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CONSENT ORDER DOCKET NO. CO-14-8151-S |
I. PRELIMINARY STATEMENT
WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
WHEREAS, J.P. Morgan Securities LLC (“JPMS”) is a broker-dealer registered in the state of Connecticut;
WHEREAS, State securities regulators from multiple jurisdictions have conducted an investigation into the registration of JPMS sales assistants (“SAs”) and JPMS’ supervisory systems with respect to the registration of SAs, such investigative authority in Connecticut being derived from Section 36b-26(a) of the Act;
WHEREAS, JPMS acknowledges and agrees that the scope of the multi-state investigation covered the period from January 1, 2004 through December 31, 2011;
WHEREAS, JPMS has cooperated with regulators by responding to inquiries, providing documentary evidence and other materials and providing regulators with access to facts relating to the investigations;
WHEREAS, JPMS has advised regulators of its agreement to resolve the multi-state investigation pursuant to the terms specified in this Consent Order;
WHEREAS, JPMS represents, through its execution of this Consent Order, that it agrees to make, and already has made, certain remedial changes to its registration policies, supervisory procedures and order entry systems, and agrees to make certain payments in accordance with the terms of this Consent Order;
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-34, inclusive”;
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive”;
WHEREAS, an administrative proceeding initiated under Section 36b-15 of the Act and Section 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, JPMS, through its execution of this Consent Order, voluntarily waives the following rights with respect to this Consent Order:
| 1. | To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f) and 36b-27(a) of the Act and Section 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut; |
| 2. | To present evidence and argument and to otherwise avail itself of Sections 36b-15(f) and 36b-27(a) of the Act and Section 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut; |
| 3. | To present its position in a hearing in which it is represented by counsel; |
| 4. | To have a written record of the hearing made and a written decision issued by a hearing officer; and |
| 5. | To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order; |
NOW THEREFORE, the Commissioner, as administrator of the Act and of the Regulations, hereby enters this Consent Order.
III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER
| 1. | JPMS admits the jurisdiction of the Commissioner in this matter. |
| 2. | Solely for the purposes of terminating the multi-state investigations, and in settlement of the issues contained in this Consent Order, JPMS, without admitting or denying the findings of fact or conclusions of law contained in this Consent Order, consents to the entry of this Consent Order by the Commissioner. |
IV. FINDINGS OF FACT
Relevant JPMS Business Units
| 3. | JPMS’ legacy wealth management business unit was referred to as Private Bank within JPMS. A review of Private Bank SAs was included in the scope of this investigation. |
| 4. | In July of 2006, the legacy brokerage unit of Banc One Securities Corporation, then known as the Private Wealth Management (“PWM”) business unit, was operating in J.P. Morgan Securities Inc., the predecessor broker-dealer to JPMS. A review of PWM SAs was included in the scope of this investigation. |
| 5. |
In October 2008, the legacy brokerage unit of Bear, Stearns & Co. Inc. known as Private Client Services (“PCS”) was operating in J.P. Morgan Securities Inc., the predecessor broker-dealer to JPMS. A review of PCS SAs was included in the scope of this investigation. |
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Sales Assistant Registration Policies | |
| 6. | For JPMS’ legacy Private Bank, PWM, and PCS business units, SAs provided administrative and sales support to one or more JPMS brokers. Many SAs, as part of their support function to brokers, directly accepted and entered orders from clients. |
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Private Bank | |
| 7. | SAs for Private Bank were generally not assigned to specific brokers but rather assisted all brokers in the respective offices in which they were located. |
| 8. | Private Bank SAs primarily supported one or more brokers in all facets of the daily business of Private Bank, including contacting clients, maintaining accounts, and accepting client orders. |
| 9. | Notably, all Private Bank SAs authorized to accept orders must comply with a 50 state registration policy, and compliance with this policy was confirmed prior to granting access to the order entry system. |
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Private Wealth Management | |
| 10. | Like Private Bank SAs, PWM SAs were generally not assigned to specific brokers but rather assisted all brokers in the respective offices in which they were located. |
