Mega bank and serial regulatory cheat JPMorgan has apparently been caught with its hand in the cookie jar again. The Commodity Futures Trading Commission has joined an ongoing investigation by other regulatory agencies regarding whether JPMorgan made sufficient disclosures when directing clients to high-risk hedge fund investments, according to sources with knowledge of the matter who spoke to the Wall Street Journal.

The CFTC inquiry into JPMorgan’s hedge funds had not been publicly released until today as it is a part of a larger probe by federal and state regulators.

The sources also noted the investigation includes a closer look at new client activities at Highbridge Capital Management, a hedge fund firm owned by JPMorgan. The CFTC is investigating why such a high percentage of Highbridge’s AUM stems from JPMorgan’s private-bank assets, and, moreover, just how important was the new client cash infusion in stabilizing Highbridge during the financial crisis, according to the WSJ sources.

CFTC Joins Investigation Into JPMorgan "Client Steering"

Details on ongoing investigation of JPMorgan

One key issue that investigators are looking at is the fact that by the end of 2012, JPMorgan private-bank client assets had grown to account for 71% of Highbridge’s flagship fund, an increase from a mere 26% in 2007, according to a source familiar with the CFTC’s probe.

Keep in mind that navigating potential conflicts of interest is a huge issue for banks today, especially given they financially incentivize employees to leverage their relationships with clients to try and bring more funds in.

Of note, regulators are monitoring this grey area more closely today, although legal experts say there is really no clear line where effective selling crosses into taking advantage. Financial institutions can sell in-house investments, but the advisers/sales people must obey regulations requiring them to only recommend investments that are suitable for those individuals.

Regulators are also more often leaning on firms to be more up front with clients about fees instead of burying fee disclosures in the fine print at the back.

More on Highbridge

Highbridge is a $27 billion firm that manages multiple hedge funds and private-equity funds under its own name. Of interest, JPMorgan initially bought a stake in Highbridge in 2004, and completed the acquisition in 2009.

Analysts point out that Highbridge was among the largest hedge-fund firms on Wall Street for several years after the turn of the century, but the firm performed poorly during the financial crisis. Investors withdrew billions from its largest hedge fund, and Highbridge offered reduced fees and other incentives to get investors to not take their cash out. The firm then decided to beef up its private-equity business as a less-volatile asset to balance its more risky hedge funds.