JPMorgan Securities (JPMS), the banking giant’s brokerage arm, has been hit with a multimillion-dollar fine over allegations it turned a blind eye to an ex-broker’s risky trading approach.
In a Letter of Acceptance, Waiver and Consent, the Financial Industry Regulatory Authority (FINRA) accuses JPMS of failing to provide reasonable supervision of a former broker who recommended an unsound investment strategy to clients between January 2016 and April 2020.
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FINRA alleges that the broker’s strategy involved taking large concentrated positions in high-yield securities using leverage. In trading, using leverage involves borrowing capital from a broker or exchange to buy larger positions with a smaller investment. While it could magnify returns, it could also magnify losses if the market moves against the position.
According to FINRA, customers who followed the broker’s recommendation lost money between March and April 2020 as market volatility spiked due to the pandemic. The regulator says JPMS clients began receiving margin calls as their leveraged positions fell in value. The clients were then forced to liquidate a significant portion of their holdings and suffered steep losses.
Says FINRA,
“The Company failed to take reasonable action in response to red flags relating to the Representative’s trading activity and use of discretion without written consent identified during the relevant period. JPMS has therefore violated FIN RA Rules 3110(a) and 2010. JPMS is censured and fined $3,250,000.”
JPMS agreed to the terms of the letter without admitting or denying FINRA’s allegations.
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