Securities Regulation Daily J.P. Morgan Securities omitted material facts when recommending fund shares
Friday, January 10, 2020

J.P. Morgan Securities omitted material facts when recommending fund shares

By Rodney F. Tonkovic, J.D.

The firm failed to offer lower-cost share classes to eligible customers and instead recommended more expensive classes.

The SEC has charged J.P. Morgan Securities with failing to disclose to customers their eligibility for less-expensive share classes. The firm sold certain retirement plan and charitable organization brokerage customers higher-priced share classes in certain mutual funds when less expensive share classes were available. The Commission found that J.P. Morgan failed to disclose the conflict of interest that arose from the higher compensation it received by selling the more expensive classes and also failed to disclose the negative impact on the investments' returns due to the different fee structures for the different classes. The broker-dealer was censured and ordered to pay disgorgement, interest, penalties totaling $1.8 million (In the Matter of J.P. Morgan Securities LLCRelease No. 33-10741, January 9, 2020).

Share classes. According to the Commission, between 2010 and 2015, J.P. Morgan lacked adequate systems and controls to determine whether customers were eligible to purchase load-waived Class A mutual fund shares. In this case, certain mutual funds offered different fund share classes that differed in the sales charges and fees that the investor would incur. Sales charges may be waived, for example, for Class A shares offered to qualified retirement and charitable accounts.

As a result of its inadequate systems and controls, J.P. Morgan failed to provide sales charge waivers in transactions involving eligible customers. Instead, the firm recommended Class A shares with an up-front sales charge, or other classes with higher ongoing fees and expenses. In addition, J.P. Morgan failed to tell the customers that the purchases of the more expensive shares would negatively impact their overall investment returns. The firm also omitted material information related to the fact that it would receive greater compensation from the purchases of more expensive share classes.

Sanctions. The Commission found that J.P. Morgan violated the antifraud provisions of Securities Act Section 17(a)(2) and (3). In addition to a cease and desist order, the firm agreed to censure and the payment of disgorgement in the amount of $251,083, prejudgment interest of $71,355, and a $1,500,000 civil penalty. In accepting J.P. Morgan's offer of settlement, the Commission took into consideration the firm's reimbursement of the affected customers and that it converted them to Class A shares with the lowest expenses for which they are eligible.

The release is No. 33-10741.

Companies: In the Matter of J.P. Morgan Securities LLC

MainStory: TopStory BrokerDealers Enforcement FraudManipulation InvestmentAdvisers

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