FINRA's JP Morgan Challenge: Will the Self Regulator End Its Hypocrisy?

January 24, 2017

You might want to call it an existential challenge. The Financial Industry Regulatory Authority has to make up its mind. Will it treat its smaller member firms the same as its larger ones? Will the self-regulator perpetuate its seemingly disparate reaction to the transgressions of its financial superstore member firms versus those of individual men and women stockbrokers? With new Chief Executive Officer Robert Cook, FINRA has a chance to hit the re-set button. One size fits all regulation is a bust. It's time to restore the partnership between the regulator and the regulated. Perhaps the first step in fixing the broken machinery of self regulation begins with an enlightened assessment of the issues presented in today's Blog.

DeBow's Check Kiting

According to online Financial Industry Regulatory Authority ("FINRA") BrokerCheck records as of January 24, 2017, Jon DeBow was employed in 2002 by J.P. Morgan Investment Management and in 2005 he became a registered representative with FINRA member firm J.P. Morgan Institutional Investments Inc.

FINRA alleged that from December 11, 2012, to November 4, 2014, DeBow wrote 38 checks totaling $46,280 from two of his personal JP Morgan bank accounts. FINRA asserted that each of the checks bounced but were covered by DeBow shortly after notice of each event. At the times when DeBow wrote the 38 checks, FINRA alleges that he knew that he had insufficient funds in his accounts.  

Online FINRA BrokerCheck records as of January 24, 2017, disclose under the heading "Employment Separation After Allegations," that JP Morgan Investment Management "discharged" DeBow on April 16, 2015, based upon allegations that:


For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, DeBow submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jon DeBow, Respondent (AWC 2015045674901, December 27, 2016). In accordance with the terms of the AWC, FINRA found that DeBow had violated FINRA Rule 2010 and imposed upon DeBow a $10,000 fine and an 18-month suspension.

For a more extensive analysis of the DeBow AWC, read: "NSF Check Kiter Snagged In FINRA Regulatory Tree" (, January 18, 2017).

Too Big To Fail or Too Big To Regulate?

In my commentary following the presentation of the underlying facts and issues in the NSF Check Kiter Snagged In FINRA Regulatory Tree" (, January 18, 2017), I offered the following observation:

As recent headlines disclose, Too-Big-To-Fail financial institutions have been charged with and pleaded guilty to all sorts of financial shenanigans involving fraudulent mortgages and bogus account openings. Do you recall anyone from any C-Suite being suspended by FINRA for such conduct? Do you recall any bank or brokerage firm being suspended from accepting new customers or required to cease trading on a specific desk as a result of any marketplace misconduct? We got a lot of small-fry getting cooked but the big-fish are left to frolic in the ocean.

Finally, let me pose these questions:

If DeBow's alleged check-kiting scheme did not involve a FINRA member firm's affiliated bank's checking account, do you think the self-regulatory organization would have proposed charges?  

If FINRA initiates regulatory action only when an associated person engages in NSF activity in a member firm's affiliated bank, does that transform FINRA from a regulator into a questionable collection agency (or the threat of one) for its member firms?

Does FINRA routinely and regularly review the checking activity of its own employees and, if so, does the self-regulatory organization fine and suspend its employees when they engage in check kiting?

Advisory Services, Affiliates, and Subsidiaries

As to the FINRA member firm entity with which DeBow was registered, J.P. Morgan Institutional Investments, Inc., various iterations of this notice appear on webpages for J.P. Morgan affiliates and subsidiaries:

Securities products and services are offered by registered representatives of J.P. Morgan Institutional Investments Inc. Member FINRA/SIPC. JPMorgan Invest Holdings LLC, JPMorgan Chase Bank, N.A., and J.P. Morgan Institutional Investments Inc. are affiliates of JPMorgan Chase & Co.

As noted above, DeBow was employed by J.P. Morgan Investment Management, Inc. As stated in J.P. Morgan Investment Mangement, Inc. Form ADV / Part 2A under "Item 4: Advisory Business":

A. General Description of Advisory Firm

This Brochure relates to the investment advisory services offered by J.P. Morgan Investment Management Inc. ("JPMIM" or the "Adviser"), which is the primary U.S. investment advisory branch of J.P. Morgan Asset Management ("JPMAM"). JPMAM is the marketing name for the asset management businesses of JPMorgan Chase & Co. ("JPMC"), a publicly traded company, and its affiliates worldwide. JPMIM is wholly-owned by JPMorgan Asset Management Holdings Inc., which is a subsidiary of JPMC. JPMIM was incorporated in Delaware on February 7, 1984. JPMIM is registered with the SEC as an investment adviser pursuant to the Investment Advisers Act of 1940, as amended (the "Advisers Act").

