Cultural Questions Raised Over Handling Complaints
JPMorgan Chase & Co.’s brokerage division has agreed to pay an $18 million penalty to settle Securities and Exchange Commission charges over clauses in its settlement agreements that regulators said impeded clients from reporting potential misconduct.
The SEC said Tuesday that JPMorgan Securities LLC inserted restrictions in agreements with hundreds of retail advisory clients and brokerage customers preventing them from voluntarily contacting the regulator's enforcement staff.
The clauses stipulated that recipients of settlements or credits over $1,000 from JPMorgan keep the terms and facts around the payouts confidential. While the agreements still technically allowed clients to respond directly to SEC inquiries, the confidentiality provisions explicitly barred contacting the SEC voluntarily to blow the whistle on possible violations.
“You simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” Gurbir S. Grewal, the SEC’s enforcement director, said in a statement Tuesday. The SEC said the policy applied to JPMorgan payouts from at least March 2020 through July 2023.
A JPMorgan spokesman said the confidentiality provisions were not intended to restrict the rights of clients in any way.
Securities attorneys said the restrictions point to potential cultural issues around handling complaints and whistleblowers within large brokerages. "This goes to tone at the top and culture," said Jay Dubow, a partner at Pepper Hamilton LLP. "You have to make clear that whistleblowing has to be encouraged."
The charges are a black eye for JPMorgan as Chief Executive Jamie Dimon has emphasized improving internal controls broadly across its business lines. In 2020 and 2021, JPMorgan suffered several major risk-management breakdowns, including losing billions of dollars on complex derivatives trades.
JPMorgan Securities said it agreed to improve compliance processes and review existing agreements. A spokesperson said the firm is “pleased to resolve this matter from several years ago.”
The SEC has aimed to root out confidentiality clauses seen as stifling whistleblowers in recent years, including some restrictions buried in employment agreements. Regulators worry the tactics discourage reporting of misconduct internally and to authorities.
Tuesday's charges also come as the SEC scrambles to improve oversight of major financial institutions in the wake of several trading scandals among banks and hedge funds.
The SEC crackdown aims to tear down barriers preventing individuals from serving as whistleblowers against financial institutions. Grewal emphasized that impeding potential whistleblowers cuts against investor protection efforts and market transparency. While JPMorgan maintains the confidentiality agreements were not aimed at stopping employees or customers from reporting alleged violations, the clauses plainly restricted contacting regulators voluntarily.
With the fine now levied, other banks and brokers must take heed to ensure their compliance systems and controls facilitate transparency and reporting of misconduct up the ladder internally and to the SEC. Policies or procedures seen as silencing whistleblowers could open up firms to regulatory penalties or investigations around improperly creating chilling effects on individuals coming forward.
As JPMorgan’s run-ins with regulators continue despite its size and resources, embedding an encouraging culture around escalating issues remains imperative across the financial sector. In that sense, the SEC’s enforcement order delivered a stark reminder to empower compliance staff to put ethics and investor interests first without reservations.