JP Morgan Citibank is a large international bank and member of the Federal Reserve System. It takes deposits in the U.S. which are insured by the FDIC. It also owns a registered U.S. broker-dealer, JPMCBD, with offices located only in New York City. JPMCBD provides investment banking services, including underwriting equities and bonds that will be publicly listed and offered. JPMCBD also has a group, JPMCBD Swaps that offers and executes swaps, futures and options to be executed with its clients.
Two employees of JPMCBD Swaps have identified a potential client, Acme Company, with whom JPMCBD Swaps will want to execute a range of derivatives (futures, options, swaps, etc.). The two JPMCBD Swaps employees are Tom Jones, a recent college graduate who will be taking his first licensing exam in a few months and then will become a first year JPMCBD Swaps Analyst, and John Smith, a fully licensed JPMCBD Swaps Vice President with fifteen years of work experience at JPMCBD Swaps.
Acme Company ("Acme") is a relatively small but growing specialty metal parts manufacturing company. It recently 'went public" - having listed its shares on the NYSE last month. Acme has just begun to "go international". It is planning to ship its products to England next year. Its CEO, Mike Mark, formed Acme two years ago out of college and has been a brilliant engineer and entrepreneur. Acme's board is still reviewing the business plan to ship its products to England and has not authorized any actions to be taken to support this plan.
JPMCBD has just started a new incentive compensation plan. The plan pays JPMCBD employees a salary and bonus. Both are will be paid in cash and immediately awarded monthly. The bonus is based on the potential revenue JPMCBD can earn on transactions that its employees arrange with clients. Although most transactions enable employees to obtain 20% of the potential revenue from the transactions, JPMCBD management has decided to gain market share in foreign exchange futures and options for the Japanese Yen and Euro and has will share 60% of the potential revenue for any Japanese Yen or Euro future or option.
Set out and discuss the following:
1. Do the actions of John Smith, Tom Jones and/or JPMCBD present any regulatory or ethical issues, problems or questions? What are the regulatory or ethical issues, problems or questions?
2. Which regulators would be responsible for these issues, problems or questions?
3. Would these issues, problems or questions arise in an examination or enforcement action by these regulators? If so, set out the examination and enforcement action and process by one of these regulators and what would be the potential outcome?
4. How would you correct these issues, problems or questions?
5. What are the regulatory or ethical issues or problems for Acme, its board, and/or Mike Mark? What regulators would be involved with these? How would you address these issues or problems if you were the regulators?
6. Has Joey done anything inappropriate? If so, why?