JPMorgan Chase & Co. will pay more than $300 million to settle U.S. allegations that it didn’t properly inform clients about what the Securities and Exchange Commission called numerous conflicts of interest in how it managed customers’ money over a half decade.
The largest U.S. bank by assets failed to tell customers that it reaped profits by putting their money into mutual funds and hedge funds that generated fees for the company, the SEC said in announcing $267 million in penalties and disgorgement against JPMorgan. The bank agreed to pay $40 million more as part of a parallel action by the Commodity Futures Trading Commission.
JPMorgan admitted disclosure failures from 2008 to 2013 related to two units that manage money — its securities subsidiary and its nationally chartered bank — as part of the SEC settlement. The New York-based bank said that the omissions in its communications were unintentional and that it has since enhanced its disclosures.
“Firms have an obligation to communicate all conflicts so a client can fairly judge the investment advice they are receiving,” Andrew J. Ceresney, director of the SEC Enforcement Division, said in a statement. “These JPMorgan subsidiaries failed to disclose that they preferred to invest client money in firm-managed mutual funds and hedge funds, and clients were denied all the facts to determine why investment decisions were being made by their investment advisers.”
The settlement caps roughly two years of investigations during which the government deposed asset-management executives and issued subpoenas for internal documents. The SEC’s enforcement division had been looking into whether the bank encouraged their financial advisers to steer clients improperly into investments that generated fees for the bank, people familiar with the investigation said earlier this year.
In its order, the SEC said the bank cooperated with commission staff, hired an independent compliance consultant and carried out its recommendations.
The disclosure weaknesses cited in the settlements “were not intentional and we regret them,” said Darin Oduyoye, a JPMorgan spokesman. “We have always strived for full transparency in client communications, and in the last two years have further enhanced our disclosures in support of that goal.”
While the agency extracted a record penalty for an asset manager, JPMorgan can continue operating as it has been in one of its most profitable businesses. The $307 million in fines and disgorgement accounts for a bit more than 1 percent of the company’s annual operating profits, or about a month of those at its asset-management division.
The settlement, announced on the Friday before Christmas, didn’t go far enough, said Dennis Kelleher, a lawyer who runs Better Markets, a consumer advocacy group.
“The conduct involves steering clients into proprietary products so brokers get higher commissions and JPMorgan gets good asset-management numbers,” said Kelleher, who said the practices remain costly for customers, additional disclosures notwithstanding. “This wasn’t a rogue trader. It wasn’t an individual employee. It’s not a mistake. It’s a five-year pattern.”
With the settlement, the bank moves beyond one of its last major regulatory challenges since the 2008 financial crisis. JPMorgan has been penalized more than $23 billion in major settlements with U.S. authorities in recent years, in connection with allegations that included conspiring to manipulate foreign-currency rates, allowing the “London Whale” trader to exceed risk limits, failing to flag transactions related to Bernard Madoff’s Ponzi scheme and misrepresenting the value of mortgage-backed securities.
“Investors are glad that the bank agreed to a settlement to move forward and this isn’t an overhang for the business anymore,” said Pri de Silva, a senior banking analyst at CreditSights Inc. in New York. “We are at the tail-end of the post-crisis litigation actions, but its been an expensive, exhausting process. I think both banks and the investor base are tired of it.”
JPMorgan shares fell 2.8 percent to $64.40 at 4:15 p.m. amid a broad decline in financial shares. The bank has climbed 2.9 percent this year, outperforming the 2.3 percent decline of the KBW Bank Index.
The SEC’s inquiries looked into JPMorgan Asset Management, a unit that grew rapidly after the 2008 financial crisis, as new regulations crimped areas including hedge-fund and proprietary trading operations that have traditionally been lucrative for Wall Street firms. The bank expanded an operation that pairs wealth management and investment funds in one reporting structure, run by Mary Erdoes, seen as one of a half-dozen in-house favorites to eventually replace Chief Executive Officer Jamie Dimon.
JPMorgan expanded its in-house mutual funds even as many competitors pulled back. Over the past decade, Morgan Stanley, Citigroup Inc. and Bank of America Corp. have shed such fund businesses after being fined for allowing conflicts of interest to result in sales abuses.
JPMorgan Asset Management — with mutual funds, alternative investments, private wealth management and some trust operations — had the highest rate of revenue growth among the bank’s four main operating units. It also had the highest percentage growth in asset inflows of any large manager in the five years through 2014, ending the year with $1.7 trillion under management, according to a February presentation to investors.
