SEC and CFTC fine JP Morgan a total of $200 million for communications with personal devices

Rick Steves

“Since the 1930s, recordkeeping and books-and-records obligations have been an essential part of market integrity and a foundational component of the SEC’s ability to be an effective cop on the beat.”

JPMS, a broker-dealer subsidiary of JPMorgan Chase agreed to pay a $125 million penalty after the Securities and Exchange Commission charged the major US broker for widespread and longstanding failures by the firm and its employees to maintain and preserve written communications.

The broker-dealer admitted the facts set forth in the SEC’s order and plans to implement robust improvements to its compliance policies and procedures to settle the matter.

Recordkeeping failures impacted SEC’s investigations

Between at least January 2018 and November 2020, JPMS employees often communicated about securities business matters on their personal devices, using text messages, WhatsApp, and personal email accounts.

Such behavior was not hidden within the firm as even supervisors, including managing directors and other senior supervisors – the very people responsible for implementing and ensuring compliance with JPMS’s policies and procedures – used their personal devices to communicate about the firm’s securities business.

Because of this, JPMS recordkeeping capabilities were significantly weakened, going against the US securities laws. During that period, JPMS received both subpoenas for documents and voluntary requests from SEC staff in numerous investigations, but the broker wasn’t able to find relevant records because these were on the personal devices of its employees.

Its recordkeeping failures deprived the SEC staff of timely access to evidence and potential sources of information for extended periods of time and in some instances permanently, thus meaningfully impacting the SEC’s ability to investigate potential violations of the federal securities laws.

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“Since the 1930s, recordkeeping and books-and-records obligations have been an essential part of market integrity and a foundational component of the SEC’s ability to be an effective cop on the beat. As technology changes, it’s even more important that registrants ensure that their communications are appropriately recorded and are not conducted outside of official channels in order to avoid market oversight,” said SEC Chair Gary Gensler.

“Unfortunately, in the past we’ve seen violations in the financial markets that were committed using unofficial communications channels, such as the foreign exchange scandal of 2013. Books-and-records obligations help the SEC conduct its important examinations and enforcement work. They build trust in our system. Ultimately, everybody should play by the same rules, and today’s charges signal that we will continue to hold market participants accountable for violating our time-tested recordkeeping requirements.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said: “Recordkeeping requirements are core to the Commission’s enforcement and examination programs and when firms fail to comply with them, as JPMorgan did, they directly undermine our ability to protect investors and preserve market integrity. We encourage registrants to not only scrutinize their document preservation processes and self-report failures such as those outlined in today’s action before we identify them, but to also consider the types of policies and procedures JPMorgan implemented to redress its failures in this case.”

Sanjay Wadhwa, Deputy Director of Enforcement, commented: “As today’s order reflects, JPMorgan’s failures hindered several Commission investigations and required the staff to take additional steps that should not have been necessary. This settlement reflects the seriousness of these violations. Firms must share the mission of investor protection rather than inhibit it with incomplete recordkeeping.”

JPMS agreed to retain a compliance consultant to conduct a comprehensive review of its policies and procedures relating to the retention of electronic communications found on personal devices and JPMS’s framework for addressing non-compliance by its employees with those policies and procedures.

JP Morgan pays $125 million to SEC and $75 million to CFTC

The Commodity Futures Trading Commission also pressed similar charges against JP Morgan and its entities, with a settlement deal including a $75 million penalty.

CFTC Acting Chairman Rostin Behnam said: “Maintenance of complete and accurate books and records is required in order to operate in our industry, as is diligent supervision. Registrants, supervisors, and compliance officers must understand these regulations and adhere to them and their firm’s guidance when conducting their business. The message of today’s enforcement action could not be more clear: the Division of Enforcement will aggressively investigate potential recordkeeping and related supervision violations, and the Commission will impose appropriate penalties for violations of these critical regulatory requirements.”

CFTC Acting Director of Enforcement Vince McGonagle, commented: “Firm compliance with recordkeeping and associated supervision requirements is essential to the CFTC’s efforts to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets. Today’s enforcement action demonstrates the Division of Enforcement’s commitment to aggressively investigating and prosecuting violations of these requirements.”

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