The Financial Industry Regulatory Authority has fined JP Morgan Securities for breaking the Securities and Exchange Commission’s Customer Protection Rule 15c3-3 and for related supervisory failures. The SEC rule creates requirements to protect customers' funds and securities.

To ensure that customers could recover their assets in the event of the broker-dealer's insolvency, the Customer Protection Rule (at 15c3-3(b)) requires a broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over all customers' fully-paid and excess margin securities. These securities must be segregated in a so-called 'control location' and must be free of liens or any other encumbrance that could prevent customers from taking possession of their securities. A firm cannot use segregated securities for its own purposes.

Between March 2008 and June 2016, according to FINRA, JP Morgan Clearing Corp did not have reasonable processes in place to ensure that its possession or control systems were operating properly. Shares that should have been segregated were available for the firm’s use because of systemic coding and design flaws, recurring and unresolved deficits and unreasonable supervision. By failing to move and maintain securities in good 'control locations,' the firm created deficits in foreign and domestic securities valued at hundreds of millions of dollars.

By way of example, JP Morgan failed to move Italian securities to a good control location for nearly two years and, on one sample day, created a deficit in 81 Italian securities worth approximately $146 million. To quote another example, in 2010-14, as a result of a data entry error, no instructions to move Nigerian securities to good control locations were carried out. Because of this failure, for example, in June 2014 JP Morgan created a deficit in 16 Nigerial securities with a value of about $120 million. Similar but distinct data and coding errors affected securities in Puerto Rico, Sri Lanka, Turkey, Venezuela and Zambia. The sums involed here were much more modest.

JP Morgan neither admitted nor denied the charges.