In re J.P. MORGAN SECURITIES

   
 
 
 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 101493 / October 31, 2024 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 6758 / October 31, 2024 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-22279 
 
In the Matter of 
 
J.P. MORGAN SECURITIES 
LLC 
 
Respondent. 
 
 
 
 
ORDER INSTITUTING ADMINISTRATIVE 
AND CEASE-AND-DESIST PROCEEDINGS, 
PURSUANT TO SECTIONS 15(b) AND 21C 
OF THE SECURITIES EXCHANGE ACT 
OF 1934 AND SECTION 203(e) OF THE 
INVESTMENT ADVISERS ACT OF 1940, 
MAKING FINDINGS, AND IMPOSING 
REMEDIAL SANCTIONS AND A CEASE-
AND-DESIST ORDER  
   
 
I. 
 
 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Sections 15(b), and 21C of the Securities Exchange Act of 1934 (“Exchange 
Act”) and Section 203(e) of the Investment Advisers Act of 1940 (“Advisers Act”), against J.P. 
Morgan Securities LLC (“JP Morgan Securities” or “Respondent”). 
 
II. 
 
 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of 
these proceedings and any other proceedings brought by or on behalf of the Commission, or to 
which the Commission is a party, and without admitting or denying the findings herein, except as 
to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are 
admitted, Respondent consents to the entry of this Order Instituting Administrative And Cease-
And-Desist Proceedings, Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 
1934 and Section 203(e) of the Investment Advisers Act of 1940, Making Findings, And Imposing 
Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. 

 
2 
 
III. 
 
 On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that 
 
Summary 
 
 From at least June 30, 2020 through July 14, 2022 (the “Relevant Period”), JP Morgan 
Securities, through its registered representatives, recommended certain mutual fund products 
(“Clone Mutual Funds”) to its retail brokerage customers when materially less expensive ETF 
products that offer the same investment portfolio to investors (“Clone ETFs” and, together with 
Clone Mutual Funds, the “Clone Pairs”) were also available on JP Morgan Securities’ platform for 
recommendation to these customers.  In total, approximately 10,516 JP Morgan Securities retail 
brokerage customers made approximately 17,494 purchases of the more expensive Clone Mutual 
Funds during the Relevant Period as a result of those recommendations.  JP Morgan Securities’ 
actions caused impacted customers to pay higher fees than they would have otherwise paid had 
they purchased the Clone ETFs instead of the Clone Mutual Funds.  Specifically, the impacted JP 
Morgan Securities retail brokerage customers paid approximately $14.03 million in higher fees and 
expenses.  When recommending the Clone Mutual Funds, JP Morgan Securities and its registered 
representatives failed to consider the costs associated with the Clone Mutual Funds as opposed to 
the less expensive Clone ETFs and failed to have a reasonable basis to believe that the 
recommendations were in the best interest of JP Morgan Securities retail brokerage customers.  
Through this conduct, JP Morgan Securities violated the Care Obligation of Regulation Best 
Interest (“Reg. BI”).  JP Morgan Securities also violated Reg. BI’s Compliance Obligation by 
failing to enforce its written policies and procedures reasonably designed to achieve compliance 
with Reg. BI’s Care Obligation.  By violating Reg. BI’s Care and Compliance Obligations, JP 
Morgan Securities violated the General Obligation of Reg. BI. 
 
Respondent 
 
 1. JP Morgan Securities is a Delaware limited liability company with its principal 
place of business in New York, New York.  It has been dually registered with the Commission as a 
broker-dealer and investment adviser since December 13, 1985, and April 3, 1965, respectively.  In 
its Form ADV dated March 28, 2024, JP Morgan Securities reports that it has approximately 
$249.7 billion in regulatory assets under management.  JP Morgan Securities is a wholly-owned 
subsidiary of JPMorgan Chase & Co., a global financial services firm incorporated in Delaware 
and headquartered in New York, New York. 
 
Background 
 
The General Obligation of Reg. BI 
                                                 
1
  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 
binding on any other person or entity in this or any other proceeding. 
 

