The Securities and Exchange Commission (SEC) announced today that JP Morgan Securities LLC (JPMS) has settled charges related to obstructing advisory clients and brokerage customers from reporting potential securities law violations. JPMS has agreed to pay an $18 million civil penalty as part of the settlement.

Coercing Client Silence with Confidential Agreements

According to the SEC's order, JPMS engaged in the practice of requesting retail clients to sign confidential release agreements between March 2020 and July 2023. These agreements were presented to clients who had received credits or settlements from the firm exceeding $1,000. The terms of the agreements compelled clients to maintain confidentiality regarding the settlement, underlying facts, and information related to the account in question. Importantly, while the agreements allowed clients to respond to SEC inquiries, they expressly prohibited clients from voluntarily contacting the SEC.

The SEC's Director of Enforcement, Gurbir S. Grewal, emphasized the illegality of including provisions that prevent individuals from reporting wrongdoing to the SEC. Grewal stated: "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."

JP Morgan Settles for $18M Over Whistleblower Violations, SEC Announces🏦🔍

💰 Settlement Amount: JP Morgan agrees to pay $18 million to resolve whistleblower protection violations.
🏛️ Regulatory Action: U.S. Securities and Exchange Commission (SEC) confirms the settlement.
🚫…

— LongYield (@LongYield) January 16, 2024

Corey Schuster, the Co-Chief of the Enforcement Division’s Asset Management Unit, highlighted the importance of ensuring that confidentiality agreements do not impede potential whistleblowers. Schuster noted: "Investors, whether retail or otherwise, must be free to report complaints to the SEC without any interference."

The SEC's order determined that JPMS violated the Rule under the Securities Exchange Act of 1934, a whistleblower protection rule that prohibits actions hindering individuals from communicating directly with SEC staff about potential securities law violations. Without admitting or denying the findings, JPMS agreed to be censured, cease and desist from violating the whistleblower protection rule, and pay the $18 million civil penalty.

SEC Charges for Identity Theft Program Failures

In 2022, the SEC charged and reached settlements with J.P. Morgan Securities, UBS Financial Services, and TradeStation Securities for lapses in their identity theft prevention programs, as reported by Finance Magnates. While neither admitting nor denying the charges, the broker-dealers allegedly violated the Identity Theft Red Flags Rule.

The firms, penalized under cease-and-desist orders, failed to implement reasonable policies and procedures to detect identity theft between January 2017 and October 2019. JP Morgan faces a penalty of $1.2 million, UBS $925,000, and TradeStation $425,000. The SEC also highlighted deficiencies in oversight, staff training, and program updates, emphasizing the need for improved customer protection.