JP Morgan Securities Hit with $2.18 Million Penalty Over Preferred Stock Flipping

Key Takeaways

• FINRA Settlement: J.P. Morgan Securities will pay $2.18 million in total penalties, including a $350,000 fine, $157,505 in restitution, and $1.67 million in disgorgement.
• Suitability Failures: At least 15 representatives recommended short-term trades of syndicate preferred stocks, often leading to customer losses while generating sales concessions and commissions for the firm.
• Supervisory Lapses: FINRA found that the firm lacked product-specific oversight and failed to detect or respond to patterns of short-term trading, violating Rules 3110 and 2010.
• Systemic Gaps: Surveillance tools focused on account-level alerts and overlooked product-specific risks, allowing unsuitable trades to go unflagged.
• Corrective Measures: JPMS has since updated its written procedures and implemented a new trade review process specific to syndicate preferred stock activity.

Deep Dive

J.P. Morgan Securities has agreed to pay more than $2.18 million to settle charges that it let a pattern of unsuitable short-term trades go unchecked, leaving retail clients with losses while the firm and its representatives raked in fees.

According to FINRA, at least 15 representatives or teams at the firm recommended customers buy into syndicate preferred stocks (securities typically meant for long-term income) and then pushed them to sell within 180 days. The practice netted the firm approximately $1.67 million in concessions and another $157,000 in commissions. But for the customers, it often meant losses, even after accounting for dividends.

What made this especially concerning was that J.P. Morgan Securities was part of the syndicate selling these products. So when its reps placed these trades, the firm got paid upfront by the issuer. When the customers sold, more fees followed. The incentive to churn was baked in and the systems designed to catch such behavior weren’t built to flag it.

FINRA found that from 2017 to the end of 2018, the firm lacked a supervisory system reasonably designed to detect and prevent this type of short-term trading in syndicate preferred stocks. The firm had general alerts in place, things like turnover rates or cost-to-equity thresholds, but nothing product-specific. In most cases, problematic trading activity slipped through the cracks.

In one instance, a single representative recommended over 150 purchases of syndicate preferred stock, then advised clients to sell for a loss in under six months. Some of those trades lasted less than 30 days. None of it was flagged.

Even when alerts were triggered, the firm didn’t consider patterns of short-term trading in its review. As FINRA put it, JPMS failed to maintain a system reasonably designed to comply with its obligation under FINRA Rule 2111, which requires that recommendations be suitable for the customer.

This is not the first time the firm has faced consequences over supervisory gaps. In 2020, it was fined $325,000 and ordered to pay more than $333,000 in restitution over failures tied to volatility-linked exchange-traded products.

In this latest case, JPMS agreed to a censure, the financial penalties, and restitution to affected clients without admitting or denying FINRA’s findings. It has since revamped its procedures and introduced new product-specific trade review processes to monitor short-term trading in syndicate preferred stocks.

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