 
3 
 
  
 2. The General Obligation of Reg. BI, which had a compliance date of June 30, 2020, 
provides in relevant part that “[a] broker, dealer, or a natural person who is an associated person of 
a broker or dealer, when making a recommendation of any securities transaction or investment 
strategy involving securities (including account recommendations) to a retail customer, shall act in 
the best interest of the retail customer at the time the recommendation is made, without placing the 
financial or other interest of the broker, dealer, or natural person who is an associated person of a 
broker or dealer making the recommendation ahead of the interest of the retail customer.”  
Exchange Act Rule 15l-1(a)(1); see also Regulation Best Interest: The Broker-Dealer Standard of 
Conduct, Exchange Act Release No. 86031, at 45-46, 471 (June 5, 2019) (hereinafter “Adopting 
Release”). 
 
 3. Broker-dealers such as JP Morgan Securities can satisfy the General Obligation 
only if they comply with four component obligations, including but not limited to: (1) exercising 
reasonable diligence, care, and skill when recommending any securities transaction or investment 
strategy involving securities to a retail brokerage customer (“Care Obligation”) and (2) 
establishing, maintaining, and enforcing policies and procedures reasonably designed to achieve 
compliance with Reg. BI (“Compliance Obligation”).  See Exchange Act Rule 15l-1(a)(2).  
Because all of the component obligations are mandatory, failure to comply with any of them would 
violate the General Obligation.  See Adopting Release at 72. 
 
The Care Obligation of Reg. BI 
 
4. The Care Obligation of Reg. BI requires, in relevant part, that a broker-dealer or its 
associated persons, when making a recommendation of any securities transaction or investment 
strategy involving securities to a retail customer, exercise reasonable diligence, care, and skill (A) 
to understand the potential risks, rewards, and costs associated with the recommendation, and have 
a reasonable basis to believe that the recommendation could be in the best interest of at least some 
retail customers and (B) to have a reasonable basis to believe that the recommendation is in the 
best interest of a particular retail customer based on that retail customer’s investment profile and 
the potential risks, rewards, and costs associated with the recommendation and does not place the 
financial or other interest of the broker-dealer or such associated person ahead of the interest of the 
retail customer.  Exchange Act Rule 15l-1(a)(2)(ii).   
 
The Clone Pairs 
 
5. Mutual funds and ETFs are investment companies that pool money from many 
investors to invest in securities—such as stocks, bonds, and short-term debt—or other assets.  
Mutual fund shares are typically purchased from the fund directly or through investment 
professionals like broker-dealers.  ETFs do not sell individual shares directly to retail investors.  
Instead, ETF shares are traded throughout the day on national stock exchanges.  Both mutual funds 
and ETFs charge investors various fees and expenses. 
 

 
4 
 
6. Many mutual funds offer different types of shares, known as classes.  Each 
mutual fund share class invests in the same pool (or investment portfolio) of securities, but each 
class may have different fees and expenses. 
 
 7. Asset management companies sometimes sponsor a Clone Pair, namely a mutual 
fund and an ETF with identical investment strategies.  A Clone ETF and Clone Mutual Fund both 
offer the same investment portfolio to investors but differ in terms of cost and legal structure, 
which generates some differences between the two products.  For example, mutual funds are priced 
once per day at their net asset value, whereas ETFs are priced throughout the day at a fluctuating 
market price. 
 
JP Morgan Securities Recommends More Expensive Clone Mutual Funds Without a 
Reasonable Basis 
 
 8. JP Morgan Securities recommended certain mutual fund products to its retail 
brokerage customers when less expensive Clone ETF products that offer the same investment 
portfolio to investors were also available on JP Morgan Securities’ platform for recommendation 
to these customers. 
 
9. By March 2019, JP Morgan Securities had onboarded both a Clone Mutual Fund 
(“First Clone Mutual Fund”) and a Clone ETF (“First Clone ETF” and, together with First Clone 
Mutual Fund, the “First Clone Pair”) to its full-service brokerage platform for its registered 
representatives to recommend to retail brokerage customers.
2
  The First Clone Pair was offered by 
the same issuer, offered investors the same investment portfolio, and were marketed as such.  All 
share classes of the First Clone Mutual Fund available for recommendation to JP Morgan 
Securities retail brokerage customers had significantly higher fees and expenses than the First 
Clone ETF.  As a result, the First Clone ETF was less expensive overall than the First Clone 
Mutual Fund share classes that were available on JP Morgan Securities’ platform for brokerage 
recommendations.   
 
