J.P. Morgan Securities LLC has agreed to pay a $150,000 fine following a settlement with the Financial Industry Regulatory Authority (FINRA). The fine is a result of alleged violations regarding the firm’s supervisory procedures related to the delivery of preliminary IPO prospectuses, which are critical documents for investors prior to a public offering.
Between January 2018 and December 2021, the firm’s supervisory system was found to be inadequately designed to ensure compliance with the requirements of delivering preliminary IPO prospectuses under Rule 15c2-8(b) of the Exchange Act. Although the firm’s written supervisory procedures (WSPs) mandated that preliminary prospectuses be delivered to customers expecting allocations, there was no effective system in place to confirm that these deliveries had occurred.
Specifically, the supervisory system relied on verifying whether customers had consented to receive electronic versions of the prospectuses and whether appropriate email addresses were on file. However, it lacked a process to confirm successful delivery to customers, leading to a failure in reviewing available information about undelivered prospectuses.
Furthermore, from March 2019 to December 2021, the firm conducted limited reviews—only assessing a sample of three IPOs each quarter to see if the institutional clients had consented electronically and had email addresses on file. Consequently, during the time frame in question, there was no thorough supervisory review concerning the delivery of preliminary IPO prospectuses for most of the approximately 400 IPOs issued.
The firm also neglected to include customers who opted out of electronic delivery on a designated list, which was supposed to ensure these clients received physical copies by mail. This oversight contributed to a failure to ensure that preliminary prospectuses reached customers at least 48 hours prior to confirmation of sales.
In October 2021, the firm self-reported some deficiencies related to the delivery protocols and took steps to address these issues. Changes were made to its WSPs at the end of December 2021, with further updates planned for January 2024.
The failure to establish an adequately designed supervisory system for delivering preliminary IPO prospectuses resulted in violations of several FINRA rules, specifically those regarding the maintenance of proper supervisory procedures and adherence to industry standards. In addition to the monetary penalty, the firm has faced a censure.
This settlement highlights the ongoing importance of robust supervisory practices within the financial services industry to ensure compliance with regulatory obligations and to protect investors. It serves as a reminder for firms to regularly review and update their procedures to adapt to regulatory requirements.