FINRA Sanctions JP Morgan For Failure To Supervise
JP Morgan Securities LLC a securities broker dealer headquartered in New York City New York has been censured and fined $325,000.00 by Financial Industry Regulatory Authority (FINRA) based upon findings that JP Morgan Securities did not supervise sales of volatility-linked exchange traded products to make sure that stockbrokers and its customers knew about the risks pertaining to those investments. Letter of Acceptance Waiver and Consent No. 2018057508101 (June 22, 2020).
According to the AWC, between January 1, 2014 and May 24, 2016, JP Morgan Securities had offered volatility-linked exchange traded products which tracked or held investments in VIX futures, providing investors exposure to Chicago Board Options Exchange Volatility Index.
The AWC indicated that a volatility exchange traded product’s exposure to VIX depends on VIX futures being rolled over prior to the expiration of the contract. Products containing earlier maturities can be sold for products with longer maturities. The difference between the proceeds obtained from selling the position and the costs of purchasing the new position – called the roll yield – is negative when a contract which is expiring is rolled into a more expensive contract. FINRA indicated that volatility exchange traded products that are held for a long period of time can sustain losses in value when the roll yield is negative.
The AWC stated that at least one JP Morgan business failed to impose restrictions on volatility exchange traded product sales. In these cases, the stockbrokers solicited customers’ purchases of VXX as well as other volatility exchange traded products. The AWC stated that some of JP Morgan’s businesses depended on a process whereby its stockbrokers would be notified if a committee approved a product and added it to a list of products which could be solicited by stockbrokers. VXX was authorized by JP Morgan businesses to be solicited for certain non-brokerage accounts.
The AWC stated that in 2015, VXX was approved by the securities broker dealer’s committee for other brokerage accounts only to be removed following a FINRA inquiry. FINRA noted that by the time that VXX was removed from its approved products list, customers who did not have intentions of investing on a short-term basis were positioned VXX by JP Morgan Securities stockbrokers and held those positions for extended periods.
According to the AWC, a supervision system and written supervisory procedures had not been created and implemented by JP Morgan with a view towards ensuring the suitability of stockbrokers’ solicitations and sales of volatility-index exchange traded products. FINRA stated that JP Morgan Securities knew about risks pertaining to VXX back in 2010. Its committee was made aware that VXX risks included a negative roll yield employed by holding the investment for a longer time period.
FINRA also indicated that JP Morgan Securities removed the products from its approved list for certain accounts given suitability concerns. It later permitted sales without any adequate methods for supervising the products to make sure stockbrokers and customers were aware of the risks including the loss of value of products due to extended holdings periods. There was no specific training provided by JP Morgan personnel in regard to the risks of volatility exchange traded products. Management personnel had not been provided with guidance on how to review transactions for suitability or otherwise monitor sales of those products that were initiated by its stockbrokers.
FINRA stated that customers who did not have aggressive objectives for investing or high risk tolerances had been solicited by stockbrokers to purchase volatility exchange traded products and had sustained losses because of holding those products for extended periods.
FINRA determined that JP Morgan Securities violated FINRA Rules 2010 and 3110(a) as well as National Association of Securities Dealers (NASD) Rule 3010(a).