10. By February 2021, JP Morgan Securities had onboarded a second Clone Mutual 
Fund (“Second Clone Mutual Fund”) and a Clone ETF (“Second Clone ETF” and, together with 
Second Clone Mutual Fund, the “Second Clone Pair”) to its full-service brokerage platform for its 
registered representatives to recommend to retail brokerage customers.  Once again, the Second 
Clone Pair was offered by the same issuer, offered investors the same investment portfolio, and 
were marketed as such.  All share classes of the Second Clone Mutual Fund available for 
recommendation to JP Morgan Securities retail brokerage customers had significantly higher fees 
and expenses than the Second Clone ETF.  As a result, the Second Clone ETF was less expensive 
overall than the Second Clone Mutual Fund share classes that were available on JP Morgan 
Securities’ platform for brokerage recommendations.  
 
                                                 
2
  Recommendations of the First Clone Mutual Fund and First Clone ETF became subject 
to Reg. BI as of June 30, 2020, the regulation’s compliance date. 

 
5 
 
11. During the Relevant Period, JP Morgan Securities recommended the First and 
Second Clone Mutual Funds to its retail brokerage customers without considering whether these 
products were materially more expensive than the corresponding Clone ETFs.  Specifically, 
between June 30, 2020 and July 14, 2022, approximately 10,516 JP Morgan Securities customers 
made approximately 17,494 purchases of the more expensive First and Second Clone Mutual 
Funds as a result of those recommendations.  JP Morgan Securities’ actions caused impacted 
customers to pay higher fees than they would have otherwise paid had they instead purchased the 
First and Second Clone ETFs.  As a result of these recommendations, retail brokerage customers 
paid approximately $14.03 million more in fees and expenses than they would have paid if they 
had instead purchased the less expensive First and Second Clone ETFs.   
 
12. When recommending the First and Second Clone Mutual Funds, JP Morgan 
Securities and its registered representatives failed to consider the costs associated with the Clone 
Mutual Funds as compared to the less expensive Clone ETFs, and therefore failed to have a 
reasonable basis to believe that the recommendations were in the best interest of JP Morgan 
Securities retail brokerage customers. 
 
JP Morgan Securities Failed to Enforce Written Policies and Procedures Reasonably 
Designed to Achieve Compliance with Reg. BI 
 
13. Reg. BI’s Compliance Obligation requires a broker-dealer to establish, maintain, 
and enforce written policies and procedures reasonably designed to achieve compliance with Reg. 
BI.  Exchange Act Rule 15l-1(a)(2)(iv).  These policies and procedures must address, among other 
things, compliance with a broker-dealer’s Care Obligation.  See Adopting Release at 16. 
 
14. JP Morgan Securities maintains various written policies and procedures (“WPPs”) 
for when its financial professionals, including registered representatives, make mutual fund 
recommendations.  During the Relevant Period, JP Morgan Securities’ WPPs stated that “careful 
attention must be paid to recommending [mutual funds] when a comparable ETF is available” and 
to “consider alternatives within the same product-type or asset class.” 
 
15. During the Relevant Period, JP Morgan Securities failed to comply with its WPPs 
in that certain registered representatives recommended the First and Second Clone Mutual Funds to 
retail brokerage customers without considering the less expensive First and Second Clone ETFs 
with identical investment strategies as an alternative within the same product-type or asset class. 
 
Violations 
 
16. As a result of the conduct described above, JP Morgan Securities willfully violated 
Rule 15l-1(a) under the Exchange Act.
3
 
                                                 
3
  See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (upholding the Commission’s 
determination that, for the purpose of Section 15, “willfulness” requires only “that the 
 

