The Financial Industry Regulatory Authority (FINRA) has named a new Large-Firm Governor - Stephen M. Cutler, Vice Chairman of JPMorgan Chase & Co. - to its Board of Governors. Cutler was appointed to complete the term of former Governor Gregory Fleming, who resigned his board seat earlier this year.  

Cutler joined JPMorgan as its General Counsel in 2007 from the law firm of WilmerHale in Washington, D.C., where he was a partner and co-chair of the firm's Securities Department. Prior to that, he was the director of the U.S. Securities and Exchange Commission's Enforcement Division. Before joining the SEC in 1999, he was a partner at Wilmer, Cutler & Pickering, where he worked for 11 years. 

Cutler obtained his bachelor's degree summa cum laude from Yale and his J.D. from Yale Law School, where he was an editor of the Yale Law Journal. 

"Steve brings a valuable perspective and a keen understanding of securities regulation and the industry to FINRA's Board," said FINRA Chairman Jack Brennan. "We welcome Steve and look forward to working with him."  

"FINRA will benefit from Steve's depth of industry and regulatory knowledge in advancing our mission of protecting investors and ensuring the integrity of our markets," said Robert Cook, FINRA's President and Chief Executive Officer. "We are very fortunate to have Steve join the FINRA Board." . . .

Stephen M. Cutler, Executive Vice President and Vice Chairman of JPMorgan Chase & Co. 

Mr. Cutler joined the company in 2007 and served as its General Counsel for nearly nine years. Previously, he was a partner at Wilmer Cutler Pickering Hale and Dorr LLP in Washington, D.C., and co-chair of the firm's Securities Department. From 2001 to 2005, Mr. Cutler served as Director of the Securities and Exchange Commission's Division of Enforcement, where he oversaw the Commission's investigations of Enron and WorldCom, as well as those involving NYSE specialists, research analyst conflicts and mutual fund market timing and revenue sharing. Before joining the SEC as Deputy Director of Enforcement in 1999, Mr. Cutler was a partner at Wilmer Cutler & Pickering in Washington, D.C. Mr. Cutler is a 1985 graduate of Yale Law School, where he served as an editor of the Yale Law Journal, and a 1982 graduate (summa cum laude) of Yale University. He is on the boards of the Legal Action Center, the National Women's Law Center and the Metropolitan Museum of Art, and for the last two years, has served as a Visiting Lecturer and co-taught a course at Yale Law School.

J.P. Morgan to Pay $267 Million for Disclosure Failures (SEC Press Release / December 18, 2015)

https://www.sec.gov/news/pressrelease/2015-283.html

The Securities and Exchange Commission today announced that two J.P. Morgan wealth management subsidiaries have agreed to pay $267 million and admit wrongdoing to settle charges that they failed to disclose conflicts of interest to clients.

An SEC investigation found that the firm's investment advisory business J.P. Morgan Securities LLC (JPMS) and nationally chartered bank JPMorgan Chase Bank N.A. (JPMCB) preferred to invest clients in the firm's own proprietary investment products without properly disclosing this preference.  This preference impacted two fundamental aspects of money management - asset allocation and the selection of fund managers - and deprived JPMorgan's clients of information they needed to make fully informed investment decisions.

In a parallel action, JPMorgan Chase Bank agreed to pay an additional $40 million penalty to the U.S. Commodity Futures Trading Commission (CFTC).. .

SEC: J.P. Morgan Misled Customers on Broker Compensation (SEC Press Release / January 6, 2016)

https://www.sec.gov/news/pressrelease/2016-1.html

The Securities and Exchange Commission today announced that J.P. Morgan's brokerage business agreed to pay $4 million to settle charges that it falsely stated on its private banking website and in marketing materials that advisors are compensated "based on our clients' performance; no one is paid on commission."

An SEC investigation found that although J.P. Morgan Securities LLC (JPMS) did not pay commissions to registered representatives in its U.S. Private Bank, compensation was not based on client performance.  Advisors were instead paid a salary and a discretionary bonus based on a number of other factors. . . 