Cross-selling and synergies between units was worth $14 billion across the bank in 2012, it said in a February 2013 presentation to investors. The bank attributed $1.1 billion of that to the synergies of selling the bank’s investment-management products to private banking clients.
JPMorgan “failed to disclose numerous conflicts of interest to certain wealth management clients,” the SEC said in its announcement. That included not telling customers of a retail product, Chase Strategic Portfolio, that it was designed to favor in-house mutual funds, or that the bank might put them into a higher-fee fund when a lower-fee version of the same fund was available. The bank’s investment advisory business, J.P. Morgan Securities LLC, also failed to disclose that it had a financial incentive to favor the bank’s funds because it received a discount on them from another JPMorgan unit, the SEC said.
At one point in early 2011, JPMorgan invested 47 percent of mutual-fund assets and 35 percent of hedge-fund assets in products and accounts that had ties to it, according to the SEC order.
JPMorgan Chase Bank failed to disclose its preference for third-party funds that shared revenue with the bank, the SEC said. During initial meetings, third-party managers were typically asked if they were willing to share their fees. If they declined, JPMorgan typically would look for an alternative manager who was willing. The bank began disclosing that it may receive these “retrocession” payments in August 2015, the SEC said.
JPMorgan agreed to pay a $40 million civil penalty to the CFTC, which also cited $60 million in disgorgement that was part of the SEC settlement.
The bank’s settlement with the SEC included a penalty component of $127 million. That surpassed the agency’s previous record of $100 million, levied on Alliance Capital Management 11 years ago, according to an SEC spokeswoman.
As part of the settlement, JPMorgan received permission to continue raising money for private companies including hedge funds and startups. The bank could have been barred from that lucrative activity based on investor protections that automatically disqualify firms found to have violated securities laws. That so-called waiver came with a condition that JPMorgan hire an independent consultant to annually certify its plan for complying with rules for private fundraising.
A senior bank executive or legal officer will have to certify in writing that they reviewed the consultant’s report. The SEC can revoke the waiver if JPMorgan is found to have repeated the kind of wrongdoing that triggered the latest SEC enforcement action.
“J.P. Morgan put its interest before its clients by failing to disclose significant conflicts of interest,” said Democratic Commissioner Kara Stein, who supported the added waiver restrictions. “These failures were part of an institutional breakdown that operated as a fraud on both its clients and its prospective clients.”
Buhari Suspends Hadiza Bala Usman as MD of NPA, Appoints Koko
President Muhammadu Buhari has suspended Hadiza Bala Usman as the Managing Director of the Nigerian Ports Authority, according to sources quoted by Peoples Gazette.
The president immediately appointed Mohammed Koko, the director of finance to replace Ms Usman.
While Ms Usman said she was aware of her suspension, she said she has not received any formal letter or communication to that effect from the Ministry of Transport.
Ms Usman was appointed as NPA chief in 2016 and has repeatedly propagated her reform policies that sought to redirect the organisation, which is one of the top revenue-generating entities of the Nigerian government.
FCMB Appoints Ms. Muibat Ijaiya as Independent Non-executive Director
FCMB Group Plc has appointed Ms. Muibat I. Ijaiya to its Board as an Independent Non – Executive Director, following the approval of the Central Bank of Nigeria.
Muibat Ijaiya is a Strategy Development and Execution expert focused on measurable transformation and impact. She has 19 years consulting and advisory experience, working with clients across Europe, Middle East, Africa and Asia, to provide expert-led solutions that support private and public sector organisations to develop and actively implement their strategies to achieve measurable change, transformation and/or improved performance.
She holds a BSc Mathematics & Education from the University of Surrey and a Warwick Business School MSc. Management Science and Operational Research certificate. She also obtained an MBA from the University of Manchester.
Muibat Ijaiya is a partner at Strategy Management Partners, a professional services organisation focused on helping private and public organisations around the world to clarify, develop, align and execute their strategies.
Prior to this, she was a director with Palladium Group Inc (United Kingdom & Middle East) and previously worked directly with Drs. Kaplan & Norton, the co-creators of the Strategy Focused Organisation and Balanced Scorecard concepts. Other advisory experience was in Corporate Finance with Ernst and Young (UK) focused on Transaction Advisory Solutions, Restructuring, Turnaround and Commercial Due Diligence. She also worked with Robson Rhodes RSM Business Consulting (EMEA) focused on Transformation and Change Management.
