SEC Investigating JP Morgan Asset-Management Conflicts

SEC Investigating JP Morgan Asset-Management Conflicts

The SEC is investigating whether JPMorgan improperly steered clients into JPMorgan’s own in-house investment products to generate fees. Through its so-called “guided architecture” program, JPMorgan brokers and bankers apparently received bonuses for steering clients into JPMorgan’s own products. In addition to potential conflicts of interest, the SEC is examining whether JPMorgan adequately disclosed its compensation structure and other practices to investors.

A major aspect of the investigation is whether JPMorgan brokers and bankers recommended JPMorgan’s proprietary products in order to receive bonuses rather than because the investments made the most sense for investors. JPMorgan allegedly pressured bankers and brokers to sell in-house products, which generated more revenue for the bank and brokerage firm.

Some of the JPMorgan structured products include JPMorgan Chase Principal Protected Notes, JPMorgan Consumer Price Indexed Securities (CPIS), JPMorgan Commodity Indexed Preferred Securities (COMPS), JPMorgan Buffered Return Enhanced Notes, JPMorgan Outperformance Buffered Return Enhanced Notes, JPMorgan Index Capped Quarterly Observation Notes, and JPMorgan EUR 500 Million Medium-Term Note Programme. The products are complex, can be difficult to understand, and often are only appropriate for sophisticated investors. But because of the financial incentives that JPMorgan offered, its bankers and brokers may have recommended these products even if they were unsuitable for investors.

This is not the first time that JPMorgan has been accused of such misconduct. In 2012, it was ordered to pay nearly $400 million to American Century Investment Management Inc. after it gave employees incentives to favor JPMorgan’s own funds in retirement accounts.

JPMorgan has built its asset-management unit in part by expanding its proprietary investment product lineup. It has $443 billion in assets under management in hundreds of mutual funds, and more in hedge funds and other investments. By contrast, Morgan Stanley, Citigroup Inc. and Bank of America Corp. have shed mutual fund businesses over the past decade, after being fined for allowing conflicts of interest to result in sales abuses.

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