CORRESP Filing
JPMORGAN CHASE & CO
Date: Dec. 3, 2012 · CIK: 0000019617 · Accession: 0000019617-12-000337
AI Filing Summary & Sentiment
File numbers found in text: 001-05805
Referenced dates: July 25, 2012, November 7, 2012
Letter
Division of Corporation Finance United States Securities and Exchange Commission Forms 8-Ks Filed July 13, 2012 Form 10-Q for Fiscal Quarter Ended June 30, 2012 Filed August 9, 2012 File No. 001-05805
Dear Ms. Hayes:
We are in receipt of the letter dated November 7, 2012 to Douglas L. Braunstein, Executive Vice President and Chief Financial Officer of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), regarding the above-referenced filings.
Certain confidential portions of this letter were omitted by means of redacting a portion of the text. The word “[Redacted]” has been inserted in place of the portions so omitted. Pursuant to the provisions of 17 C.F.R. §200.83, we have separately submitted a copy of this letter containing the redacted portions of this letter with the Staff and have requested confidential treatment for the redacted portions of this letter.
To assist in your review of our responses to the comments set forth in the Staff's letter, we have set forth below in full the comments contained in the letter, together with our responses.
Form 10-K for the Fiscal Year Ended December 31, 2011
Item 9A: Controls and Procedures, page 20
1.We note your response to prior comment two of our letter dated July 25, 2012 where you indicated that there was a material difference in the size and characteristics of the synthetic credit portfolio during the first quarter of 2012. As part of your analysis of the overall effectiveness of the design of the controls, including your evaluation of the severity of the control deficiencies identified, please tell us whether you considered both the potential size and complexity
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and the related volume of activity that reasonably could have occurred in 2011 and the activity that was expected in future periods. For example, refer to the section of the Commission's Guidance Regarding Management's Report on Internal Control Over Financial Reporting (http://www.sec.gov/rules/interp/2007/33-8810.pdf) related to evaluation of control deficiencies that indicates that you should consider the volume of activity in the class of transactions exposed to the deficiency that has occurred in the period, or that is expected in future periods. In this regard, we note that it would appear that this volume of activity, and the likelihood that it could have occurred as of December 31, 2011, or was expected to occur in future periods, should be considered in evaluating whether the design of your controls was effective as of December 31, 2011.
The Firm assesses the effectiveness of its internal controls over financial reporting (“ICFRs”) based upon the COSO framework. The Firm's process for assessing its ICFR is a “top-down” risk-based approach, which is designed to identify key financial reporting controls that, if not designed appropriately or if not operating effectively, may result in a material misstatement of the Firm's financial statements.
As part of the Firm's assessment of the overall effectiveness of the design of its internal controls over financial reporting, the Firm considered the potential size, complexity and volume of activity that reasonably could have occurred in CIO at year-end 2011 and that was expected to occur in future periods. The Firm concluded that the design of the CIO valuation control process was appropriate at December 31, 2011 and March 31, 2012, but that a material weakness existed in the operating effectiveness of the VCG process as of March 31, 2012. Further, the Firm concluded that the significance and nature of the changes in CIO's synthetic credit portfolio during the first quarter of 2012 could not have been reasonably expected in December 2011.
[Redacted]
2. Additionally, please tell us whether you have identified any deficiencies as of
December 31, 2011, March 31, 2012, or June 30, 2012 in the risk assessment component of your controls related to timeliness of identifying and addressing new or changed financial reporting risks. Please also describe how you evaluated the severity of any such deficiencies.
The Firm did not identify deficiencies in the risk assessment component of the Firm's control framework regarding financial reporting risks at December 31, 2011, March 31, 2012 or June 30, 2012.
As noted in the Firm's response to the Staff's comment 1, although the Firm concluded that the design of the CIO valuation control process was effective, including as of March 31, 2012, the Firm did identify a material weakness in the operating effectiveness of the CIO valuation control process at March 31, 2012. The Firm does not view the material weakness in the operating effectiveness as a risk assessment issue. Rather, the Firm considers the finance supervision and engagement deficiency it noted to be an integral part and a key component of the CIO valuation control activity itself.
