(b) of the United States Securities Exchange Act of 1934 and Sections 203(e) and 203(k) of the United States Investment Advisers Act of 1940, which mandate clear disclosure of conflicts that may affect the impartiality of recommendations. As part of its order, the Securities and Exchange Commission required J.P. Morgan Securities Limited Liability Company to implement enhanced disclosure protocols, provide comprehensive training for advisers, and develop protocols that ensure recommendations are based solely on the client’s best interests.
Regulation Best Interest Violations in High-Fee Mutual Fund Recommendations
Under Regulation Best Interest, which mandates that broker-dealers act in their clients’ best financial interests when recommending investments, J.P. Morgan Securities Limited Liability Company failed to act in the best interest of its clients from June 2020 to July 2022. During this period, advisers recommended mutual funds with higher fees—known as Clone Mutual Funds—over lower-cost exchange-traded fund alternatives with identical investment profiles. This conduct led approximately 10,516 clients to incur an additional $14 million in fees.
The Securities and Exchange Commission found these actions to be in violation of Regulation Best Interest’s Care Obligation, outlined in Exchange Act Rule 15l-1(a)(1), which mandates that broker-dealers prioritise cost-effective recommendations that are in the client’s best interests. J.P. Morgan Securities Limited Liability Company was also found in violation of Regulation Best Interest’s Compliance Obligation, which requires firms to establish effective policies that enforce compliance with client-first standards. To address these breaches, the Securities and Exchange Commission ordered J.P. Morgan Securities Limited Liability Company to provide restitution to impacted clients and to overhaul its procedures to ensure that cost considerations are central to future recommendations.
The comprehensive orders issued by the US Securities and Exchange Commission against J.P. Morgan Investment Management Incorporated and J.P. Morgan Securities Limited Liability Company included an array of penalties and corrective measures, ranging from substantial financial penalties to strengthened internal compliance protocols. United States Securities and Exchange Commission aims to reinforce standards within advisory and investment practices, protecting the interests of investors and holding financial firms accountable to the legal and regulatory frameworks governing the United States financial industry.
(Source: https://www.sec.gov/newsroom/press-releases/2024-178)