JPMorgan Chase Paying $264 Million to Settle FCPA Charges (SEC Press Release / November 17, 2016)
https://www.sec.gov/news/pressrelease/2016-241.html

The Securities and Exchange Commission today announced that JPMorgan Chase & Co. has agreed to pay more than $130 million to settle SEC charges that it won business from clients and corruptly influenced government officials in the Asia-Pacific region by giving jobs and internships to their relatives and friends in violation of the Foreign Corrupt Practices Act (FCPA).

JPMorgan also is expected to pay $72 million to the Justice Department and $61.9 million to the Federal Reserve Board of Governors for a total of more than $264 million in sanctions resulting from the firm's referral hiring practices.

According to an SEC order issued today, investment bankers at JPMorgan's subsidiary in Asia created a client referral hiring program that bypassed the firm's normal hiring process and rewarded job candidates referred by client executives and influential government officials with well-paying, career-building JPMorgan employment.  During a seven-year period, JPMorgan hired approximately 100 interns and full-time employees at the request of foreign government officials, enabling the firm to win or retain business resulting in more than $100 million in revenues to JPMorgan. . .

Manhattan U.S. Attorney Settles Lending Discrimination Suit Against JPMorgan Chase For $53 Million / Settlement Includes Admissions by the Bank and Provides Compensation for Borrowers Harmed by the Discriminatory Lending Practices (DOJ Press Release / January 20, 2017)
https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-settles-lending-discrimination-suit-against-jpmorgan-chase-53

The government's data model projects that, from at least 2006 through late 2009, certain of the approximately 106,000 African-American and Hispanic borrowers who obtained loans through independent mortgage brokers participating in Chase's wholesale channel paid higher rates and fees on "wholesale" home mortgage loans compared to the rates and fees paid by similarly situated white borrowers who obtained loans through independent mortgage brokers participating in Chase's wholesale channel. It projects that in thousands of instances, an African-American borrower entering into the same type of Chase wholesale mortgage as a white borrower paid higher loan rates and larger fees than such white borrower. Similarly, it projects that in thousands of instances, a Hispanic borrower entering into the same type of Chase wholesale mortgage as a white borrower paid higher loan rates and larger fees than such white borrower.

As the January 24, 2017, Blog's opening paragraph presciently warned:

You might want to call it an existential challenge. The Financial Industry Regulatory Authority has to make up its mind. Will it treat its smaller member firms the same as its larger ones? Will the self-regulator perpetuate its seemingly disparate reaction to the transgressions of its financial superstore member firms versus those of individual men and women stockbrokers? With new Chief Executive Officer Robert Cook, FINRA has a chance to hit the re-set button. One size fits all regulation is a bust. It's time to restore the partnership between the regulator and the regulated. Perhaps the first step in fixing the broken machinery of self regulation begins with an enlightened assessment of the issues presented in today's BrokeAndBroker.com Blog.

After I criticized what I viewed as the disparate, overly-favorable treatment afforded by FINRA to its large member firm JPM, I offered in part this observation:

Disparate FINRA Regulation?

FINRA carried the banner for non-FINRA-member-firm J.P. Morgan Chase Bank and its FINRA-member-firm subsidiary J.P. Morgan Institutional Investments when it investigated DeBow and fined him $10,000 and suspended him for 18 months. Recall that no act technically took place at any J.P. Morgan FINRA member firm because the checks were all written against the non-member bank's account. If you read the AWC, it says that he was discharged by FINRA member firm J.P. Morgan Institutional Investments for "VIOLATION OF PARENT COMPANY'S CODE OF CONDUCT."  Note the reference to the non-FINRA member firm parent company's Code of Conduct.

Given that FINRA seemed comfortable acting as a collection agency or keeper-of-the-flame when it pounced on DeBow, what then should FINRA do now that it is confronted with the DOJ settlement involving J.P. Morgan Chase Bank, an intertwined affiliate of at least a couple of J.P. Morgan FINRA member firms? 

For starters, FINRA should investigate the extent to which all those banking and affiliate entanglements may have involved customers of its member firms. Armed with that information and guided by its actions against DeBow, FINRA should consider fining any member firm and suspending its senior brokerage staff for looking the other way, facilitating any referrals of minority mortgage clients, and feeding the fires of that marketing machinery that may have contributed to racial discrimination. I mean, after all, there is a $53 million civil-rights-lawsuit settlement with DOJ by J.P. Morgan Chase Bank, N.A. involving 106,000 minority victims of improper mortgage practices.