| 11. | PWM SAs primarily supported one or more brokers in all facets of the daily business of PWM, including client support, maintaining accounts, and accepting client orders. |
| 12. | From 2006 through 2008, JPMS’ PWM endeavored to register SAs that were authorized to accept client orders in the same states as the broker(s) they supported, but PWM SAs were generally not registered in all 50 states. |
| 13. | In 2009, PWM adopted Private Bank’s 50 state registration policy for all SAs who were authorized to accept client orders. |
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Private Client Services | |
| 14. | Unlike SAs for Private Bank and PWM, SAs for PCS were generally assigned to support specific brokers. |
| 15. | The primary role of PCS’ SAs was to support one or more brokers in all facets of the daily business of PCS, including extensive client contacts, reviewing account activity, and accepting orders from clients. |
| 16. | PCS policies required PCS SAs who were authorized to accept client orders to be registered in the same state as the broker(s) they supported, but PCS SAs were generally not registered in all 50 states. The multi-state investigation revealed that, in some instances, there were PCS SAs that were authorized to accept client orders but not registered in the same state as the broker(s) they supported. |
|
Unlicensed Sales Assistants | |
| 17. | Consistent with Private Bank’s 50 state registration policy, the multi-state investigation did not find that Private Bank SAs accepted orders without appropriate state registrations. |
| 18. | However, the multi-state investigation concluded that certain SAs for PWM and PCS accepted unsolicited orders at times when the SAs were not appropriately registered in Connecticut. |
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Failure to Comply With Books and Records Requirements | |
| 19. | At all relevant times, Private Bank has utilized an order entry system called TOPAZ. |
| 20. | Prior to October of 2008, PWM utilized an order entry system called Streetscape. In connection with each order, Streetscape recorded, among other information, the identity of the person who accepted the order from the client. In October of 2008, PWM transferred from Streetscape to TOPAZ. |
| 21. | Prior to February of 2011, TOPAZ did not specifically record the identity of the order acceptor (as distinct from the order enterer) and JPMS did not in all instances maintain a separate record to identify the order acceptor for equity or mutual fund trades. Furthermore, prior to June of 2011, TOPAZ did not specifically record the identity of the order acceptor (as distinct from the order enterer) and JPMS did not in all instances maintain a separate record to identify the order acceptor for fixed income and structured product trades. |
| 22. | Section 36b-14(a)(2) of the Act requires every registered broker-dealer to make, keep and preserve books and records required by the Securities and Exchange Commission. To that end, a registered broker-dealer is required to comply with SEC Rule 17a-3(a)(6)(i) which requires each broker-dealer to make and maintain a memorandum of each brokerage order. In addition to other information, this memorandum is required to show the identity of any person, other than the employee responsible for the account, who accepted a client order. The memorandum need not show the identity of any person, other than the agent responsible for the account, who entered or accepted the order if the order is entered into an electronic system that generates the memorandum and if that system is not capable of receiving an entry of the identity of any person other than the responsible agent; in that circumstance, the dealer shall maintain a separate record that identifies each other person. |
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Remedial Efforts | |
| 23. | JPMS has implemented a number of enhancements in its legacy PCS division since this investigation began, including implementing a new trading system with additional blocking mechanisms and the ability to confirm the registration status of order acceptors. |
| 24. | JPMS has further enhanced its registration, compliance training, and written compliance policies. |
| 25. | As a result of the multi-state investigation, JPMS updated the TOPAZ system to record the identity of the order acceptor in the electronic order system. |
| 26. | JPMS provided substantial cooperation in connection with this regulatory investigation. |
V. CONCLUSIONS OF LAW
| 1. |
The Commissioner has jurisdiction over this matter pursuant to the Act. |
| 2. |
JPMS’ failure to establish an adequate supervisory system to monitor the registration status of persons accepting client orders constituted a violation of Section 36b-31-6f(b) of the Regulations under the Act which requires each registered broker-dealer to establish, enforce and maintain a system for supervising the activities of its agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations. |
