When is a kickback not a kickback?  That term appears in a recent settlement between JPMorgan Chase and the Securities and Exchange Commission, in which the bank copped to improperly funneling money from its wealthy private-banking clients into outside hedge funds.  In choosing outside funds to invest in, the bank almost invariably chose ones that were willing to pay “retrocessions” to JPMorgan, according to the S.E.C.  The Financial Times lexicon defines retrocessions as “kickbacks, trailer or finders fees.” It also refers to them as a “fee sharing arrangement.” According to the FT, “Critics suggest such a system encourages advisers to promote funds or products not because they are the most suitable for end-investors, but because they will receive a fee.”  One way to toe a blurry line between kickbacks and legitimate payments would be to disclose any such payments to clients. After all, retrocessions come out of the fund that pays them and are thus an indirect cost to clients who invest in the fund.  But disclosure was not JPMorgan’s style. The S.E.C. found that from 2008 to 2015, the bank violated securities’ laws by failing to disclose its preference for investing in hedge funds that paid retrocessions. In addition to paying regulators $307 million for that and other violations, JPMorgan must send new disclosures to clients.  A plain English disclosure – the only kind that is useful – would say something like: “We invest your money in hedge funds that pay us a fee for using them. We rarely use funds that refuse to pay us fees.”  Even better, the S.E.C. should ban retrocessions. Then no one would have to think about what they really are.
Call it what you will, S.E.C., but letting banks only invest in hedge funds that pay for their business should be disclosed to the clients footing the bill.