[Redacted]
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Requested by JPMorgan Chase & Co.
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Form 10-Q for Fiscal Quarter Ended March 31, 2012
Market Risk Management, page 73
Value-at-Risk, page 73
3. We note your response to the sixth bullet point of prior comment 10 of our letter dated July 25, 2012 regarding the need for disclosure of certain model, assumptions, and parameter changes to your value-at-risk (VaR) models. Please clearly explain to us how you considered your disclosure obligations pursuant to Item 305(a)(4) of Regulation S-K for the VaR model change that occurred within CIO during the first quarter of 2012, and how you evaluated materiality for purposes of your conclusions in this instance. For example, please specifically discuss any quantitative or qualitative metrics you consider in assessing VaR model changes, and describe whether these factors change depending on the type of VaR model change being made. Also, as part of your response, please tell us whether you would consider any mathematical model change related to the calculation of market or credit risk that is required to be submitted to the Division of Trading and Markets for approval pursuant to Rule 15c3-1e(a)(8) as material for disclosure under Item 305(a)(4), if approval is ultimately granted. If not, please tell us the types of circumstances where you believe disclosure under Item 305(a)(4) would not be required.
Item 305(a)(4) of Regulation S-K requires disclosure in a registrant's Form 10-K or 10-Q regarding changes in a Registrant's VaR model if there have been changes in “key model characteristics, assumptions and parameters used in providing quantitative information about market risk” and “if the effects of any such change is material [emphasis added]".
The Firm monitors changes in its VaR models on a monthly basis for the Investment Bank and on a quarterly basis for its others lines of business (LOB) to assess whether any such changes would require disclosure under Item 305(a)(4). With respect to the first quarter of 2012, the VaR models that were used to report VaR in the Firm's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (“2012 First Quarter 10-Q”) were the same models as those used to report VaR in prior quarters, including in the Firm's 2011 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. As was noted in footnote (c) on p. 73 of the 2012 First Quarter Form 10-Q, the methodology used to calculate CIO's VaR in the first quarter 2012 was consistent with the methodology used to calculate CIO's VaR in 2011 (as reported in the relevant quarterly and annual reports).1 Accordingly, although there was an interim change in the VaR model during the first quarter, that change had been reversed by the time the 2012 First Quarter 10-Q was filed. As a result, the Firm believes there was no model change within the meaning of Item 305(a)(4), which applies to VaR as reported in annual and quarterly reports, and, in any event, there could not have been a “material” change in the context of the VaR as reported in the 2012 First Quarter 10-Q.
[Redacted]
Note 3 – Fair value measurement, page 91
4. We note your response to comments 11 and 12 of our letter dated July 25, 2012 and have the following questions:
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•
We understand from your disclosure in your third-quarter Form 10-Q that the CIO valuation control group (VCG) typically establishes price testing thresholds. It is not clear how the acceptable range is defined, especially for instruments with a wide bid-offer range. Further, tell us how the VCG ensures that the range is sensitive enough that it is actually providing independent price verification. As part of your response, please clarify the process for reviewing the thresholds, including to whom the results of the analysis are reported, the factors that drive the thresholds, and how often the thresholds have changed over time.
With the exception of the most liquid exchange traded instruments, there is generally not one single estimate of fair value for a particular instrument to which all market participants would unanimously agree. This is because market transactions occur in the normal course of business throughout a range (often the bid-ask spread); this market activity creates a range of reasonable fair values for any particular instrument. The Firm must apply judgment within such a range to identify an appropriate specific estimation of fair value. The range of reasonable values is narrow (but not non-existent) for the most liquid instruments and generally increases as liquidity decreases. The objective of pricing thresholds is to approximate the reasonable range of fair values for a particular instrument so that VCG can identify when a variance between a front office mark and external pricing information may not be appropriate because it is outside the range of reasonable fair values.
[Redacted]
•
In your response to both comments 11 and 12, you have noted that the VCG will make valuation adjustments for various factors including the size of the net open risk position. Tell us which specific portfolio or positions you factor in the net open risk position.
