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Statement In The Matter Of JPMorgan Chase Bank, N.A., Regarding Order Under 506(d) Of The Securities Act Of 1933 Granting A Waiver Of The Rule 506(d)(1)(iii) Disqualification Provision

Commissioner Kara M. Stein

Dec. 18, 2015

On December 18, 2015, the Securities and Exchange Commission (“Commission”) granted a conditional waiver to JPMorgan Chase Bank, N.A. (“J.P. Morgan”) from the automatic disqualification provision under Rule 506(d)(1)(iii) of the Securities Act of 1933 (“Securities Act”).[1]  The request for this waiver arose from an order entered by the U.S. Commodity Futures Trading Commission (“CFTC”) making findings and imposing sanctions as a result of J.P. Morgan’s failure to adequately disclose certain conflicts of interest to clients.[2]  The facts underlying the CFTC order are generally the same as those underlying the Commission order dated December 18, 2015.[3]

These facts include the failure of J.P. Morgan to disclose a preference for steering certain clients into affiliated funds.  Additionally, J.P. Morgan failed to disclose that it had a preference for placing on its investment platform only those third party hedge fund managers who were willing to pay a placement agent fee to an affiliate of J.P. Morgan, typically referred to as a “retrocession.”  In short, J.P. Morgan put its interest before its clients by failing to disclose significant conflicts of interest.  Taken together with the violations outlined in the Commission’s order, these failures were part of an institutional breakdown that operated as a fraud on both its clients and its prospective clients.   

Accordingly, today the Commission grants a conditional waiver to J.P. Morgan that imposes stringent requirements on J.P. Morgan’s ability to conduct business under Rule 506 going forward.  J.P. Morgan’s violations triggered certain automatic disqualifications under the federal securities laws, including the ability to use Rule 506.[4]  Rule 506 is a safe harbor for the private offering exemption of Section 4(a)(2) of the Securities Act and is used by private investment funds, companies, and others to make unregistered offerings of securities.  This conditional waiver can be revoked if J.P. Morgan fails to comply with either the terms of the Commission’s order or the CFTC order.  Additionally, for five years following the date of the Commission’s order, the Commission may revoke or further condition this waiver if J.P. Morgan is the subject of any action triggering “ineligible issuer” status under Rule 405 of the Securities Act, disqualification under Section 9(a) of the Investment Company Act of 1940, or disqualification under Rule 506(d) of Regulation D. 

During my tenure, I have been repeatedly concerned about the binary nature of granting or denying waivers.[5]  Today’s action represents a different and more outcome-focused approach.  First, this conditional waiver requires J.P. Morgan to hire a truly independent compliance consultant to conduct a comprehensive review of J.P. Morgan’s policies and procedures relating to Rule 506.  The consultant is required to test J.P. Morgan’s Rule 506 policies and produce an annual report on the bank’s compliance with these policies.  This consultant must be walled off from having a business relationship with J.P. Morgan or its affiliates currently and for a period of two years following completion of its engagement.  This approach will reduce the potential for conflicts of interest and serve as an important protection, one that I have been urging in other contexts as well.[6]

Second, this waiver requires extensive involvement by the senior executives of J.P. Morgan, including the principal executive officer and principal legal officer, in remedying these problems.  Each will be required to review and understand the independent compliance consultant’s work and recommendations. The executives also must certify annually that they have reviewed the consultant’s report. 

Finally, the independent compliance consultant’s annual report, as well as the certifications by the principal executive officer and principal legal officer, will be published on the Commission’s website.   This additional transparency should help the public and the Commission in determining whether J.P. Morgan continues to show “good cause” for receiving a waiver from automatic disqualification under Rule 506.

I believe that the granting of a conditional waiver to J.P. Morgan is appropriate given the facts and circumstances.  I hope that this conditional waiver will contribute to an improved compliance environment at J.P. Morgan.  Going forward, any future violations and other facts may lead to a different conclusion, including a revocation of this conditional waiver. 

[1] See Securities Act Release No. 33-9993 (Dec. 18, 2015) available at

[2] See Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC Docket No. 16-05 (Dec. 18, 2015), available at

[3] See Securities Act Release No. 33-9992 (Dec. 18, 2015) available at

[4] Today’s Commission order also triggers an automatic disqualification under Rule 405 of the Securities Act, rendering J.P. Morgan an “ineligible issuer” under 17 CFR 230.405, because there is now an administrative order finding that J.P. Morgan violated the anti-fraud provisions of the federal securities laws.   

[5] See, e.g., Commissioner Kara M. Stein, Remarks before the Consumer Federation of America’s 27th Annual Financial Services Conference (Dec. 4, 2014), available at

[6] See Commissioner Luis A. Aguilar and Commissioner Kara M. Stein, Dissenting Statement In the Matter of Oppenheimer & Co., Inc. (Feb. 4, 2015), available at

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