FINRA Board of Governors

I just checked and noticed that the current list of FINRA's Board of Governors includes Stephen M. Cutler of JPMorgan Chase & Co. If it turns out that his firm or its affiliates engaged in discrimination, maybe FINRA should remove Mr. Cutler from its Board and impose an 18-month ban on future Board service by JPMorgan representatives.

[B]etween approximately March 2008 and August 2016, numerous traders and sales personnel on JPMorgan's precious metals desk located in New York, London, and Singapore engaged in a scheme to defraud in connection with the purchase and sale of gold, silver, platinum, and palladium futures contracts (collectively, precious metals futures contracts) that traded on the New York Mercantile Exchange Inc. and Commodity Exchange Inc., which are commodities exchanges operated by the CME Group Inc.  In tens of thousands of instances, traders on the precious metals desk placed orders to buy and sell precious metals futures contracts with the intent to cancel those orders before execution, including in an attempt to profit by deceiving other market participants through injecting false and misleading information concerning the existence of genuine supply and demand for precious metals futures contracts. In addition, on certain occasions, traders on the precious metals desk engaged in trading activity that was intended to deliberately trigger or defend barrier options held by JPMorgan and thereby avoid losses.

One of the traders on the precious metals desk, John Edmonds, 38, of Brooklyn, New York, pleaded guilty on Oct. 9, 2018, to one count of commodities fraud and one count of conspiracy to commit wire fraud, commodities fraud, commodities price manipulation, and spoofing, and his sentencing, at this time, has not been scheduled before U.S. District Judge Robert N. Chatigny of the District of Connecticut. Another one of the traders on the precious metals desk, Christian Trunz, 35, of New York, New York, pleaded guilty on Aug. 20, 2019, to one count of conspiracy to engage in spoofing and one count of spoofing in connection with his precious metals futures contracts trading at JPMorgan and another financial services firm, and his sentencing is scheduled for Jan. 28, 2021, before U.S. District Judge Sterling Johnson of the Eastern District of New York. 

Finally, as part of the investigation, the department obtained a superseding indictment on Nov. 15, 2019 against three former JPMorgan traders, Gregg Smith, Michael Nowak, and Christopher Jordan, and one former salesperson, Jeffrey Ruffo, in the Northern District of Illinois that charged them for their alleged participation in a racketeering conspiracy and other federal crimes in connection with the manipulation of the precious metals futures contracts markets.  An indictment is merely an allegation and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

Also according to admissions and court documents, between approximately April 2008 and January 2016, traders on JPMorgan's U.S. Treasuries desk located in New York and London engaged in a scheme to defraud in connection with the purchase and sale of U.S. Treasury futures contracts that traded on the Chicago Board of Trade, which is a commodities exchange operated by the CME Group Inc., and of U.S. Treasury notes and bonds traded in the secondary cash market (the U.S. Treasury futures, notes, and bonds, collectively, U.S. Treasury Products).  In thousands of instances, traders on the U.S. Treasuries desk placed orders to buy and sell U.S. Treasury Products with the intent to cancel those orders before execution, including in an attempt to profit by deceiving other market participants through injecting false and misleading information concerning the existence of genuine supply and demand for U.S. Treasury Products.

As part of the DPA, JPMorgan, and its subsidiaries JPMorgan Chase Bank, N.A. (JPMC) and J.P. Morgan Securities LLC (JPMS) have agreed to, among other things, continue to cooperate with the Fraud Section and the U.S. Attorney's Office for the District of Connecticut in any ongoing or future investigations and prosecutions concerning JPMorgan, JPMC, JPMS, and their subsidiaries and affiliates, and their officers, directors, employees and agents.  As part of its cooperation,  JPMorgan, JPMC, and JPMS are required to report evidence or allegations of conduct which may constitute a violation of the wire fraud statute, the anti-fraud, anti-spoofing and/or anti-manipulation provisions of the Commodity Exchange Act, the securities and commodities fraud statute, and federal securities laws prohibiting manipulative and deceptive devices.  In addition, JPMorgan, JPMC, and JPMS have also agreed to enhance their compliance program where necessary and appropriate, and to report to the government regarding remediation and implementation of their enhanced compliance program.