JPMorgan Chase has elected to apply the portfolio exception to its market making derivative portfolios and related cash instruments within the IB line of business.
•
You have noted in this response as well in response to our comment 21 that the VCG is independent of the trading function. However, you have also noted that the respective VCG groups are located within both the CIO and Investment Bank (IB). Please discuss and disclose in future filings the structure of the VCG groups within the various business lines, including its reporting structure in each line.
The Firm historically maintained a VCG in both the IB and CIO. In both cases VCG was part of the respective IB/CIO Finance functions and reported directly to the respective IB/CIO Controller. The Controllers report to the respective IB/CIO CFOs, who each have dual reporting to the CFO of the Firm as well as to the IB Chief Executive Officer and the Firm's Chief Investment Officer, respectively.
In October 2012 the Firm combined the existing VCGs in CIO and IB (including activities covering Mortgage Banking) into a single VCG. The combined VCG continues to be part of the Firm's Finance function and is managed and evaluated accordingly. In addition, the Firm established a firm-wide Valuation Governance Forum (VGF) comprising senior finance and risk executives to oversee the management of risks arising from valuation activities across the Firm. The firm-wide VGF is chaired by the firm-wide head of VCG, and also includes sub-forums for the Investment Bank, Mortgage Bank, and Corporate functions, including CIO.
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The Firm will provide an expanded description of reporting lines of the combined VCG function in its 2012 Form 10-K.
•
Separately for each CIO and IB, please explain the process when the front office's mark is outside of the VCG's acceptable range and identify the parties responsible for making the final determination of the mark to be used. Please clarify how and whether this information is communicated to the trader that posted the marks.
[Redacted]
The results of the independent price testing process are reported to individual traders on a monthly basis, either in person or via email. This reporting includes all variances between front office marks and VCG independent marks and any resulting adjustments made by VCG.
5. We note your response to comment 13 of our letter dated 25, 2012, and have the following questions:
•
Your response indicates that you have applied liquidity adjustments to certain financial instruments. Please tell us amounts for your entire portfolio where you have made adjustments that are greater than 10% of the price or spread yet are still in Level 2.
[Redacted]
•
Please reconcile the statement that there was enough market activity for these instruments to be considered Level 2 with your other statements about holding positions in indices that were not as liquid. Specifically address the extent to which you consider your own positions and your own transactions when assessing the level of market activity in a particular index.
When determining the classification of instruments within the fair value measurement hierarchy the Firm evaluates the type and source of market information available as well as the level of market activity. The classification within the fair value hierarchy is made by considering available market information for a particular instrument without regard to entity-specific information, such as the size of position held by the Firm.
[Redacted]
Note 24 – Business Segments, page 163
6. We note your response to comment 19 from our letter dated July 25, 2012 regarding how the carrying values of your reporting units are determined for purposes of performing your goodwill impairment analysis. We are continuing to evaluate your response, and we may have further comment in the future.
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Form 8-K filed July 13, 2012
Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review, page 2
7. We note your response to comments 21 and 23 from our letter dated July 25, 2012 and have the following comments:
•
We understand that based on your review and analysis of emails, voice tapes, and interviews suggest trader intent to mark positions advantageously. It is not clear from your response exactly how this advantageous marking was being done. Please further describe how these positions were being marked advantageously.
[Redacted]
•
Tell us the extent to which the traders were marking long positions and short positions incorrectly, but still within the bid-offer spread and within the VCG established thresholds.
