{"newsRefNo":"16PR106","lang":"EN","title":"SFC reprimands and fines two JP Morgan entities HK$5.6 million for regulatory breaches","html":"<p>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 &amp; 2).</p>\r\n<p>The SFC&rsquo;s investigations into the conduct of JPMSAP and JPMCB found the following breaches:</p>\r\n<p><span style=\"text-decoration: underline;\">Disclosure of financial interests and market making activities in research reports</span></p>\r\n<ul>\r\n<li>JPMSAP failed to disclose JP Morgan&rsquo;s financial interests in respect of certain listed issuers covered in its research reports. &nbsp;The failure was caused by deficiencies in JP Morgan&rsquo;s global securities position reporting system which failed to include stock borrow and options positions in the calculation of positions in relevant securities. &nbsp;The deficiencies were first identified by JP Morgan in the US in October 2013 and brought to JPMSAP&rsquo;s attention in January 2014. &nbsp;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).</li>\r\n<li>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.</li>\r\n<li>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).</li>\r\n</ul>\r\n<p><span style=\"text-decoration: underline;\">Offering of offshore index options without Type 2 and/or Type 5 registration</span></p>\r\n<ul>\r\n<li>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).</li>\r\n</ul>\r\n<p><span style=\"text-decoration: underline;\">Delay in reporting breaches to the SFC</span></p>\r\n<ul>\r\n<li>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. &nbsp;In both instances, JP Morgan self-reported the breaches to the SFC around five months after discovery of the breaches (Note 6).</li>\r\n</ul>\r\n<p>In determining this disciplinary action, the SFC took into account that:</p>\r\n<ul>\r\n<li>JPMSAP and JPMCB co-operated with the SFC in resolving the SFC&rsquo;s concerns;</li>\r\n<li>JP Morgan has taken remedial measures to rectify the deficiencies in its securities position reporting system; and</li>\r\n<li>JPMCB has stopped offering offshore listed index options to clients.</li>\r\n</ul>\r\n<p>End</p>\r\n<p>Notes:</p>\r\n<ol>\r\n<li>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.</li>\r\n<li>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.</li>\r\n<li>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&rsquo;s market capitalization (or the new listing applicant&rsquo;s issued share capital), the firm should disclose that fact in the research report.</li>\r\n<li>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. &nbsp;Paragraph 16.10(a) of the Code of Conduct requires such disclosure to be clear, concise and specific.</li>\r\n<li>During the relevant period, JPMCB offered to its clients offshore listed index options that referenced stock indices. &nbsp;The SFC considers that the products were futures contracts for the purpose of the SFO.</li>\r\n<li>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.</li>\r\n</ol>","issueDate":"2016-10-20T16:38:00.027","modificationTime":"2016-10-20T16:38:01","imageList":[],"appendixDocList":[{"fileKeySeq":null,"lang":null,"refNo":0,"caption":"A copy of the Statement of Disciplinary Action is available on the SFC website ","dateOnWeb":null}],"maskedFooterType":null}