Firm's tactic 'not only undermined critical investor protections and placed investors at risk, but was also illegal,' says SEC enforcement director
The SEC ordered JPMorgan to pay an $18 million fine to settle charges that it tried to prevent clients from alerting the agency if they suspected the firm had violated securities laws, the agency announced Tuesday.
From 2020 through July 2023, J.P. Morgan Securities, a subsidiary of JPMorgan Chase & Co., asked some clients in advisory accounts and customers in brokerages accounts to sign a release that said they would keep confidential credits or settlements from the firm that exceeded $1,000. The clients were not permitted to disclose the agreement or any other information about the account unless it was in response to an inquiry from the Securities and Exchange Commission.
The agreement prohibited J.P. Morgan Securities clients from voluntarily communicating with the SEC concerning potential securities law violations, the SEC order states. The arrangement violated the whistleblower protection provision of the Dodd-Frank financial reform law, which provides financial incentives to encourage investors and others to report suspected wrongdoing, the SEC charged.
The release stated that the J.P. Morgan Securities client “promises not to sue or solicit others to institute any action or proceeding against [JPMS] arising out of events concerning the account,” according to the SEC. The release also said that if the client violates the agreement, the client could be sued by J.P. Morgan Securities.
The SEC issued a cease-and-desist order against J.P. Morgan Securities, censured the firm and imposed the $18 million civil penalty.
“Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement. “But that’s exactly what we allege J.P. Morgan did here. For several years, it forced certain clients into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC. This either-or proposition not only undermined critical investor protections and placed investors at risk, but was also illegal.”
The SEC said that J.P. Morgan Securities did not admit nor deny the agency’s findings. After the SEC informed the firm that its client agreements violated the whistleblower law, it revised the language in its agreements to clarify that clients were not prohibited from communicating directly with any government authority or regulator.
“We take our regulatory obligations seriously and promptly took action to resolve this issue,” a JPMorgan spokesperson said in a statement.
The SEC has awarded more than $1 billion to whistleblowers since issuing its first award in 2012, the agency said on its website.
