Law EnforcementJanuary 25, 2024

JP Morgan Settles SEC Charges It Violated Whistleblower Protection Rule

The banking giant’s subsidiary agreed to be censured and pay an $18 million penalty.

Reported by Michael Katz

J.P. Morgan Securities has agreed to pay $18 million to settle Securities and Exchange Commission charges that it impeded hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC.

According to the SEC’s order, over a period of more than three years, J.P. Morgan Securities requested that certain clients sign a confidential release agreement if they received a credit or settlement of more than $1,000, regardless of whether the firm admitted or denied any error or wrongdoing in connection with the credit or settlement. The company also sometimes offered its clients an additional payment above and beyond the credit or payment calculated for the dispute.

The agreements, according to the SEC, required the clients to keep confidential the settlement, all underlying facts relating to the settlement and all information relating to the account. Although the agreements allowed clients to respond to SEC inquiries, they did not permit them to voluntarily contact the regulator. The SEC specified that at least 362 J.P. Morgan Securities clients signed a release, receiving an amount ranging from approximately $1,000 to $165,000.

“You simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a release. “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.”

The SEC’s order found that the firm violated a Securities Exchange Act whistleblower protection rule that prohibits firms from hindering people from contacting the regulator about possible securities law violations. According to Rule 21F-17, “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

Without admitting or denying the SEC’s findings, J.P. Morgan Securities agreed to be censured, to cease and desist from violating the whistleblower protection rule, and to pay an $18 million civil penalty.

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