J.P. Morgan Securities Settles Short Interest Reporting Violations

J.P. Morgan Securities LLC (JPMS) has reached a settlement with the Financial Industry Regulatory Authority (FINRA) over a series of short interest reporting violations spanning more than 16 years. The firm will pay a $3 million fine and accept a censure as part of the settlement, which addresses a range of inaccuracies in its short interest reporting from 2008 to 2024.

JPMS has long been a key player in the investment banking, asset management, and brokerage sectors. With more than 34,000 registered representatives across thousands of offices, its activities touch nearly every corner of the financial world. However, over the course of the past decade and a half, JPMS made significant errors in reporting short interest data—a vital metric for both regulators and investors.

Short interest refers to the total number of short positions—bets that a stock’s price will fall—held by a firm, and accurate reporting is essential for transparency in the market. These figures are not just regulatory necessities; they shape public perception and investor decisions. From June 2008 through August 2024, JPMS submitted inaccurate reports for approximately 820,000 short interest positions, involving a staggering 77 billion shares. These errors, in some cases, resulted in overreporting, while in others, positions were underreported.

The violations didn’t just stop at bad data. The firm also failed to implement an adequate supervisory system to ensure the accuracy of its reports. Without proper oversight, these errors snowballed over time, compounding the issue.

What Went Wrong?

The reporting errors were far from straightforward, involving a range of mistakes that accumulated over the years. From 2008 to May 2020, JPMS incorrectly reported certain customer positions on a net basis rather than a gross basis, aggregating customer data from its non-U.S. affiliates in a way that didn’t align with reporting rules. In other cases, stock loan activity found its way into reports when it shouldn’t have been there at all.

Between 2016 and 2019, JPMS also excluded key positions from Canadian and Latin American securities in its reports. Furthermore, during part of this period, positions in over-the-counter foreign securities that were dually listed in both the U.S. and overseas were left out of the reports entirely. This was compounded by other mistakes in more recent years, such as incorrectly including external transfers in prime brokerage accounts and overreporting short interest tied to dividend reinvestment activity. In short, the errors came from multiple sources, stretching across various time periods and types of securities.

Supervisory Failures

Beyond the reporting errors themselves, JPMS was also found lacking in its supervisory practices. FINRA’s rules require firms to establish and maintain robust supervisory systems to ensure compliance with regulations. JPMS, however, failed to adequately review whether accounts were properly included or excluded for short interest reporting purposes. It wasn’t until 2020 that the firm introduced a quarterly review process to address this gap. More recently, in 2023 and 2024, JPMS took additional steps to ensure its reporting was accurate by tightening controls over its prime brokerage accounts and confirming that accounts classified as omnibus accounts were correctly excluded from short interest reporting.

In response to these violations, JPMS has agreed to pay a $3 million fine and accept a censure from FINRA. The firm has also voluntarily waived its right to contest the fine, acknowledging the seriousness of the violations. The settlement will prevent any future actions from FINRA based on the same factual findings, effectively bringing an end to this chapter for the firm.

This settlement is not just a financial penalty; it is a reminder of the importance of maintaining high standards for compliance and reporting within the financial services industry. Inaccurate data, particularly when it comes to something as impactful as short interest, can erode public trust and have far-reaching consequences. JPMS’s case underscores the need for firms to regularly review and refine their reporting systems to keep pace with changing regulations and to ensure they can meet the expectations of regulators, investors, and the public.

Strengthening Compliance & Transparency

The good news for JPMS is that the firm has already taken steps to address the issues. Since 2020, the firm has worked to strengthen its internal processes, including enhanced reviews and better oversight of key data. These efforts are part of a broader trend in the industry where firms are increasingly focused on improving the accuracy and transparency of their operations.

This settlement serves as a critical reminder to financial institutions of all sizes that no matter how large or established the firm may be, regulatory oversight is a constant and should never be taken for granted. Accurate reporting, strong internal controls, and proactive compliance measures are essential not only for avoiding penalties but also for maintaining the integrity of the financial markets.

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