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J. P. Morgan Securities LLC is the securities broker-dealer subsidiary of J.P. Morgan, and as a broker-dealer sells securities and investment services through approximately 2,800 financial advisors located in Chase bank branches nationwide. As of the end of last year, J.P. Morgan, the bank, has $2.6 trillion in assets and J.P. Morgan Asset Management also had $1.7 trillion in assets under management as of December 31, 2014.
Through its various related entities, J.P. Morgan also designs and markets to its customers, the Chase Strategic Portfolio. The Chase Strategic Portfolio was developed in 2007, as a unified managed account program, and was distributed to retail investors through advisors located in Chase bank branches across the country. The Chase Strategic Portfolio minimum account value has always been $50,000 and its current median account value is approximately $110,000, so in substantial part, these are not large or high net worth investors.
However, at least according to a Cease and Desist Order entered today by the United States Securities and Exchange Commission, J.P. Morgan and its related entities consented to the imposition of a $367 million fine based upon the finding that the Chase Strategic Portfolio fund research team, which supposedly used a “quantitative scoring methodology” and a “series of analytical metrics” in fact cooked its analysis to show a preference for J.P. Morgan Proprietary Mutual Funds, which at one point resulted in approximately 60% of Chase Strategic Portfolio customer funds being invested in J.P. Morgan Proprietary Mutual Funds.
In addition, J.P. Morgan Securities admitted that it contracted with its affiliate J.P. Morgan Asset Management to provide various services to the Chase Strategic Portfolio product, including asset allocation, portfolio construction, and tactical trading advice, and charged or “discounted” the price of these services based upon the amount of Chase Strategic Portfolio that J.P. Morgan Securities invested in J.P. Morgan Proprietary Mutual Funds.
Moreover, when J.P. Morgan Securities selected funds among its Proprietary Mutual Funds to invest in the Chase Strategic Portfolio , it had two choices, and “institutional” share and a “select” share. The SEC found and J.P. Morgan admitted that in certain of these funds, it invested Chase Strategic Portfolio assets in the Select share class even though the lower cost Institutional class was available to earn shareholder servicing fees 15 basis points higher than the Institutional share class offered by those Proprietary Mutual Funds.
However, since self-dealing knows no bounds, in addition to cheating the smaller investors, apparently J.P. Morgan Securities cheated the richer investors too. J.P. Morgan Securities offers its Private Client Group customers of the three types: “affluent,” “high net worth,” and “ultra-high net worth” fiduciary investment manageent for discretionary, diversified, risk-adjusted investment management accounts that can hold, among other investments, mutual funds
and hedge funds.
It appears that based upon “discretion” and supported by convenient data, the Private Client Group customers had invested 47% of mutual fund assets and 35% of hedge fund assets in Proprietary Funds.
For these accounts, the investment funds are on what is known as the “Private Bank Platform.” With respect to most of the private hedge funds on the Private Bank Platform, a broker-dealer acts as the placement agent and earns fees for placement, shareholder servicing and other ongoing services. These placement agent fees are typically referred to as “retrocessions” and are usually a portion of the private hedge fund managers’ management and/or performance fees earned on relevant client assets. The standard retrocession that the broker-dealer affiliate of JPMCB receives from a third-party hedge fund is approximately 1.0% of the market value of relevant client assets invested, paid on an annual basis.
However, beginning in at least 2005, J.P. Morgan sought retrocessions from third-party private
hedge fund managers under consideration for inclusion on the Private Bank Platform. If a manager declined to pay retrocessions, an alternative manager with a similar investment strategy that would pay retrocessions was typically sought. Currently all but one of the third-party-managed hedge funds on the Private Bank Platform and available for direct investment pay retrocessions to J.P. Morgan Chase affiliates.
Anyway, J.P. Morgan Chase and its affiliates agreed not to do this anymore. They also agreed to pay $367 million which includes disgorgement of $127,500,000, prejudgment interest of $11,815,000, and a civil money penalty of $127,500,000.