 
6 
 
 
JP Morgan Securities’ Self-Reporting, Cooperation and Remedial Efforts 
17. In determining to accept the Offer, the Commission considered self-reporting and 
remedial acts promptly undertaken by Respondent and the cooperation afforded the Commission 
staff.  JP Morgan Securities self-reported the conduct to the Commission staff and conducted an 
investigation.  JP Morgan Securities remediated the conduct by repaying impacted customers 
plus interest.  JP Morgan Securities also converted impacted customers into a lower-priced share 
class of the Clone Mutual Funds, which the impacted customers were not otherwise eligible to 
purchase, to approximate the lower fees of the Clone ETFs and minimize customer impact.  
18. Upon becoming aware of the issue, JP Morgan Securities restricted all future 
purchases (both new positions and additions to existing positions) by full service brokerage 
accounts of the First and Second Clone Mutual Fund share classes that had higher fees than the 
First and Second Clone ETFs, respectively.   
19. JP Morgan Securities self-reported the issue to the Commission staff, undertook 
an investigation to confirm that there were no other Clone Pairs available for recommendation on 
its platform to retail brokerage customers and provided timely updates to the Commission staff 
and voluntarily produced documents, reports and other materials. 
20. JP Morgan Securities updated its written procedures for adding new actively-
managed mutual fund and ETF strategies and vehicles to its full-service brokerage platform to 
prevent future occurrences of Clone Pairs with materially different expense ratios being available 
for JP Morgan Securities’ registered representatives to recommend to its retail brokerage 
customers.  
21. JP Morgan Securities voluntarily identified the impacted customers who 
purchased First and Second Clone Mutual Fund share classes that had higher fees than the First 
and Second Clone ETFs during the Relevant Period, and has completed full remediation for 
those customers, including reimbursement of certain transactions that were not subject to Reg. BI 
because they occurred before Reg. BI’s compliance date and/or were not recommended by JP 
Morgan Securities.  JP Morgan Securities identified approximately 10,516 impacted customers 
that paid a total of approximately $14.03 million in up-front sales charges, contingent deferred 
sales charges, and higher ongoing fees and expenses from purchases of the First and Second 
Clone Mutual Funds recommended by JP Morgan Securities and its registered representatives.  
JP Morgan Securities issued payments (including interest) totaling approximately $15.21 million 
to approximately 10,906 accounts attributable to purchases recommended by JP Morgan 
Securities and its registered representatives, by crediting the accounts of current customers and 
mailing reimbursement checks or otherwise directing payments as instructed by former 
customers.  The $15.21 million that JP Morgan Securities paid to impacted customers who made 
                                                 
person charged with the duty knows what he is doing. It does not mean that, in addition, 
he must suppose that he is breaking the law.” (internal quotation marks omitted)). 

 
7 
 
recommended purchases also included approximately $1.18 million to account for potential tax 
implications and the greater of interest or lost performance.  JP Morgan Securities’ conversion of 
positions to a lower fee share class of the First and Second Clone Mutual Funds with an expense 
ratio approximately that of the First and Second Clone ETFs was undertaken at no cost to the 
customers.  In addition to the remediation described above, JP Morgan Securities also 
remediated JP Morgan Securities retail brokerage customers who made unsolicited purchases 
during the Relevant Period of the First and Second Clone Mutual Fund share classes that had 
higher fees than the First and Second Clone ETFs.  In total, JPMS paid approximately $15.9 
million to remediate impacted customers. 
IV. 
 In view of the foregoing, the Commission deems it appropriate and in the public interest to 
impose the sanctions agreed to in Respondent’s Offer. 
 
 Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act and Section 203(e) 
of the Advisers Act, it is hereby ORDERED that: 
 
 A. Respondent cease and desist from committing or causing any violations and any 
future violations of Rule 15l-1 under the Exchange Act.  
 
B. Respondent is censured.   
 
C. Respondent acknowledges that the Commission is not imposing a civil penalty 
based upon its self-report, its cooperation in a Commission investigation, and its remediation.  If at 
any time following the entry of the Order, the Division of Enforcement (“Division”) obtains 
information indicating that Respondent knowingly provided materially false or misleading 
information or materials to the Commission, or in a related proceeding, the Division may, at its 
sole discretion and with prior notice to the Respondent, petition the Commission to reopen this 
matter and seek an order directing that the Respondent pay a civil money penalty.  Respondent 
may contest by way of defense in any resulting administrative proceeding whether it knowingly 
provided materially false or misleading information, but may not:  (1) contest the findings in the 
Order; or (2) assert any defense to liability or remedy, including, but not limited to, any statute of 
limitations defense. 
 
 By the Commission. 
 
