By Eric Peters, Spring 2018 IAC Student Intern
In December 2017, the Financial Industry Regulatory Authority (FINRA) announced that J.P. Morgan had been fined $2.8 million for violating the SEC’s Customer Protection Rule and for supervisory failures taking place from March 2008 to June 2016. The Customer Protection Rule is intended to safeguard customers’ cash and securities so that they can be promptly returned should the broker-dealer become insolvent. The rule requires firms to segregate customer securities and restricts them from using these segregated securities for their own purposes.
J.P. Morgan allegedly failed to ensure that reasonable processes were in place for their possession and control systems. These process failures included systemic coding and design flaws, recurring and unresolved deficits, and unreasonable supervision. As a result of this violation, J.P. Morgan allegedly created deficits in foreign and domestic securities valued at hundreds of millions of dollars. In one instance, the firm’s failure to segregate securities involving Italian securities resulted in a deficit of $146 million, comprised of 81 Italian securities.
The Customer Protection Rule establishes crucial safeguards for investors, ensuring that their securities are well-maintained. It is important that firms maintain reasonably designed and maintained systems and procedures to comply with the SEC’s possession and control requirements. J.P. Morgan is cooperating with officials by undertaking a plan to address the violations and to over-reserve cash deposits in an effort to improve the protection of its customers from the firm’s failure to properly segregate its customers’ securities. Without admitting or denying the findings, J.P. Morgan has consented to the entry of FINRA’s findings and is working to improve its processes.