Regulators concluded on Friday that the bank had engaged in a conflict of interest by adopting investment practices that gave preference to its own asset management and investment products, even when doing so resulted in higher fees for clients. In some instances, JPMorgan advisers were found to have directed investors into higher-fee products, even when the same JPMorgan product was available for lower fees. 'The undisclosed conflicts [of interest] were pervasive', reports the US Securities and Exchange Commission (SEC) head of enforcement Andrew J. Ceresney.
Harm to clients
In its conclusions, the SEC alleges that JPMorgan has made around $127 million of gains based on the partial and improper advisory and investment practices of its brokers between 2008 and 2015. Though Mr Ceresney has stated that the practice of steering investments toward in-house funds caused 'significant harm' to JPMorgan clients, the $307 million settlement payout will not go to JPMorgan customers. Instead, the settlement is comprised of $267 million to be paid to the SEC and a further $40 million to be paid to the Commodity Futures Trading Commission.
Banks are usually allowed to exhibit a preference for their own in-house funds and investment products so long as that preference is disclosed to the client. In the case of JPMorgan, the conflict of interest arose from a failure on the part of brokers and management to maintain transparency around the Chase Strategic Portfolio and JPMorgan Investment Portfolio platforms. The portfolios, created in 2007, automatically invested a significant proportion of any money in propriety JPMorgan mutual funds without proper disclosure to clients. Furthermore, the company was found to have given preference to outside hedge fund managers who were willing to pay placement fees (or retrocessions) to JPMorgan over those who declined.
Wrongdoing Admitted
Late last week, JPMorgan announced the settlement and acknowledged the 'disclosure weaknesses' highlighted by the SEC investigation, but maintained that its preferential advice practices around in-house funds were regretted and 'not intentional'. A spokesperson for JPMorgan's asset management division, Darin Oduyoye, was also at pains to stress that the ongoing disclosure failure was not representative of JPMorgan's broader ethos on transparency.
'We have always strived for full transparency in client communications, and in the last two years have further enhanced our disclosures in support of that goal', Mr Oduyoye commented. 'We remain confident in our investment process and are proud of the way we manage money.' Sources: New York Times; American Banker
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