The department reached this resolution with JPMorgan based on a number of factors, including the nature and seriousness of the offense conduct, which spanned eight years and involved tens of thousands of instances of unlawful trading activity; JPMorgan's failure to fully and voluntarily self disclose the offense conduct to the department; JPMorgan's prior criminal history, including a guilty plea on May 20, 2015, for similar misconduct involving manipulative and deceptive trading practices in the foreign currency exchange spot market (FX Guilty Plea); and the fact that substantially all of the offense conduct occurred prior to the FX Guilty Plea. 

JPMorgan received credit for its cooperation with the department's investigation and for the remedial measures taken by JPMorgan, JPMC, and JPMS, including suspending and ultimately terminating individuals involved in the offense conduct, adopting heightened internal controls, and substantially increasing the resources devoted to compliance.  Significantly, since the time of the offense conduct, and following the FX Guilty Plea, JPMorgan, JPMC, and JPMS engaged in a systematic effort to reassess and enhance their market conduct compliance program and internal controls.  These enhancements included hiring hundreds of new compliance officers, improving their anti-fraud and manipulation training and policies, revising their trade and electronic communications surveillance programs, implementing tools and processes to facilitate closer supervision of traders, taking into account employees' commitment to compliance in promotion and compensation decisions, and implementing independent quality assurance testing of non-escalated and escalated surveillance alerts.  Based on JPMorgan's, JPMC's and JPMS' remediation and the state of their compliance program, the department determined that an independent compliance monitor was unnecessary. 

[B]etween April 2015 and January 2016, certain traders on J.P. Morgan Securities' Treasuries trading desk employed manipulative trading strategies involving Treasury cash securities. The order finds that the traders placed bona fide orders to buy or sell a particular Treasury security, while nearly simultaneously placing non-bona fide orders, which the traders did not intend to execute, for the same series of Treasury security on the opposite side of the market. The order finds that the non-bona fide orders were intended to create a false appearance of buy or sell interest, which would induce other market participants to trade against the bona fide orders at prices that were more favorable to J.P. Morgan Securities than J.P. Morgan Securities otherwise would have been able to obtain. According to the order, after the traders secured beneficially priced executions for the bona fide orders, they promptly cancelled the non-bona fide orders.

[F]rom at least 2008 through 2016, JPM, through numerous traders on its precious metals and Treasuries trading desks, including the heads of both desks, placed hundreds of thousands of orders to buy or sell certain gold, silver, platinum, palladium, Treasury note, and Treasury bond futures contracts with the intent to cancel those orders prior to execution. Through these spoof orders, the traders intentionally sent false signals of supply or demand designed to deceive market participants into executing against other orders they wanted filled. According to the order, in many instances, JPM traders acted with the intent to manipulate market prices and ultimately did cause artificial prices.

The order also finds that JPMS, a registered futures commission merchant, failed to identify, investigate, and stop the misconduct. The order states that despite numerous red flags, including internal surveillance alerts, inquiries from CME and the CFTC, and internal allegations of misconduct from a JPM trader, JPMS failed to provide supervision to its employees sufficient to enable JPMS to identify, adequately investigate, and put a stop to the misconduct. 

The order notes that during the early stages of the Division of Enforcement's investigation, JPM responded to certain information requests in a manner that resulted in the Division being misled. The order recognizes, however, JPM's significant cooperation in the later stages of the investigation.

Unfortunately, though, the Order also presents a troubling - and wholly collateral - issue.  Pursuant to rules adopted by the SEC, the findings of our Order will result in the disqualification of Respondents from certain exemptions relating to the registration of securities offerings under Regulations A and D of the SEC's regulations (a "Reg A/D disqualification"). However, the SEC's regulations also provide that such disqualification "shall not apply" if the CFTC "advises in writing" that disqualification "should not arise as a consequence of such order." The Order issued today includes this advice.

Although they may have been well-intentioned, these SEC rules (which were not mandated by statute) have put the CFTC in a difficult position in cases such as this one.  As often happens, the Respondents will not agree to settle the CFTC's enforcement action absent a waiver of the resulting Reg A/D disqualification.  SEC rules provide that the SEC may waive the disqualification upon a showing of good cause, but waiting for such an SEC waiver intolerably subjects the CFTC's enforcement program to the vagaries of when the SEC makes time to consider the Respondents' request.  In order to efficiently perform our responsibility to enforce the CEA and the Commission's regulations, therefore, we decide whether to advise, as set forth in the SEC's rules, that the Reg A/D disqualification provisions of the securities laws should not apply - a decision that is more appropriately one for securities regulators to make.