| 3. | JPMS’ failure to ensure that its SAs were registered in accordance with JPMS’ written procedures constituted a failure to enforce established written procedures and therefore contravened Section 36b-31-6f(b) of the Regulations. |
| 4. | JPMS’ acceptance of orders in Connecticut through SAs who were not properly registered in Connecticut constituted a violation of Section 36b-6(b) of the Act. |
| 5. | JPMS’ failure, in certain instances, to record the identity of the person accepting client orders entered through the TOPAZ system until June of 2011 contravened Section 36b-14(a)(2) of the Act. |
| 6. | Pursuant to Section 36b-27(d) and Sections 36b-15(a)(1) and 36b-15(a)(2)(K) of the Act, the violations described above constitute a basis for the imposition of administrative remedies against JPMS. |
| 7. | The Commissioner finds the following relief appropriate and in the public interest. |
VI. CONSENT ORDER
On the basis of the Findings of Fact, Conclusions of Law, and JPMS’ consent to the entry of this Consent Order,
IT IS HEREBY ORDERED THAT:
| 1. |
This Consent Order concludes the investigation by the Commissioner and any other action that the Commissioner could commence under the Act and the Regulations as it relates to unregistered activity in Connecticut by JPMS’ SAs and JPMS’ supervision of SAs’ registration status during the period from January 1, 2004 through December 31, 2011. |
| 2. |
This Consent Order is entered into solely for the purpose of resolving the above referenced multi-state investigation, and is not intended to be used for any other purpose. |
| 3. |
For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against JPMS, nor does it limit or create liability of JPMS, or limit or create defenses of JPMS, to any claims. |
| 4. |
Within ten (10) days after the entry of this Consent Order by the Commissioner, JPMS shall remit by bank check payable to “Treasurer, State of Connecticut” the total sum of Fifty Three Thousand Eight Hundred Dollars ($53,800) as an administrative fine. |
| 5. |
This Consent Order is not intended by the Commissioner to subject any Covered Person (as defined below) to any disqualifications under the laws of the United States, any state, the District of Columbia, Puerto Rico, or the U.S. Virgin Islands, or under the rules or regulations of any securities or commodities regulator or self-regulatory organization, including, without limitation, any disqualification from relying upon state or federal registration exemptions or safe harbor provisions. “Covered Person” means JPMS or any of its affiliates and their current or former officers, directors, employees, or other persons that could otherwise be disqualified as a result of the State Orders (as defined below). |
| 6. |
This Consent Order and the order of any other State in any proceeding related to JPMS’ agreement to resolve the above referenced multi-state investigation (collectively, the “State Orders”) shall not disqualify any Covered Person, as defined in paragraph 5. above, from any business that they otherwise are qualified, licensed or permitted to perform under applicable securities laws or regulations of Connecticut and any disqualifications from relying upon this state’s registration exemptions or safe harbor provisions that arise from the State Orders are hereby waived. |
| 7. | This Consent Order shall be binding upon JPMS and its successors and assigns as well as the successors and assigns of relevant affiliates with respect to the conduct subject to the provisions above and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events, and conditions. |
NOW THEREFORE, the Commissioner enters the following:
| 1. | The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered; |
| 2. | Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against JPMS based upon a violation of this Consent Order or based upon the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed; and |
| 3. | This Consent Order shall become final when entered. |
| So ordered at Hartford, Connecticut, | _______/s/__________ | |
| this 25th day of June 2014. | Howard F. Pitkin | |
| Banking Commissioner |
CONSENT TO ENTRY OF ORDER
I, Jeffrey Lipman, state on behalf of J.P. Morgan Securities LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of J.P. Morgan Securities LLC; that J.P. Morgan Securities LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that J.P. Morgan Securities LLC voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. J.P. Morgan Securities LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that J.P. Morgan Securities LLC shall pay pursuant to this Consent Order.
| J.P. Morgan Securities LLC | |
| By | _____ /s/_______________ |
| Jeffrey Lipman | |
| Senior Vice President |
On this 12 day of June 2014, personally appeared Jeffrey Lipman, signer of the foregoing Consent Order, who, being duly sworn, did acknowledge to me that he was authorized to execute the same on behalf of J.P. Morgan Securities LLC, a limited liability company, and acknowledged the same to be his free act and deed, before me.
______/s/_________________________
Notary Public
My Commission Expires: April 11, 2017
Administrative Orders and Settlements