 
 
Vanessa A. Countryman 
        Secretary 

UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

SECURITIES EXCHANGE ACT OF 1934 

Release No. 101493 / October 31, 2024 

 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 6758 / October 31, 2024 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-22279 

 

In the Matter of 

 

J.P. MORGAN SECURITIES 

LLC 

 

Respondent. 

 

 

 

 

ORDER INSTITUTING ADMINISTRATIVE 

AND CEASE-AND-DESIST PROCEEDINGS, 

PURSUANT TO SECTIONS 15(b) AND 21C 

OF THE SECURITIES EXCHANGE ACT 

OF 1934 AND SECTION 203(e) OF THE 

INVESTMENT ADVISERS ACT OF 1940, 

MAKING FINDINGS, AND IMPOSING 

REMEDIAL SANCTIONS AND A CEASE-

AND-DESIST ORDER  

   

 

I. 

 

 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Sections 15(b), and 21C of the Securities Exchange Act of 1934 (“Exchange 

Act”) and Section 203(e) of the Investment Advisers Act of 1940 (“Advisers Act”), against J.P. 

Morgan Securities LLC (“JP Morgan Securities” or “Respondent”). 

 

II. 

 

 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of 

these proceedings and any other proceedings brought by or on behalf of the Commission, or to 

which the Commission is a party, and without admitting or denying the findings herein, except as 

to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are 

admitted, Respondent consents to the entry of this Order Instituting Administrative And Cease-

And-Desist Proceedings, Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 

1934 and Section 203(e) of the Investment Advisers Act of 1940, Making Findings, And Imposing 

Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. 



 

2 

 

III. 

 

 On the basis of this Order and Respondent’s Offer, the Commission finds1 that 

 

Summary 

 

 From at least June 30, 2020 through July 14, 2022 (the “Relevant Period”), JP Morgan 

Securities, through its registered representatives, recommended certain mutual fund products 

(“Clone Mutual Funds”) to its retail brokerage customers when materially less expensive ETF 

products that offer the same investment portfolio to investors (“Clone ETFs” and, together with 

Clone Mutual Funds, the “Clone Pairs”) were also available on JP Morgan Securities’ platform for 

recommendation to these customers.  In total, approximately 10,516 JP Morgan Securities retail 

brokerage customers made approximately 17,494 purchases of the more expensive Clone Mutual 

Funds during the Relevant Period as a result of those recommendations.  JP Morgan Securities’ 

actions caused impacted customers to pay higher fees than they would have otherwise paid had 

they purchased the Clone ETFs instead of the Clone Mutual Funds.  Specifically, the impacted JP 

Morgan Securities retail brokerage customers paid approximately $14.03 million in higher fees and 

expenses.  When recommending the Clone Mutual Funds, JP Morgan Securities and its registered 

representatives failed to consider the costs associated with the Clone Mutual Funds as opposed to 

the less expensive Clone ETFs and failed to have a reasonable basis to believe that the 

recommendations were in the best interest of JP Morgan Securities retail brokerage customers.  

Through this conduct, JP Morgan Securities violated the Care Obligation of Regulation Best 

Interest (“Reg. BI”).  JP Morgan Securities also violated Reg. BI’s Compliance Obligation by 

failing to enforce its written policies and procedures reasonably designed to achieve compliance 

with Reg. BI’s Care Obligation.  By violating Reg. BI’s Care and Compliance Obligations, JP 

Morgan Securities violated the General Obligation of Reg. BI. 

 

Respondent 

 

 1. JP Morgan Securities is a Delaware limited liability company with its principal 

place of business in New York, New York.  It has been dually registered with the Commission as a 

broker-dealer and investment adviser since December 13, 1985, and April 3, 1965, respectively.  In 

its Form ADV dated March 28, 2024, JP Morgan Securities reports that it has approximately 

$249.7 billion in regulatory assets under management.  JP Morgan Securities is a wholly-owned 

subsidiary of JPMorgan Chase & Co., a global financial services firm incorporated in Delaware 

and headquartered in New York, New York. 

 

Background 

 

The General Obligation of Reg. BI 

                                                 
1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 

binding on any other person or entity in this or any other proceeding. 