Muibat continues to work in advancing the science of strategy execution, particularly for organisations in complex industries and public institutions focused on transforming key sectors, and the Board is assured that her wealth of experience would be of great impact to the FCMB Group.
Is a ‘Tesla’ About to Eat Construction Equipment Makers’ Lunch?
With digitalization, electrification and autonomy all set to change the industry, could construction’s established players be wrongfooted by a new market disruptor? Industry thinkers Alan Berger and Carl-Gustaf Goransson discuss who’s in the strongest position: Old guard or Newcomers.
In 2008 no one saw Tesla Motors as much other than a niche electric sports car company. Certainly not other car companies – in 2009 Tesla only made 147 cars. Fast forward 12 years and Tesla is making 500,000 cars a year and is valued higher than the top six car manufacturers combined.
Of course, much has been written about the unexpectedly and disproportionately large disruptive effect Tesla has had on the global automotive industry. Like construction equipment, the car business has been consolidating, with no significant new entrants in a long time. This raises the question as to whether the same thing could happen in the construction equipment world – could a disrupter barge into the sector and win? Indeed, the industry is trying to digest the triple challenges of digitization, autonomous operation and electrification – creating an opportunity for new players to emerge.
Central to the success of today’s OEMs is their extensive product, customer and application knowledge. But given the technical changes that are coming, is that going to be enough to save them from a digital disruptor?
The new era of machines will require a completely new architecture, one that is designed around the capabilities of an electrical drivetrain. It will also be adapted from today’s equipment in order to transfer power with cables instead of belts, and shafts and hoses will enable new ways to optimize performance and productivity. Such a platform will be largely software controlled, moving a portion of feature development from relatively slow-moving mechanical changes to faster and more easily upgradable software changes. That said, by nature, construction equipment does physical work, and the working tools will remain similar to that used today. A disrupter would develop a completely new machine, while existing OEMs could do so only if they resist the temptation to take the ‘easy’ path of adapting current machines. Indeed, OEMs would be able to leverage their vast portfolio of intellectual property to speed this along. Advantage OEM.
Large parts of the supply chain will remain the same, as many components and raw materials of tomorrow’s machines will be like today’s. However, new components will be needed as well, particularly in the drivetrain and hydraulic systems. (If there is a hydraulic system). This has triggered a competitive scramble that is now pitting traditional engine manufacturers against transmission/axle manufacturers and hydraulic component suppliers. While this new competitive dynamic will take time to sort itself out, clearly the traditional supply base is positioning itself to offer the needed new parts. Therefore, existing OEM-supplier relationships – and access to the latest technology – will favor existing OEMs over newcomers. Advantage OEM.
With new, digitally enabled sales models, the traditional role of the dealer is likely to change, and a new player could greatly accelerate this. Just look at the success of Tesla’s direct selling model. That said, construction equipment requires responsive and intensive access to service, which is a vital part of the dealers’ offering. A disrupter could build a service-only network, leveraging established dealers while moving most of the sales activity on-line. This is difficult for existing OEMs and therefore the newcomer has an edge. Advantage disruptor.
It is well known that parts and services drive a large part of total operating income for OEMs. Simplified, software-driven machines require less maintenance and this will negatively impact the traditional business model and reduce the value of existing OEM’s captive parts distribution networks. Indeed, there is no need for a newcomer to develop their own parts network, since there are now third-party solutions such as Amazon. A newcomer can then more easily focus on other sources of high margin recurring revenues – such as offering features-as-a-service. Advantage newcomer.
Access to capital
To fund their existing portfolio and prepare for the technical transformation today’s OEMs have to balance R&D, capital expenditure and operating income – not an easy balancing act. Not so startups, whose compelling business models and few external dependencies can get access to significant capital. All they need to worry about is being focused on developing the new products, services and business. Advantage disruptor Before concluding, there is one additional and important consideration. Tesla was founded well before the automotive industry recognized the need and technology availability. Clearly, this is not the case for the construction equipment industry today. Taking all of these factors together, it seems that the existing OEMs can drive the disruption themselves if they are willing to commit to the extensive and complete transformation needed. But, if none do so, don’t be surprised if someone else decides to do it for or to them.
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