J.P. Morgan Securities LLC (JPMS) has agreed to pay a fine of US $2.8 million to the Financial Industry Regulatory Authority (FINRA), the largest independent regulator for US securities firms, to resolve charges that it failed to promptly obtain and later maintain physical possession or control of certain customers’ fully paid and excess margin securities.
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JPMS neither denied nor admitted to any wrongdoing on its behalf within the context of the settlement, but consented to the entry of FINRA’s findings. Also, the brokerage has agreed to implement enhancements to address the violations.
As part of its settlement, the Wall Street self-regulator considered J.P. Morgan’s cooperation and that it over-reserved cash deposits to remedy issues related to its failed segregation of securities.
The Securities and Exchange Commission (SEC) rule creates requirements to protect customers’ funds and securities from broker-dealer misuse and requires that assets be available for distribution in the event of the broker-dealer’s insolvency.
The FINRA found that J.P. Morgan Securities violated the Customer Protection Rule Violations and Supervisory Failures by defaulting to maintain adequate reserves to ensure that its possession or control systems were operating properly. The reserve deficiencies valued at hundreds of millions of dollars occurred between March 2008 to June 2016.
According to the FINRA complaint: “Shares that should have been segregated were available for the firm’s use, due to systemic coding and design flaws, recurring and unresolved deficits and unreasonable supervision. By failing to move and maintain securities in good control locations, the firm created deficits in foreign and domestic securities valued at hundreds of millions of dollars.”
For example, the regulator found that the company failed to move Italian securities to a good control location for nearly two years, and on one sample day, created a deficit in 81 Italian securities worth approximately $146 million.
Susan Schroeder, Executive Vice President of FINRA’s Department of Enforcement, added: “Firms have a fundamental responsibility to safeguard the securities of their customers. The Customer Protection Rule is an important component of investor protection, and member firms must have reasonably designed and maintained systems and procedures to comply with the possession and control requirements.”
