Brokers, Compliance, Enforcement

JP Morgan SEC Violation: Confidential Agreements Impede Client Communications

Washington D.C., Jan. 16, 2024 – The Securities and Exchange Commission (SEC) has taken action against J.P. Morgan Securities LLC  for their alleged hindrance of clients from reporting potential securities law violations.

SEC Charges J.P. Morgan

The SEC has officially charged J.P. Morgan with impeding numerous advisory clients and brokerage customers from reporting potential securities law violations. In response to these charges, J.P. Morgan has agreed to pay a significant $18 million civil penalty to settle the case.

The Role of Confidential Agreements

According to the SEC’s order, from March 2020 through July 2023, J.P. Morgan routinely requested retail clients to sign confidential release agreements if they had received a credit or settlement exceeding $1,000 from the firm. These agreements mandated that clients keep the settlement, all related facts, and account information strictly confidential. While the agreements allowed clients to respond to SEC inquiries, they prohibited clients from voluntarily contacting the SEC.

SEC’s Firm Stance

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized, “Whether it’s in your employment contracts, settlement agreements, or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing. But that’s exactly what we allege J.P. Morgan did here. 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.”

Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit, added, “Investors, whether retail or otherwise, must be free to report complaints to the SEC without any interference. Those drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.”

JPMS Violation of Whistleblower Protection Rule

The SEC’s order highlights that J.P. Morgan violated Rule 21F-17(a) under the Securities Exchange Act of 1934. This rule serves as a whistleblower protection measure, prohibiting any action that obstructs individuals from communicating directly with SEC staff about potential securities law violations. Without admitting or denying the SEC’s findings, J.P. Morgan has agreed to be censured, cease and desist from violating the whistleblower protection rule, and pay the substantial $18 million civil penalty.

Implications for Investors

This case raises important considerations for investors, both retail and institutional. The SEC’s action against J.P. Morgan underscores the significance of whistleblower protection and the need for transparency within financial institutions.

Lessons for Financial Firms

Financial firms and institutions can learn valuable lessons from this case. We revised the confidentiality agreements in litigation matters a few years ago, and firms must review and revise their confidentiality agreements, employment contracts, and settlement agreements to ensure compliance with whistleblower protection rules. Companies must strike a balance between protecting their interests and respecting individuals’ rights to report any unlawful activities.

Moreover, compliance departments within financial firms should stay informed about evolving regulations and legal developments to prevent any inadvertent violations. Proactive measures, such as employee training and regular compliance audits, can help organizations avoid costly legal repercussions.

Contact Us

J.P. Morgan’s settlement with the SEC serves as a reminder of the importance of whistleblower protection and transparency within the financial industry. Investors and financial institutions alike should take this case as an opportunity to reassess their practices and commitments to upholding the law. The securities attorneys at Sallah Astarita & Cox, LLC have decades of experience representing financial firms in their regulatory and litigation matters.

For further updates and insights on financial regulations and compliance, stay tuned to our website and here at SECLaw.com. We are dedicated to providing you with the latest information to help you make informed decisions in the ever-changing financial landscape.

SEC Press Release

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | mja@sallahlaw.com | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.

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