SFC reprimands and fines two JP Morgan entities HK$5.6 million for regulatory breaches
The Securities and Futures Commission (SFC) has reprimanded J.P. Morgan Securities (Asia Pacific) Limited (JPMSAP) and JPMorgan Chase Bank, National Association (JPMCB), and fined them $3 million and $2.6 million respectively for regulatory breaches including disclosure failures in research reports and offering offshore listed index options without the required licences (Notes 1 & 2).
The SFC’s investigations into the conduct of JPMSAP and JPMCB found the following breaches:
Disclosure of financial interests and market making activities in research reports
- JPMSAP failed to disclose JP Morgan’s financial interests in respect of certain listed issuers covered in its research reports. The failure was caused by deficiencies in JP Morgan’s global securities position reporting system which failed to include stock borrow and options positions in the calculation of positions in relevant securities. The deficiencies were first identified by JP Morgan in the US in October 2013 and brought to JPMSAP’s attention in January 2014. During the sample year 2013, JPMSAP was required to disclose its financial interests of more than 1% in four listed issuers in 33 research reports, but it failed to do so in 30 of these reports (Note 3).
- JPMSAP failed to put in place adequate systems and controls to ensure compliance with the disclosure of financial interests requirements under the Code of Conduct.
- JPMSAP failed to make clear, concise and specific disclosure in the research reports where JP Morgan is a market maker. Instead of clearly specifying whether JP Morgan made a market in the relevant securities, JPMSAP simply included a standard disclosure clause referring investors to the HKEX website to check if JP Morgan was a liquidity provider or market maker for the securities covered (Note 4).
Offering of offshore index options without Type 2 and/or Type 5 registration
- Between 1 April 2003 and 22 July 2015, JPMCB offered certain offshore listed index options to its clients without a Type 2 (dealing in futures contracts) and/or Type 5 (advising on futures contracts) registration (Note 5).
Delay in reporting breaches to the SFC
- JPMSAP and JPMCB did not report the breaches or suspected breaches to the SFC in a timely manner as required under the Code of Conduct. In both instances, JP Morgan self-reported the breaches to the SFC around five months after discovery of the breaches (Note 6).
In determining this disciplinary action, the SFC took into account that:
- JPMSAP and JPMCB co-operated with the SFC in resolving the SFC’s concerns;
- JP Morgan has taken remedial measures to rectify the deficiencies in its securities position reporting system; and
- JPMCB has stopped offering offshore listed index options to clients.