 



 

3 

 

  

 2. The General Obligation of Reg. BI, which had a compliance date of June 30, 2020, 

provides in relevant part that “[a] broker, dealer, or a natural person who is an associated person of 

a broker or dealer, when making a recommendation of any securities transaction or investment 

strategy involving securities (including account recommendations) to a retail customer, shall act in 

the best interest of the retail customer at the time the recommendation is made, without placing the 

financial or other interest of the broker, dealer, or natural person who is an associated person of a 

broker or dealer making the recommendation ahead of the interest of the retail customer.”  

Exchange Act Rule 15l-1(a)(1); see also Regulation Best Interest: The Broker-Dealer Standard of 

Conduct, Exchange Act Release No. 86031, at 45-46, 471 (June 5, 2019) (hereinafter “Adopting 

Release”). 

 

 3. Broker-dealers such as JP Morgan Securities can satisfy the General Obligation 

only if they comply with four component obligations, including but not limited to: (1) exercising 

reasonable diligence, care, and skill when recommending any securities transaction or investment 

strategy involving securities to a retail brokerage customer (“Care Obligation”) and (2) 

establishing, maintaining, and enforcing policies and procedures reasonably designed to achieve 

compliance with Reg. BI (“Compliance Obligation”).  See Exchange Act Rule 15l-1(a)(2).  

Because all of the component obligations are mandatory, failure to comply with any of them would 

violate the General Obligation.  See Adopting Release at 72. 

 

The Care Obligation of Reg. BI 

 

4. The Care Obligation of Reg. BI requires, in relevant part, that a broker-dealer or its 

associated persons, when making a recommendation of any securities transaction or investment 

strategy involving securities to a retail customer, exercise reasonable diligence, care, and skill (A) 

to understand the potential risks, rewards, and costs associated with the recommendation, and have 

a reasonable basis to believe that the recommendation could be in the best interest of at least some 

retail customers and (B) to have a reasonable basis to believe that the recommendation is in the 

best interest of a particular retail customer based on that retail customer’s investment profile and 

the potential risks, rewards, and costs associated with the recommendation and does not place the 

financial or other interest of the broker-dealer or such associated person ahead of the interest of the 

retail customer.  Exchange Act Rule 15l-1(a)(2)(ii).   

 

The Clone Pairs 

 

5. Mutual funds and ETFs are investment companies that pool money from many 

investors to invest in securities—such as stocks, bonds, and short-term debt—or other assets.  

Mutual fund shares are typically purchased from the fund directly or through investment 

professionals like broker-dealers.  ETFs do not sell individual shares directly to retail investors.  

Instead, ETF shares are traded throughout the day on national stock exchanges.  Both mutual funds 

and ETFs charge investors various fees and expenses. 

 



 

4 

 

6. Many mutual funds offer different types of shares, known as classes.  Each 

mutual fund share class invests in the same pool (or investment portfolio) of securities, but each 

class may have different fees and expenses. 

 

 7. Asset management companies sometimes sponsor a Clone Pair, namely a mutual 

fund and an ETF with identical investment strategies.  A Clone ETF and Clone Mutual Fund both 

offer the same investment portfolio to investors but differ in terms of cost and legal structure, 

which generates some differences between the two products.  For example, mutual funds are priced 

once per day at their net asset value, whereas ETFs are priced throughout the day at a fluctuating 

market price. 

 

JP Morgan Securities Recommends More Expensive Clone Mutual Funds Without a 

Reasonable Basis 

 

 8. JP Morgan Securities recommended certain mutual fund products to its retail 

brokerage customers when less expensive Clone ETF products that offer the same investment 

portfolio to investors were also available on JP Morgan Securities’ platform for recommendation 

to these customers. 

 

9. By March 2019, JP Morgan Securities had onboarded both a Clone Mutual Fund 

(“First Clone Mutual Fund”) and a Clone ETF (“First Clone ETF” and, together with First Clone 

Mutual Fund, the “First Clone Pair”) to its full-service brokerage platform for its registered 

representatives to recommend to retail brokerage customers.2  The First Clone Pair was offered by 

the same issuer, offered investors the same investment portfolio, and were marketed as such.  All 

share classes of the First Clone Mutual Fund available for recommendation to JP Morgan 

Securities retail brokerage customers had significantly higher fees and expenses than the First 

Clone ETF.  As a result, the First Clone ETF was less expensive overall than the First Clone 

Mutual Fund share classes that were available on JP Morgan Securities’ platform for brokerage 

recommendations.   