J.P. Morgan Investment Management's 2015 SEC Settlement

In anticipation of the institution of proceedings by the Securities and Exchange Commission ("SEC") but without admitting or denying the findings, J.P. Morgan Investment Management submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of J.P. Morgan Investment Management Inc, Respondent (Order Instituting Cease-And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order and Civil Penalty; '34 Act Rel. No. 76143; Admin. Proc. File No. 3-16897 / October 14, 2015). As set forth in the "Summary" portion of the J.P. Morgan Investment Management Inc. OIP:

1. These proceedings arise out of violations of Rule 105 of Regulation M of the Exchange Act by JPMIM, a New York-based registered investment adviser. Rule 105 prohibits selling short an equity security that is the subject of certain public offerings and purchasing the offered security from an underwriter or broker or dealer participating in the offering, if such short sale was effected during the restricted period as defined therein.

2. On ten occasions, from October 2009 through September 2012, JPMIM bought offering shares from an underwriter or broker or dealer participating in a follow-on public offering after having sold short the same security during the restricted period. These violations collectively resulted in profits of $662,763.

In accordance with the terms of the SEC settlement, J.P. Morgan Investment Management agreed to pay $662,763 disgorgement, $56,758.40 interest, and a $364,689 penalty.

JPMorgan Chase Bank Settlement

In "Manhattan U.S. Attorney Settles Lending Discrimination Suit Against JPMorgan Chase For $53 Million /Settlement Includes Admissions by the Bank and Provides Compensation for Borrowers Harmed by the Discriminatory Lending Practices") (Press Release, United States Department of Justice, United States Attorney for the Southern District of New York, 17-019, February 20, 2017), the Department of Justice ("DOJ") announced the settlement of a civil rights lawsuit against JPMorgan Chase Bank, N.A. As set forth in the Press Release:

According to the stipulation of fact agreed to by the parties in the Consent Order, filed in federal court in Manhattan:

  • Prior to January 2006 and continuing until early 2009, Chase originated and funded residential mortgage loans through a wholesale channel. Applications for these loans were brought to Chase by thousands of independent mortgage brokers throughout the United States who had entered into contracts with Chase for the purpose of bringing mortgage loan applications to it for origination and funding.
  • From 2006 to 2009, approximately 360,000 wholesale mortgage loans were sourced by these independent brokers and brought to Chase. Of these, Chase reported that approximately 40,000 wholesale loans were made to African-American borrowers and that approximately 66,000 wholesale loans were made to Hispanic borrowers. Chase closed its wholesale channel in 2009.
  • The government's data model projects that, from at least 2006 through late 2009, certain of the approximately 106,000 African-American and Hispanic borrowers who obtained loans through independent mortgage brokers participating in Chase's wholesale channel paid higher rates and fees on "wholesale" home mortgage loans compared to the rates and fees paid by similarly situated white borrowers who obtained loans through independent mortgage brokers participating in Chase's wholesale channel. It projects that in thousands of instances, an African-American borrower entering into the same type of Chase wholesale mortgage as a white borrower paid higher loan rates and larger fees than such white borrower. Similarly, it projects that in thousands of instances, a Hispanic borrower entering into the same type of Chase wholesale mortgage as a white borrower paid higher loan rates and larger fees than such white borrower.
To compensate the estimated 50,000 African-American and Hispanic borrowers who paid higher rates and fees than similarly situated white borrowers, CHASE has agreed to create a settlement fund in the amount of approximately $53 million . . .

READ: United States of America, Plaintiff, v. JPMorgan Chase Bank, N.A., Defendant (17-CV-347, United States District Court for the Southern District of New York):

FINRA Standards (Double?)

FINRA Rule 2010, which is the workhorse rule under which DeBow was charged in his AWC:

FINRA 2010. Standards of Commercial Honor and Principles of Trade

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.

Such lovely and high-minded standards, no? Commercial honor! Just principles of trade! Equitable principles of trade! Put 'em all together and you have the very rule that allowed FINRA to go after DeBow for his check kiting and to fine him $10,000 and send him to the penalty box to cool his heels for 18 months.

Ain't it wonderful that Wall Street is policed by such a dedicated self-regulatory organization.

Will FINRA now investigate whether any of the 106,000 African-American and Hispanic borrowers allegedly defrauded by J.P. Morgan  Chase Bank also maintained a securities account with a J.P. Morgan FINRA member firm? 

Will FINRA consider whether the continued affiliation of any JP Morgan FINRA-member-firm with its banking affiliate is consistent with the self-regulatory organization's standards of honor and its trade principles? 