When the Firm made its decision to restate its first quarter financials, the Firm determined to restate the positions in the entire synthetic credit portfolio to an objectively determined benchmark “mid” valuation, notwithstanding that the prior valuations were within the VCG established thresholds. As noted in the Firm's response to the Staff's comment 4, the Firm does not believe that there is one single estimate of fair value for the positions in the s
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CORRESP 1 filename1.htm 11-7-2012 SEC Comment Letter (Redaction) Confidential Treatment Requested by JPMorgan Chase & Co. Page 1 December 3, 2012 Ms. Suzanne Hayes Assistant Director Division of Corporation Finance United States Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Re: JPMorgan Chase & Co. Form 10-K for Fiscal Year Ended December 31, 2011 Filed February 29, 2012 Form 10-Q for Fiscal Quarter Ended March 31, 2012 Filed May 10, 2012 Forms 8-Ks Filed July 13, 2012 Form 10-Q for Fiscal Quarter Ended June 30, 2012 Filed August 9, 2012 File No. 001-05805 Dear Ms. Hayes: We are in receipt of the letter dated November 7, 2012 to Douglas L. Braunstein, Executive Vice President and Chief Financial Officer of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), regarding the above-referenced filings. Certain confidential portions of this letter were omitted by means of redacting a portion of the text. The word “[Redacted]” has been inserted in place of the portions so omitted. Pursuant to the provisions of 17 C.F.R. §200.83, we have separately submitted a copy of this letter containing the redacted portions of this letter with the Staff and have requested confidential treatment for the redacted portions of this letter. To assist in your review of our responses to the comments set forth in the Staff's letter, we have set forth below in full the comments contained in the letter, together with our responses. Form 10-K for the Fiscal Year Ended December 31, 2011 Item 9A: Controls and Procedures, page 20 1.We note your response to prior comment two of our letter dated July 25, 2012 where you indicated that there was a material difference in the size and characteristics of the synthetic credit portfolio during the first quarter of 2012. As part of your analysis of the overall effectiveness of the design of the controls, including your evaluation of the severity of the control deficiencies identified, please tell us whether you considered both the potential size and complexity Confidential Treatment Requested by JPMorgan Chase & Co. Page 2 and the related volume of activity that reasonably could have occurred in 2011 and the activity that was expected in future periods. For example, refer to the section of the Commission's Guidance Regarding Management's Report on Internal Control Over Financial Reporting (http://www.sec.gov/rules/interp/2007/33-8810.pdf) related to evaluation of control deficiencies that indicates that you should consider the volume of activity in the class of transactions exposed to the deficiency that has occurred in the period, or that is expected in future periods. In this regard, we note that it would appear that this volume of activity, and the likelihood that it could have occurred as of December 31, 2011, or was expected to occur in future periods, should be considered in evaluating whether the design of your controls was effective as of December 31, 2011. The Firm assesses the effectiveness of its internal controls over financial reporting (“ICFRs”) based upon the COSO framework. The Firm's process for assessing its ICFR is a “top-down” risk-based approach, which is designed to identify key financial reporting controls that, if not designed appropriately or if not operating effectively, may result in a material misstatement of the Firm's financial statements. As part of the Firm's assessment of the overall effectiveness of the design of its internal controls over financial reporting, the Firm considered the potential size, complexity and volume of activity that reasonably could have occurred in CIO at year-end 2011 and that was expected to occur in future periods. The Firm concluded that the design of the CIO valuation control process was appropriate at December 31, 2011 and March 31, 2012, but that a material weakness existed in the operating effectiveness of the VCG process as of March 31, 2012. Further, the Firm concluded that the significance and nature of the changes in CIO's synthetic credit portfolio during the first quarter of 2012 could not have been reasonably expected in December 2011. [Redacted] 2. Additionally, please tell us whether you have identified any deficiencies as of December 31, 2011, March 31, 2012, or June 30, 2012 in the risk assessment component of your controls related to timeliness of identifying and addressing new or changed financial reporting risks. Please also describe how you evaluated the severity of any such deficiencies. The Firm did not identify deficiencies in the risk assessment component of the Firm's control framework regarding financial reporting risks at December 31, 2011, March 31, 2012 or June 30, 2012. As noted in the Firm's response to the Staff's comment 1, although the Firm concluded that the design of the CIO valuation control process was effective, including as of March 31, 2012, the Firm did