Hong Kong's Securities And Futures Commission 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.

Notes:

1. JPMSAP is a registered institution under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 7 (providing automated trading services) regulated activities.
2. JPMCB is a registered institution under the SFO to carry on business in Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
3. Paragraph 16.5(a) of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) provides that where a firm has any financial interests in relation to an issuer or a new listing applicant the securities in respect of which are reviewed in a research report, and such interests aggregate to an amount equal to or more than 1% of the issuer’s market capitalization (or the new listing applicant’s issued share capital), the firm should disclose that fact in the research report.
4. Paragraph 16.5(b) of the Code of Conduct requires a firm that makes, or will make, a market in the securities in respect of the issuer or the new listing applicant to disclose that fact in the research report.  Paragraph 16.10(a) of the Code of Conduct requires such disclosure to be clear, concise and specific.
5. During the relevant period, JPMCB offered to its clients offshore listed index options that referenced stock indices.  The SFC considers that the products were futures contracts for the purpose of the SFO.
6. Under paragraph 12.5 of the Code of Conduct, a licensed corporation or registered institution is required to report to the SFC immediately upon the happening of any material breach, infringement of or non-compliance with any rules, laws, regulations and codes administered or issued by the SFC, or where it suspects any such breach, infringement or non-compliance by itself or persons it employs or appoints to conduct business with clients.