This is not a new issue; we have wrestled with this conundrum several times since we joined the Commission in September 2017 and September 2018.  Indeed, this is not the first time that CFTC Commissioners publicly have raised concerns regarding this issue. We are aware that CFTC and SEC representatives have been seeking a resolution that would permit the CFTC to effectively enforce the CEA and CFTC regulations while allowing the SEC to more appropriately determine whether a Reg A/D disqualification resulting from a CFTC enforcement action should be waived.  We appreciate these efforts and the progress that we understand has been made to date.  But the fact that this case has arisen and yet this issue still has not been resolved prompts us to write together to emphasize the urgency of finding a remedy from the SEC to avoid further hindering the CFTC's enforcement program and consuming valuable time of our Commission.

The CFTC and SEC have an admirable record of cooperative enforcement efforts that - as reflected in the resolution of our respective charges against the Respondents in this case - have served the public interest well.  But the public interest is not being well served by the current circumstances regarding Reg A/D disqualifications created by the SEC's rules.  Resolving this issue must be a top priority.

For eight years, a group of traders at JPMorgan systematically "spoofed" precious metals and Treasury futures markets by entering hundreds of thousands of orders with the intent to cancel them before execution.  The Commission's Order finds that JPMorgan manipulated these markets and failed to diligently supervise its traders.  The scope of misconduct and market harm described in the Order is unparalleled among prior spoofing cases brought by the Commission.  This enforcement action illustrates how vital it is for firms to maintain adequate surveillance systems and promptly investigate red flags.

These egregious violations warrant the historic level of monetary sanctions imposed by the CFTC.  However, it is the responsibility of the SEC, not the CFTC, to determine who is subject to registration requirements for the offer and sale of securities, and whether such misconduct warrants any disqualifications in the securities markets.

Various SEC regulations, including Regulations A and D, exempt companies from the requirement to register securities offerings with the SEC. "Bad actors" found to have committed certain violations of the securities laws are automatically disqualified from claiming such exemptions absent a determination by the SEC to provide a waiver.  SEC regulations also provide for automatic disqualification for certain violations of the Commodity Exchange Act ("CEA").  However, under those SEC regulations, the automatic disqualification does not apply if the CFTC "advises" the SEC that disqualification under Regulations A and D should not arise as a consequence of the CFTC's order.

This SEC-created process has complicated the CFTC's ability to settle its own enforcement cases without resource-intensive litigation.  Respondents in CFTC cases subject to automatic disqualification under the SEC's regulations often do not agree to settle their CFTC cases unless and until either the SEC grants a waiver of the disqualification, or the CFTC "advises" the SEC that the disqualification shall not apply.  In a number of instances, such as this one today, rather than indefinitely delay enforcement of the CEA in anticipation of a potential waiver by the SEC, CFTC enforcement staff will notify SEC staff of the request to waive the bad actor provisions.  Where SEC staff does not object or raise concerns, the Commission will then "advise" the SEC that the disqualification shall not apply.  Essentially, the SEC advises the CFTC on whether the CFTC should advise the SEC that the SEC's regulation shall not apply.  This circular consultation obscures public transparency and accountability and wastes scarce CFTC resources.

More fundamentally, the CFTC's advice on the application of the SEC's regulations has no legal effect.  Congress has not authorized the CFTC-the federal derivatives regulator-to determine whether companies should be required to register securities offerings with the SEC.  Nor did it authorize the SEC to delegate this responsibility to the CFTC.

Accordingly, any advice the CFTC offers about compliance with securities registration requirements is, as the term indicates, purely advisory and has no effect on JPMorgan's qualifications under the securities laws.  For this reason, although I disagree with the proffering of this advice, its inclusion does not affect my overall support of this enforcement action.

As I have said before, the CFTC and the SEC should develop a process in which the SEC exclusively will consider and decide whether a company subject to a CFTC enforcement order should be exempt from registration under the securities laws, within a timeframe that does not unreasonably delay the CFTC's issuance of the order.  I urge my colleagues at the SEC to continue to work with us to speedily resolve this issue.