identify a material weakness in the operating effectiveness of the CIO valuation control process at March 31, 2012. The Firm does not view the material weakness in the operating effectiveness as a risk assessment issue. Rather, the Firm considers the finance supervision and engagement deficiency it noted to be an integral part and a key component of the CIO valuation control activity itself. [Redacted] Confidential Treatment Requested by JPMorgan Chase & Co. Page 3 Form 10-Q for Fiscal Quarter Ended March 31, 2012 Market Risk Management, page 73 Value-at-Risk, page 73 3. We note your response to the sixth bullet point of prior comment 10 of our letter dated July 25, 2012 regarding the need for disclosure of certain model, assumptions, and parameter changes to your value-at-risk (VaR) models. Please clearly explain to us how you considered your disclosure obligations pursuant to Item 305(a)(4) of Regulation S-K for the VaR model change that occurred within CIO during the first quarter of 2012, and how you evaluated materiality for purposes of your conclusions in this instance. For example, please specifically discuss any quantitative or qualitative metrics you consider in assessing VaR model changes, and describe whether these factors change depending on the type of VaR model change being made. Also, as part of your response, please tell us whether you would consider any mathematical model change related to the calculation of market or credit risk that is required to be submitted to the Division of Trading and Markets for approval pursuant to Rule 15c3-1e(a)(8) as material for disclosure under Item 305(a)(4), if approval is ultimately granted. If not, please tell us the types of circumstances where you believe disclosure under Item 305(a)(4) would not be required. Item 305(a)(4) of Regulation S-K requires disclosure in a registrant's Form 10-K or 10-Q regarding changes in a Registrant's VaR model if there have been changes in “key model characteristics, assumptions and parameters used in providing quantitative information about market risk” and “if the effects of any such change is material [emphasis added]". The Firm monitors changes in its VaR models on a monthly basis for the Investment Bank and on a quarterly basis for its others lines of business (LOB) to assess whether any such changes would require disclosure under Item 305(a)(4). With respect to the first quarter of 2012, the VaR models that were used to report VaR in the Firm's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (“2012 First Quarter 10-Q”) were the same models as those used to report VaR in prior quarters, including in the Firm's 2011 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. As was noted in footnote (c) on p. 73 of the 2012 First Quarter Form 10-Q, the methodology used to calculate CIO's VaR in the first quarter 2012 was consistent with the methodology used to calculate CIO's VaR in 2011 (as reported in the relevant quarterly and annual reports).1 Accordingly, although there was an interim change in the VaR model during the first quarter, that change had been reversed by the time the 2012 First Quarter 10-Q was filed. As a result, the Firm believes there was no model change within the meaning of Item 305(a)(4), which applies to VaR as reported in annual and quarterly reports, and, in any event, there could not have been a “material” change in the context of the VaR as reported in the 2012 First Quarter 10-Q. [Redacted] Note 3 – Fair value measurement, page 91 4. We note your response to comments 11 and 12 of our letter dated July 25, 2012 and have the following questions: Confidential Treatment Requested by JPMorgan Chase & Co. Page 4 • We understand from your disclosure in your third-quarter Form 10-Q that the CIO valuation control group (VCG) typically establishes price testing thresholds. It is not clear how the acceptable range is defined, especially for instruments with a wide bid-offer range. Further, tell us how the VCG ensures that the range is sensitive enough that it is actually providing independent price verification. As part of your response, please clarify the process for reviewing the thresholds, including to whom the results of the analysis are reported, the factors that drive the thresholds, and how often the thresholds have changed over time. With the exception of the most liquid exchange traded instruments, there is generally not one single estimate of fair value for a particular instrument to which all market participants would unanimously agree. This is because market transactions occur in the normal course of business throughout a range (often the bid-ask spread); this market activity creates a range of reasonable fair values for any particular instrument. The Firm must apply judgment within such a range to identify an appropriate specific estimation of fair value. The range of reasonable values is narrow (but not non-existent) for the most liquid instruments and generally increases as liquidity decreases. The objective of pricing thresholds is to approximate the reasonable range of fair values for a particular instrument so that VCG can identify when a variance between a front office mark and external pricing information may not be appropriate because it is outside the range of reasonable fair values. [Redacted] • In your response to both comments 11 and 12, you