 

10. By February 2021, JP Morgan Securities had onboarded a second Clone Mutual 

Fund (“Second Clone Mutual Fund”) and a Clone ETF (“Second Clone ETF” and, together with 

Second Clone Mutual Fund, the “Second Clone Pair”) to its full-service brokerage platform for its 

registered representatives to recommend to retail brokerage customers.  Once again, the Second 

Clone Pair was offered by the same issuer, offered investors the same investment portfolio, and 

were marketed as such.  All share classes of the Second Clone Mutual Fund available for 

recommendation to JP Morgan Securities retail brokerage customers had significantly higher fees 

and expenses than the Second Clone ETF.  As a result, the Second Clone ETF was less expensive 

overall than the Second Clone Mutual Fund share classes that were available on JP Morgan 

Securities’ platform for brokerage recommendations.  

 

                                                 
2  Recommendations of the First Clone Mutual Fund and First Clone ETF became subject 

to Reg. BI as of June 30, 2020, the regulation’s compliance date. 



 

5 

 

11. During the Relevant Period, JP Morgan Securities recommended the First and 

Second Clone Mutual Funds to its retail brokerage customers without considering whether these 

products were materially more expensive than the corresponding Clone ETFs.  Specifically, 

between June 30, 2020 and July 14, 2022, approximately 10,516 JP Morgan Securities customers 

made approximately 17,494 purchases of the more expensive First and Second Clone Mutual 

Funds as a result of those recommendations.  JP Morgan Securities’ actions caused impacted 

customers to pay higher fees than they would have otherwise paid had they instead purchased the 

First and Second Clone ETFs.  As a result of these recommendations, retail brokerage customers 

paid approximately $14.03 million more in fees and expenses than they would have paid if they 

had instead purchased the less expensive First and Second Clone ETFs.   

 

12. When recommending the First and Second Clone Mutual Funds, JP Morgan 

Securities and its registered representatives failed to consider the costs associated with the Clone 

Mutual Funds as compared to the less expensive Clone ETFs, and therefore failed to have a 

reasonable basis to believe that the recommendations were in the best interest of JP Morgan 

Securities retail brokerage customers. 

 

JP Morgan Securities Failed to Enforce Written Policies and Procedures Reasonably 

Designed to Achieve Compliance with Reg. BI 

 

13. Reg. BI’s Compliance Obligation requires a broker-dealer to establish, maintain, 

and enforce written policies and procedures reasonably designed to achieve compliance with Reg. 

BI.  Exchange Act Rule 15l-1(a)(2)(iv).  These policies and procedures must address, among other 

things, compliance with a broker-dealer’s Care Obligation.  See Adopting Release at 16. 

 

14. JP Morgan Securities maintains various written policies and procedures (“WPPs”) 

for when its financial professionals, including registered representatives, make mutual fund 

recommendations.  During the Relevant Period, JP Morgan Securities’ WPPs stated that “careful 

attention must be paid to recommending [mutual funds] when a comparable ETF is available” and 

to “consider alternatives within the same product-type or asset class.” 

 

15. During the Relevant Period, JP Morgan Securities failed to comply with its WPPs 

in that certain registered representatives recommended the First and Second Clone Mutual Funds to 

retail brokerage customers without considering the less expensive First and Second Clone ETFs 

with identical investment strategies as an alternative within the same product-type or asset class. 

 

Violations 

 

16. As a result of the conduct described above, JP Morgan Securities willfully violated 

Rule 15l-1(a) under the Exchange Act.3 

                                                 
3  See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (upholding the Commission’s 

determination that, for the purpose of Section 15, “willfulness” requires only “that the 

 



 

6 

 

 

JP Morgan Securities’ Self-Reporting, Cooperation and Remedial Efforts 

17. In determining to accept the Offer, the Commission considered self-reporting and 

remedial acts promptly undertaken by Respondent and the cooperation afforded the Commission 

staff.  JP Morgan Securities self-reported the conduct to the Commission staff and conducted an 

investigation.  JP Morgan Securities remediated the conduct by repaying impacted customers 

plus interest.  JP Morgan Securities also converted impacted customers into a lower-priced share 

class of the Clone Mutual Funds, which the impacted customers were not otherwise eligible to 

purchase, to approximate the lower fees of the Clone ETFs and minimize customer impact.  

