Washington, D.C. – JPMorgan Chase Bank, N.A. (JPMCB) has been charged with failing to disclose conflicts of interest to clients of its wealth management business, J.P. Morgan Private Bank, the U.S. Commodity Futures Trading Commission (CFTC) announced on December 18, 2015.
The CFTC found that JPMCB did not fully disclose its preference for investing client funds in commodity pools and exempt pools – specifically hedge funds and mutual funds – managed by its affiliates and subsidiaries, known as Proprietary Funds. Furthermore, JPMCB failed to disclose its preference for investing client funds in third-party-managed hedge funds that shared fees with JPMCB affiliates.
JPMCB admitted to the facts presented in the CFTC’s Order and acknowledged violations of the Commodity Exchange Act and related Regulations. The bank will pay a $40 million civil monetary penalty and $60 million in disgorgement, and is ordered to cease and desist from further violations.
According to the Order, JPMCB manages investment management accounts (IM Accounts) and Global Access Portfolios (GAP) for clients. Since at least 2008, JPMCB preferred to invest these assets in Proprietary Funds, expecting a significant portion of the portfolio to be allocated to them. While some disclosures were made historically, JPMCB failed to disclose this preference between January 2011 and January 2014, and never disclosed a preference for proprietary hedge funds before January 2014.
Prior to August 2015, JPMCB also failed to disclose its preference for investing IM Accounts and GAP funds in third-party hedge funds where JPMCB acted as a placement agent, earning fees for placement, servicing, and ongoing services – known as “retrocessions.” JPMCB actively sought these retrocessions from hedge fund managers since at least 2005, often prioritizing managers willing to pay them over those who were not. This practice remained undisclosed until August 2015, when additional language was added to client documentation.
“Investors are entitled to know if a bank managing their money favors placing investments in its own proprietary funds or other vehicles that generate fees for the bank,” said Aitan Goelman, CFTC’s Director of Enforcement. “As demonstrated by the enforcement actions made public today, we and our regulatory partners will aggressively pursue financial institutions that fail to provide adequate disclosures to clients.”
The CFTC’s Order was issued simultaneously with a related order from the U.S. Securities and Exchange Commission.
Source: CFTC.gov
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