have noted that the VCG will make valuation adjustments for various factors including the size of the net open risk position. Tell us which specific portfolio or positions you factor in the net open risk position. JPMorgan Chase has elected to apply the portfolio exception to its market making derivative portfolios and related cash instruments within the IB line of business. • You have noted in this response as well in response to our comment 21 that the VCG is independent of the trading function. However, you have also noted that the respective VCG groups are located within both the CIO and Investment Bank (IB). Please discuss and disclose in future filings the structure of the VCG groups within the various business lines, including its reporting structure in each line. The Firm historically maintained a VCG in both the IB and CIO. In both cases VCG was part of the respective IB/CIO Finance functions and reported directly to the respective IB/CIO Controller. The Controllers report to the respective IB/CIO CFOs, who each have dual reporting to the CFO of the Firm as well as to the IB Chief Executive Officer and the Firm's Chief Investment Officer, respectively. In October 2012 the Firm combined the existing VCGs in CIO and IB (including activities covering Mortgage Banking) into a single VCG. The combined VCG continues to be part of the Firm's Finance function and is managed and evaluated accordingly. In addition, the Firm established a firm-wide Valuation Governance Forum (VGF) comprising senior finance and risk executives to oversee the management of risks arising from valuation activities across the Firm. The firm-wide VGF is chaired by the firm-wide head of VCG, and also includes sub-forums for the Investment Bank, Mortgage Bank, and Corporate functions, including CIO. Confidential Treatment Requested by JPMorgan Chase & Co. Page 5 The Firm will provide an expanded description of reporting lines of the combined VCG function in its 2012 Form 10-K. • Separately for each CIO and IB, please explain the process when the front office's mark is outside of the VCG's acceptable range and identify the parties responsible for making the final determination of the mark to be used. Please clarify how and whether this information is communicated to the trader that posted the marks. [Redacted] The results of the independent price testing process are reported to individual traders on a monthly basis, either in person or via email. This reporting includes all variances between front office marks and VCG independent marks and any resulting adjustments made by VCG. 5. We note your response to comment 13 of our letter dated 25, 2012, and have the following questions: • Your response indicates that you have applied liquidity adjustments to certain financial instruments. Please tell us amounts for your entire portfolio where you have made adjustments that are greater than 10% of the price or spread yet are still in Level 2. [Redacted] • Please reconcile the statement that there was enough market activity for these instruments to be considered Level 2 with your other statements about holding positions in indices that were not as liquid. Specifically address the extent to which you consider your own positions and your own transactions when assessing the level of market activity in a particular index. When determining the classification of instruments within the fair value measurement hierarchy the Firm evaluates the type and source of market information available as well as the level of market activity. The classification within the fair value hierarchy is made by considering available market information for a particular instrument without regard to entity-specific information, such as the size of position held by the Firm. [Redacted] Note 24 – Business Segments, page 163 6. We note your response to comment 19 from our letter dated July 25, 2012 regarding how the carrying values of your reporting units are determined for purposes of performing your goodwill impairment analysis. We are continuing to evaluate your response, and we may have further comment in the future. Confidential Treatment Requested by JPMorgan Chase & Co. Page 6 Form 8-K filed July 13, 2012 Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review, page 2 7. We note your response to comments 21 and 23 from our letter dated July 25, 2012 and have the following comments: • We understand that based on your review and analysis of emails, voice tapes, and interviews suggest trader intent to mark positions advantageously. It is not clear from your response exactly how this advantageous marking was being done. Please further describe how these positions were being marked advantageously. [Redacted] • Tell us the extent to which the traders were marking long positions and short positions incorrectly, but still within the bid-offer spread and within the VCG established thresholds. When the Firm made its decision to restate its first quarter financials, the Firm determined to restate the positions in the entire synthetic credit portfolio to an objectively determined benchmark “mid” valuation, notwithstanding that the prior valuations were within the VCG established thresholds. As noted in the Firm's response to the Staff's comment 4, the Firm does not believe that there is one single estimate of fair value for the positions in the s