J.P. Morgan Securities LLC a broker-dealer headquartered in New York New York has been censured and fined by FINRA based upon the firm’s consent to findings that it harmed customers by charging them erroneous fees. Letter of Acceptance Waiver and Consent No. 2017053493101 (Oct. 18, 2018).
According to the AWC, in 2012, a vendor was employed by J.P. Morgan to address the calculation of fees that were charged to customers in the firm’s wealth management program, and to automate the rebalancing of customers’ mutual fund holdings. Apparently; however, the firm did not create and implement a supervision system and procedures aimed at supervising that vendor’s activities.
Evidently, the vendor hired by J.P. Morgan did not rebalance customers’ accounts. In May of 2016, after an employee of the firm noticed that one of the firm’s customer accounts had not been appropriately allocated, the firm discovered that 6,411 customer accounts had not been reallocated. The AWC stated that 2,514 accounts which did not get rebalanced resulted in customers either having missed opportunities or incurred losses; the damage to customers in this regard was estimated at $1,300,000.00.
FINRA stated that the deficiency in the firm’s system occurred because of the firm’s lack of appropriate supervisory measures. The AWC stated that the vendor was relied upon by the firm to conduct reviews of its exception reports; however, there were no additional reviews or procedures undertaken by the firm to ensure that the vendor’s contracted services had been performed accurately. In addition, there were no procedures utilized by the firm to monitor the vendor’s reports to assess whether customers’ accounts were inappropriately allocated.
The AWC also stated that the firm caused customers’ accounts to be overcharged because of undetected vendor billing errors. Apparently, the same vendor that botched the reallocation of customers’ accounts had been used to calculate rebates and fees for customers enrolled in the firm’s wealth management program.
The AWC indicated that in July of 2014, a new billing platform had been used by the vendor. Once that platform was implemented, the firm failed to test it or implement procedures to monitor the vendor’s billing transactions. FINRA found that a number of billing errors did not get addressed, some of which were undiscovered for nearly three years. FINRA described one situation where from October of 2014 to December of 2015, a total of 186,396 individual retirement accounts were not credited with the appropriated fee rebate: 127,843 of the accounts had erroneous rebates and 44,856 of the accounts lacked a rebate.
Moreover, with respect to 44,314 accounts, fees were incorrectly applied or account fee terminations had been untimely processed. The AWC also stated that from July of 2014 to March of 2017, the wrong blended rate was applied to nearly 60,000 accounts. The firm was cited by FINRA as having failed to watch over the vendor’s calculation of rebates and fees, which caused at least 150,000 accounts to be assessed a total of $3,100,000.00 in baseless fees.
FINRA found that the firm’s supervisory failures were violative of FINRA Rule 2010, 3110(a) and 3010(a).
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