JPMorgan Received Asset Management Conflicts Warning from OCC in 2012

According to a source with direct knowledge about the Office of Comptroller of the Currency’s findings, the agency had already warned JPMorgan Chase (JPM) last year that the investment bank had erred when it directed clients toward its in-house investment products.

OCC examiners found that in late 2011 JPMorgan had not complied with restrictions placed on in-house financial products sales, as well as fulfill its duties to retirement plan investors under ERISA (the Employee Retirement Income Security Act). Following these discoveries, the agencies ordered JPMorgan to pay back fees to customers.

While the issues highlighted by the OCC more than likely won’t pose much of a problem to JPMorgan—typically the US Department Of Labor resolves such violations by ordering restitution and in a confidential manner—the alleged infractions do point to what could become a problem of regulatory tension between federal regulators and JPMorgan, as the former group seeks to put to rest criticism that its poor oversight played a role in allowing the financial crisis of 2008 to happen. Now, since Thomas Curry took over as Comptroller of the Currency, OCC appears to have made it a priority to monitor the growing risks that can arise via routine bank functions, as well as from activities that could lead to “operational risks.”

JPMorgan Chase’s assets under management that are found in its proprietary mutual funds reached $223 billion at the start of 2013, which a significant rise from $96 billion in 2009. All assets under the bank’s purview, including retirement plans, alternate assets, and funds, have been growing for 16 quarters in a row.

Also during 2013’s first quarter, a $31 billion gain allowed JPMorgan’s client assets to hit $2.1 trillion. Unlike other asset managers, the bank conducts securities underwriting, commercial banking, and money management on such a big scale and in such an interlinked fashion that, per guidelines in the OCC’s exam handbook, such actions merit more regulatory examination.

Regulators & ERISA Assets
Because ERISA assets are some of the most legally protected, there is a greater chance that regulators will pay attention to them. That said, Section 406(b) of ERISA obligates retirement fund fiduciaries to always place clients’ interest first.

As OCC doesn’t directly supervise ERISA, its perspective is via supervising banks’ winder duties to make sure operations are performed in a way that decreases operational risks, as well as reputational and legal harm. Although monitoring ERISA compliance has long been part of OCC’s examination wheelhouse, some observers are finding that the agency’s current concentration on both the Act and how banks sell proprietary investment instruments is an add-on previous monitoring practices.

The Securities and Exchange Commission is also looking at JPMorgan and its proprietary products sales. While it is not known at this time whether the agency’s inquiries will result in formal action, a number of ex-JPMorgan Chase financial advisers already have sued or filed arbitration claims accusing the bank of pressuring them to place client assets in in-house products. The financial firm denies the securities’ cases allegations.

Meantime, according to Reuters last year, the Labor Department too has been examining JPMorgan. The DOL is looking at the firm’s purchases for 401(k) plan stable value funds under its management of $1.7 million in mortgage debt that it underwrote before the real estate crisis. Already, investors have filed securities cases alleging wrongdoing that, once again, the bank denies.

Office of Comptroller of the Currency

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Texas Judge Throws Out Verizon Retirees’ Class Action Lawsuit Over $8.4B Pension Sales to Prudential, Stockbroker Fraud Blog, July 9, 2013

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