FINRA fined JP Morgan Securities $2.8 million for multiple rules violations related to the SEC's Customer Protection Rule and related supervisory regulations, writing that the firm's deficiencies and violations occurred from 2008 through 2016 after JP Morgan purchased failing firm Bear Stearns and, in turn, failed to update, modify, or fix Bear Stearns' flawed and deficient electronic systems.
AWC #2015047091401
The findings pertain to JP Morgan Clearing Corp, as the JPMorgan's clearing firm was known at the time, and the firm's securities control function, wherein the firm obtains and maintains physical possession or control of customers' fully-paid and excess margin securities, as required by the industry's Customer Protection Rule. Specifically, Rule 15c3-3 requires broker-dealers to protect securities that customers leave in the firm's custody by promptly obtaining and maintaining physical possession or control of all fully-paid and excess margin securities.
Taking physical possession of securities/funds and protecting them by segregating or placing them into secure accounts away from the firm's business operations or speculative ventures is important in the event of a financial event, including fraudulent misconduct, that would otherwise harm or deplete customer funds if they were not securely held by the firm. The rule prohibits firms from using customer funds and fully paid for/excess margin securities to finance their business, including loan collateralization or securities lending. This protects customers from suffering potential harm when their brokerage missteps in its business operations function.
Investigators found that JP Morgan employed an electronic legacy system carried over from Bear Stearns Securities Corporation, a firm that failed in 2008, upon which JP Morgan Chase purchased it. The findings pertain to both JP Morgan's domestic and international securities business.
The report states that after purchasing Bear Stearns, JP Morgan did not materially update the Bear Stearns legacy system, which "had design flaws and coding and data errors" that in turn produced failures in JP Morgan's control function, namely creating deficits when JP Morgan failed to promptly obtain possession of the securities as required by the Customer Protection Rule.
FINRA wrote that these deficiencies, created in part by JP Morgan's lack of adequate systems and procedures and the deficient Bear Stearns-era technology, went undetected due to inadequate supervision, citing one example in which JP Morgan created a deficit in 81 Italian securities worth approximately $146 million, and whose failure persisted for nearly two years.
This isn't the first time FINRA has fined clearing firms for violating the SEC Customer Protection Rule. For example, FINRA fined Pershing LLC $3 million in 2015 for similar shortages that subjected customer funds and securities to undue risk. In 2016, Merrill Lynch agreed to pay $415 million to settle SEC charges that it misused customer cash to generate profits for the firm, unnecessarily putting billions of dollars in customer securities and funds at risk in violation of Rule 15c3-3.
If you have invested with JP Morgan Securities or with any firm whose failure to obtain and maintain adequate levels of funding has proven harmful to your investments or interests due to securities that have gone missing or have been involved in a high-risk trading scheme gone wrong, such as a pump-and-dump, short-squeeze, or Ponzi, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.