Is there a double standard at FINRA when it comes to the transgressions of its larger and smaller firms -- and of the individual associated persons who fall under its jurisdiction?

Marketing of Products and Services

If we visit the Home Page for J.P. Morgan Securities, another FINRA member firm, we learn:

"J.P. Morgan Securities" is a marketing name for a wealth management business conducted by JPMorgan Chase & Co. and certain subsidiaries. J.P. Morgan Securities offers investment products, services, Clearing and Custody through J.P. Morgan Securities LLC, a member of FINRA and SIPC. Bank products and services are offered by JPMorgan Chase Bank, N.A. and its bank affiliates.

FINRA member firm "J.P. Morgan Securities" is a "marketing name" for JPMorgan Chase & Co.'s "wealth management business," which extends to "certain subsidiaries" of JPMorgan Chase & Co. Tossed into that interlocking marketing, we learn that JPMorgan Chase Bank, N.A. (the above settling Defendant) and its affiliates offer "bank products and services" within the marketing construct. All of which seems to describe a fairly well integrated relationship among FINRA member firm J.P. Morgan Securities, JPMorgan Chase & Co., JPMorgan Chase Bank, and their affiliates: sort of the very definition of a financial superstore and a Too-Big-To-Fail conglomerate.

Disparate FINRA Regulation?

FINRA carried the banner for non-FINRA-member-firm J.P. Morgan Chase Bank and its FINRA-member-firm subsidiary J.P. Morgan Institutional Investments when it investigated DeBow and fined him $10,000 and suspended him for 18 months. Recall that no act technically took place at any J.P. Morgan FINRA member firm because the checks were all written against the non-member bank's account. If you read the AWC, it says that he was discharged by FINRA member firm J.P. Morgan Institutional Investments for "VIOLATION OF PARENT COMPANY'S CODE OF CONDUCT."  Note the reference to the non-FINRA member firm parent company's Code of Conduct.

Given that FINRA seemed comfortable acting as a collection agency or keeper-of-the-flame when it pounced on DeBow, what then should FINRA do now that it is confronted with the DOJ settlement involving J.P. Morgan Chase Bank, an intertwined affiliate of at least a couple of J.P. Morgan FINRA member firms? 

For starters, FINRA should investigate the extent to which all those banking and affiliate entanglements may have involved customers of its member firms. Armed with that information and guided by its actions against DeBow, FINRA should consider fining any member firm and suspending its senior brokerage staff for looking the other way, facilitating any referrals of minority mortgage clients, and feeding the fires of that marketing machinery that may have contributed to racial discrimination. I mean, after all, there is a $53 million civil-rights-lawsuit settlement with DOJ by J.P. Morgan Chase Bank, N.A. involving 106,000 minority victims of improper mortgage practices.

FINRA Board of Governors

I just checked and noticed that the current list of FINRA's Board of Governors includes Stephen M. Cutler of JPMorgan Chase & Co. If it turns out that his firm or its affiliates engaged in discrimination, maybe FINRA should remove Mr. Cutler from its Board and impose an 18-month ban on future Board service by JPMorgan representatives.

Burris and J.P. Morgan

Then there's that troublesome issue with Johnny Burris and FINRA and J.P. Morgan. Given the unique facts involved, I'm not sure why FINRA is pursuing a regulatory case against Burris,  and the self regulator comes off as both compromised and conflicted. Add into the mix of facts and circumstances, the recent J.P. Morgan Chase Bank's DOJ settlement, and the self regulator looks even worse. By way of a refresher, read:

"Selling the Home Brand: A Look Inside an Elite JPMorgan Unit" (New York Times, DealBook, Marc 2, 2013):

The bank, Mr. Burris's bosses explained, examines the amount of JPMorgan-branded portfolios of mutual funds that brokers sell. "If you look at our firm, 50 percent of all our sales go" to those investments, Mr. Haigis said. Furthermore, he said, such products draw less scrutiny from the Financial Industry Regulatory Authority, which polices Wall Street.

"FINRA and JPMorgan go after whistleblower for $624 (not a typo) loss" (, September 22, 2016):

Now an independent RIA, Burris runs Burris Wealth Management in Surprise, Arizona, and serves mainly elderly clients. Two years after he initiated his OSHA whistleblower case, Burris says he got a got a call from Margery Shanoff, a FINRA enforcement attorney, in the spring of last year.

Burris said she told him that FINRA had completed a thorough investigation into his activities at JPMorgan.

"You are in big trouble," he recalls Shanoff telling him.

Burris said he asked how that could be, given that no one had called to get his side of the story. Shanoff did not respond to a request for her description of the conversation.