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FINRA Fines J.P. Morgan Securities $1.25 Million

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  • Posted on: Dec 4 2017

J.P. Morgan Securities, LLC (“J.P. Morgan”) was recently fined $1.25 million by the Financial Industry Regulatory Authority (“FINRA”) for how the securities firm handled criminal background checks. In particular, J.P. Morgan failed to conduct timely or adequate background checks on approximately 95 percent of its non-registered personnel, a total of about 8,600 employees. 

As noted by FINRA in the announcement of the settlement (here), under the federal securities laws, broker-dealers are required to fingerprint certain associated persons working in a non-registered capacity who may present a risk to customers based on their positions. Fingerprinting helps firms identify if a person has been convicted of crimes that would disqualify them from being associated with a firm, absent explicit regulatory approval. Federal banking laws also require banks to conduct such checks on employees using a more limited list of disqualifying events.

Section 17(f) (2) of the Securities Exchange Act of 1934 and Rule 17f-2 (here) promulgated thereunder require broker-dealer firms to submit fingerprints for all partners, directors, officers, and employees unless they are exempt under certain provisions.  Rule 17f-2 exempts employees from fingerprinting if they do not sell securities or regularly have access to the keeping, handling, or processing of securities, monies, or the original books and records relating to the securities or monies. Employees are also exempt if they do not have direct supervisory responsibility for those who sell securities or access to securities, monies, or the original books and records.

FINRA found that for more than eight years (between January 2009 and May 2017), J.P. Morgan failed to fingerprint approximately 2,000 of its non-registered associated persons in a timely manner, preventing the firm from determining whether those persons might be disqualified from working at the firm. In addition, the firm fingerprinted other non-registered associated persons but limited its screening to criminal convictions specified in federal banking laws and an internally created list that included crimes such as kidnapping, rape, murder, manslaughter and sexual assault. In total, J.P. Morgan did not appropriately screen 8,600 individuals for all felony convictions or for disciplinary actions by financial regulators. FINRA also found that four individuals who were subject to a statutory disqualification because of a criminal conviction were allowed to associate, or remain associated, with the firm during the relevant time period. One of the four individuals was associated with the firm for 10 years; another for eight years.

FINRA did not disclose the crimes to which the convictions were related.

Susan Schroeder, Executive Vice President of FINRA’s Department of Enforcement, said, “FINRA member firms play an important gatekeeper role in keeping bad actors from harming investors. Firms have a clear responsibility to appropriately screen all employees for past criminal or regulatory events that can disqualify individuals from associating with member firms, even in a non-registered capacity.”

In addition to paying the $1.25 million fine, J.P. Morgan agreed to review its systems and procedures related to the identification, fingerprinting and screening of non-registered associated persons. The firm cooperated with FINRA in self-reporting and undertaking a plan to address the violations, a factor that FINRA weighed when determining the appropriate monetary sanction, FINRA said. “We self-reported this matter and are pleased it’s now behind us,” said J.P. Morgan spokeswoman Jessica Francisco.

In settling the matter, J.P. Morgan neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

In December 2015, FINRA imposed a $1.25 million fine on Merrill Lynch for failing to fingerprint employees. (Here.) According to FINRA, from January 1, 2009, through October 28, 2013, Merrill Lynch failed to fingerprint or properly screen approximately 4,500 out of 20,000 non-registered associated employees. Of those individuals, 1,115 were not fingerprinted, 240 were not fingerprinted until after they started working, and 3,145 were not screened for felony convictions or regulatory actions. Merrill Lynch also consented to the entry of FINRA’s findings, but neither admitted nor denied the charges.

The Takeaway

FINRA has stated that it is trying to detect rogue brokers who may have been disciplined for misconduct but who still work in the industry – a number that represents about seven percent of financial advisers. The settlement with J.P. Morgan, though involving non-registered, associated personnel, is an example of that effort. As a result, member firms should ensure that their background check procedures comply with the federal securities laws and rules.

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