JP Morgan (NYSE: JPM) has agreed to a settlement of USD 307 million in a case involving a case of failure to disclose conflict of interest to its clients.
Two year investigation comes to a close
JP Morgan Chase had been under scrutiny for its alleged failure on disclosure of conflict of interest to a number of its wealthy clients. Investment advisors registered with the SEC (as is the case with much of the JP Morgan team) are expected to uphold strict fiduciary standards. However, for a period of nearly seven years, starting in 2008, the bank favored its in-house products over others in the market, in violation of SEC standards.
The investigation that began about two years ago, comes to a close with the latest announcement. Under the agreement, arrived at with the Securities and Exchange Commission as well as the Commodity Futures Trading Commission of the United States, the bank will have to pay up a sum of USD 307 million as a settlement for its admitted oversight.
J.P. Morgan Securities LLC and JPMorgan Chase Bank N.A. were the two arms of the financial services firm embroiled in this scandal. According to the SEC Enforcement Division, the subsidiaries of JP Morgan had ‘failed to disclose’ vital information on certain investment decisions to clients.
They had chosen to invest their clients’ money in mutual funds as well as hedge funds managed by the firm itself, over alternatives in the market. The firm had used this strategy with numerous wealthy clients as well as pension funds. In doing so, the private bank was able to generate a higher income from sale of its proprietary financial products from its other subsidiary firm.
This conflict of interest was never communicated to the clients, precluding them from making any informed decisions on the investment advice they were getting from JP Morgan.
JP Morgan incurs penalties and an SEC warning
The bank will need to cough up USD 127.5 million as refund besides the USD 127.5 million incurred as a fine, and a USD 11.8 million interest amount. Also, the CFTC is to get USD 40 million by way of penalties.
The firm has for now, been let off and permitted to continue raising money for hedge funds, startups and other private companies. This however, comes with a stern warning and is strictly conditional. JP Morgan will necessarily have to engage the services of an independent consultant who will certify the bank’s plans on how they will work with the rules on private fundraising. Failure to stick with the rules and regulations could see things turning out much worse in case of a future violation.