18. Upon becoming aware of the issue, JP Morgan Securities restricted all future 

purchases (both new positions and additions to existing positions) by full service brokerage 

accounts of the First and Second Clone Mutual Fund share classes that had higher fees than the 

First and Second Clone ETFs, respectively.   

19. JP Morgan Securities self-reported the issue to the Commission staff, undertook 

an investigation to confirm that there were no other Clone Pairs available for recommendation on 

its platform to retail brokerage customers and provided timely updates to the Commission staff 

and voluntarily produced documents, reports and other materials. 

20. JP Morgan Securities updated its written procedures for adding new actively-

managed mutual fund and ETF strategies and vehicles to its full-service brokerage platform to 

prevent future occurrences of Clone Pairs with materially different expense ratios being available 

for JP Morgan Securities’ registered representatives to recommend to its retail brokerage 

customers.  

21. JP Morgan Securities voluntarily identified the impacted customers who 

purchased First and Second Clone Mutual Fund share classes that had higher fees than the First 

and Second Clone ETFs during the Relevant Period, and has completed full remediation for 

those customers, including reimbursement of certain transactions that were not subject to Reg. BI 

because they occurred before Reg. BI’s compliance date and/or were not recommended by JP 

Morgan Securities.  JP Morgan Securities identified approximately 10,516 impacted customers 

that paid a total of approximately $14.03 million in up-front sales charges, contingent deferred 

sales charges, and higher ongoing fees and expenses from purchases of the First and Second 

Clone Mutual Funds recommended by JP Morgan Securities and its registered representatives.  

JP Morgan Securities issued payments (including interest) totaling approximately $15.21 million 

to approximately 10,906 accounts attributable to purchases recommended by JP Morgan 

Securities and its registered representatives, by crediting the accounts of current customers and 

mailing reimbursement checks or otherwise directing payments as instructed by former 

customers.  The $15.21 million that JP Morgan Securities paid to impacted customers who made 

                                                 

person charged with the duty knows what he is doing. It does not mean that, in addition, 

he must suppose that he is breaking the law.” (internal quotation marks omitted)). 



 

7 

 

recommended purchases also included approximately $1.18 million to account for potential tax 

implications and the greater of interest or lost performance.  JP Morgan Securities’ conversion of 

positions to a lower fee share class of the First and Second Clone Mutual Funds with an expense 

ratio approximately that of the First and Second Clone ETFs was undertaken at no cost to the 

customers.  In addition to the remediation described above, JP Morgan Securities also 

remediated JP Morgan Securities retail brokerage customers who made unsolicited purchases 

during the Relevant Period of the First and Second Clone Mutual Fund share classes that had 

higher fees than the First and Second Clone ETFs.  In total, JPMS paid approximately $15.9 

million to remediate impacted customers. 

IV. 

 In view of the foregoing, the Commission deems it appropriate and in the public interest to 

impose the sanctions agreed to in Respondent’s Offer. 

 

 Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act and Section 203(e) 

of the Advisers Act, it is hereby ORDERED that: 

 

 A. Respondent cease and desist from committing or causing any violations and any 

future violations of Rule 15l-1 under the Exchange Act.  

 

B. Respondent is censured.   

 

C. Respondent acknowledges that the Commission is not imposing a civil penalty 

based upon its self-report, its cooperation in a Commission investigation, and its remediation.  If at 

any time following the entry of the Order, the Division of Enforcement (“Division”) obtains 

information indicating that Respondent knowingly provided materially false or misleading 

information or materials to the Commission, or in a related proceeding, the Division may, at its 

sole discretion and with prior notice to the Respondent, petition the Commission to reopen this 

matter and seek an order directing that the Respondent pay a civil money penalty.  Respondent 

may contest by way of defense in any resulting administrative proceeding whether it knowingly 

provided materially false or misleading information, but may not:  (1) contest the findings in the 

Order; or (2) assert any defense to liability or remedy, including, but not limited to, any statute of 

limitations defense. 

 

 By the Commission. 

 

 

 

Vanessa A. Countryman 

        Secretary 


	UNITED STATES OF AMERICA
	Respondent
	Background