© 2020 Arizent. All rights reserved.

FINRA hits J.P. Morgan Securities with $2.8M fine over custody failures

Register now

FINRA has slammed J.P. Morgan Securities with a $2.8 million fine for violating an SEC rule designed to protect customers' funds and securities.

The rule requires broker-dealers that maintain custody of customer securities to obtain and maintain physical possession or control over certain of those securities, a requirement that J.P. Morgan did not comply with, according to FINRA.
The firm failed to segregate or "lock up" customers' fully paid and excess margin securities in good control locations separate from its own assets, FINRA alleged in its settlement with the firm.

FINRA faulted J.P. Morgan for not having reasonable processes in place to ensure that its possession or control systems were operating properly.

"Shares that should have been segregated were available for the firm's use due to systemic coding and design flaws, recurring and unresolved deficits and unreasonable supervision," FINRA said.

As a result of the violations, J.P. Morgan created deficits in foreign and domestic securities valued at hundreds of millions of dollars, according to FINRA. In one instance, the firm allegedly failed to move Italian securities to a good control location for nearly two years, creating a deficit in 81 Italian securities worth some $146 million on one sample day.

The regulator also chided the firm for not having a reasonable supervisory system in place to ensure compliance with the customer protection rule.

"Firms have a fundamental responsibility to safeguard the securities of their customers," Susan Schroeder, executive vice president of FINRA's Enforcement Department, said in a statement.

The lapses, which occurred from March 2008 through June 2016, stemmed from flawed legacy systems that J.P. Morgan inherited from Bear Stearns, according to FINRA.

J.P. Morgan agreed to the $2.8 million fine and a censure without admitting or denying the charges against it.

In settling, FINRA considered J.P. Morgan's cooperation, noting that the firm voluntarily over-reserved cash deposits to protect customers from its failed segregation of securities.

“We’re pleased FINRA recognized our extraordinary cooperation to resolve the matter," Brian Marchiony, a J.P. Morgan spokesman, said in an email. "After a thorough review, we enhanced our controls, upgraded our systems and there were no findings that any client accounts were harmed.”

For reprint and licensing requests for this article, click here.