J.P. Morgan Securities (JPMS) has submitted an order of settlement to the Securities and Exchange Commission (SEC) to resolve the market regulator’s allegations that it disadvantaged certain retirement plan and charitable organization clients.
SEC documents show the regulator will accept the settlement order, in which J.P. Morgan Securities neither admits nor denies the SEC’s findings.
According to an SEC investigation, from at least January 2010 through December 2015, J.P. Morgan Securities “disadvantaged certain retirement plan and charitable organization brokerage customers who maintained accounts at JPMS by failing to ascertain that they were eligible for a less expensive share class, and recommending and selling them more expensive share classes in certain open-end registered investment companies when less expensive share classes were available.”
The SEC says J.P. Morgan Securities did so without disclosing that it would receive greater compensation from the eligible customers’ purchases of the more expensive share classes.
“Eligible customers did not have sufficient information to understand that JPMS had a conflict of interest resulting from compensation it received for selling the more expensive share classes,” the SEC says. “Specifically, JPMS recommended and sold these eligible customers Class A shares with an up-front sales charge, or Class B or Class C shares with a back-end contingent deferred sales charge and higher ongoing fees and expenses, when these eligible customers were eligible to purchase load-waived Class A shares.”
The SEC further alleged that J.P. Morgan Securities omitted material information concerning its compensation when it recommended the more expensive share classes.
“JPMS also did not disclose that the purchase of the more expensive share classes would negatively impact the overall return on the eligible customers’ investments, in light of the different fee structures for the different fund share classes,” the SEC says. “In making those recommendations of more expensive share classes while omitting material facts, JPMS violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. These provisions prohibit, respectively, in the offer or sale of securities, obtaining money or property by means of an omission to state a material fact necessary to make statements made not misleading, and engaging in a course of business which operates as a fraud or deceit on the purchaser.”
In determining to accept the settlement offer, the SEC considered remedial acts promptly undertaken by JPMS and cooperation afforded the Commission staff, including that JPMS voluntarily identified and converted eligible customers into a lower-priced share class, and repaid eligible customers, including through reimbursement of transactions outside the relevant period.
Specifically, JPMS identified approximately 16,734 eligible customers that paid a total of $16,283,277 in upfront sales charges and higher ongoing fees and expenses. The SEC says JPMS has issued payments (including interest) to approximately 16,335 accounts, representing approximately 98% of eligible customers, by crediting the accounts of current customers and mailing reimbursement checks or otherwise directing payments as instructed by former customers. JPMS also has converted all eligible customers holding Class B and Class C shares to Class A shares with the lowest expenses for which they are eligible, at no cost to the customers.