SEC Company Response from JPMORGAN CHASE & CO (JPM, AMJB, VYLD, JPM-PC, JPM-PD, JPM-PJ, JPM-PK, JPM-PL, JPM-PM) (CIK 0000019617) (JPM) — May 1, 2012
JPMORGAN CHASE & CO (JPM, AMJB, VYLD, JPM-PC, JPM-PD, JPM-PJ, JPM-PK, JPM-PL, JPM-PM) (CIK 0000019617)
Date: May 1, 2012 · CIK: 0000019617 · Accession: 0000950103-12-002299
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 333-177923
Letter
VIA EDGAR AND E-MAIL Office of Capital Markets Trends Division of Corporation Finance United States Securities and Exchange Commission JPMorgan Chase & Co. 424 Prospectuses relating to Registration Statement on Form S-3ASR Filed November 14, 2011 File No. 333-177923
Dear Ms. Starr:
We are in receipt of the letter, dated April 12, 2012, to the undersigned from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), regarding your review of offerings of JPMorgan Chase & Co.’s (the “Issuer”) Global Medium-Term Notes, Series E (the “Notes”) that are registered under the Securities Act of 1933, as amended (the “Securities Act”) under the Registration Statement on Form S-3ASR (File No. 333-177923) (the “Registration Statement”) filed on November 14, 2011. We appreciate your extension of the response deadline to May 1, 2012.
We believe that structured notes can be a valuable tool for our clients, especially in the current market environment, and welcome the opportunity to cooperate with the Staff in improving disclosure and establishing best industry practices in structured note offerings.
To assist in your review of the Issuer’s responses to the comments set forth in the Staff’s letter, the Issuer has set forth below in full the comments contained in the letter, together with its responses.
JPMorgan Chase & Co. • 270 Park Avenue, New York, New York 10017
Tel: 212 270 6000
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Product Names
1. The staff in the Division of Corporation Finance has previously indicated that note titles using the term “principal protected” should also include balanced information about limitations to the principal protection feature. We believe this concern regarding potential confusion over the titles of securities may exist for note titles across various product categories. Issuers should evaluate the titles used for their different types of structured notes and should revise to clearly describe the product in a balanced manner and avoid titles that stress positive features without also identifying limiting or negative features.
The Issuer acknowledges this comment. The Issuer has evaluated and will continue to evaluate the appropriateness of the titles of its Notes. As a result of extensive discussions with the Staff between June 2010 and November 2010, which discussions involved other market participants, the Securities Industry and Financial Markets Association and other issuers of structured notes, the Issuer has removed “principal protected” from the titles of its Notes. The Notes that were formerly referred to as “principal protected notes linked to [underlying asset or index]” are now titled “notes linked to [underlying asset or index].”
Product Pricing and Value
2. We note that issuers of structured notes often include disclosure, including in risk factors, explaining that the value of the notes at issuance and/or the price that the affiliate would pay for the notes in the secondary market, assuming no change in market conditions, will be less than the public offering price. In order for investors to be able to understand the relationship of the note purchase price to its fair value (as estimated by the issuer or its affiliate) and potential secondary market prices, we believe issuers should consider prominently disclosing the difference between the public offering price of the note and the issuer or its affiliate’s estimate of the fair value of the note or discuss with us the reasons such disclosure should not be provided. Issuers also should consider identifying the specific amounts being paid from the note proceeds for costs and expenses.
The Issuer acknowledges this comment. The Issuer believes that “fair value” is subject to various market interpretations and would welcome clarifying guidance regarding the expected definition.
The Issuer’s practice is to disclose the fair value of the Notes as the offer price at which the Issuer would not expect to realize a profit over the term of the Notes. This fair value is equal to the Notes’ public offer price less the sales commissions paid to affiliated or third-party distributors and less the projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging its obligations under the Notes. The Issuer also discloses the presence of estimated costs of hedging the Issuer’s obligations under the notes through one or more of its affiliates. In determining the price at which the Issuer may be willing to immediately repurchase the Notes in the secondary market, some of these components are subject to the amortization policy of J.P. Morgan Securities LLC (“JPMS”) as discussed in the response to Comment 3 below. Because expenses related to offerings of the Notes are managed on an aggregate basis
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instead of being accounted for or allocated on a per issuance basis, the Issuer does not factor these expenses into the price of the Notes paid by investors.
In many Note offerings, the Issuer discloses in the fee table on the front cover the commission paid to the relevant agent, which commission also includes the projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging the Issuer’s obligations under the Notes. While the Issuer has not disclosed the estimated amount of expected hedging costs associated with the pricing and managing of risks related to the Notes, the Issuer includes qualitative disclosures about their existence on the front cover of its term sheets, preliminary pricing supplements and final pricing supplements related to these offerings with language to the following effect:
The price to the public includes the estimated cost of hedging our obligations under the notes through one or more of our affiliates.
In certain Note offerings, the Issuer participates in a competitive bid process with other issuers of structured notes, which is sometimes referred to as “open architecture” by distributors of structured notes. Open architecture developed as a result of the desire of these distributors to offer issuer credit risk diversification and competitive pricing on economic terms to their clients. In these open architecture offerings, the Issuer discloses the commission paid to the relevant agent. The maximum amount of projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging the Issuer’s obligations under the Notes is disclosed in the “Use of Proceeds and Hedging” section of the relevant product supplement. As with the offerings described in the preceding paragraph, the Issuer includes qualitative disclosures about the existence of hedging costs on the front cover of its term sheets, preliminary pricing supplements and final pricing supplements related to these offerings.
3. We have observed that some issuers of structured notes or their affiliates will, for a limited period of time immediately following an offering, use values on account statements or provide repurchase prices to customers at levels that temporarily exceed the issuer’s or affiliate’s own estimate of the fair value of the product. Further, we understand that after a given period of time such values and prices will be readjusted to better reflect the issuer’s or affiliate’s own estimate of the fair value of the product. If applicable, we ask that you disclose, including in risk factor disclosure as appropriate, your usage of different values and prices in this manner and explain the potential impacts on post-offering pricing, valuation, and trading.
The Issuer acknowledges this comment. The price at which the Issuer may be willing to immediately repurchase the Notes in the secondary market will typically exceed the “fair value” of the Notes using the fair value described in the response to Comment 2 above. The amount of this excess includes the projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging the Issuer’s obligations under the Notes and, in certain circumstances, the estimated cost of hedging the Issuer’s obligations under the notes through one or more of its affiliates. [Redacted]
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As a result, assuming no change in market conditions or other relevant factors, indicative bid prices provided by the Issuer for the Notes will generally exceed the “fair value” of the Notes using the fair value described in the response to Comment 2 above until this amortization is complete.
As described in more detail in the response to Comment 8 below, JPMS generally publishes indicative bid prices for the Notes. The distributors of the Notes are responsible for providing account statements to customers. These distributors may use JPMS’ indicative bid prices for completing customer account statements or they may source the valuation of the Notes from independent pricing vendors.
In future filings, the Issuer proposes to include risk factor disclosure substantially similar to the following in term sheets, preliminary pricing supplements and final pricing supplements, if applicable:
For purposes of determining the price, if any, at which J.P. Morgan Securities LLC, which we refer to as JPMS, is willing to buy the notes, JPMS may amortize over time the projected profits that our affiliates expect to realize for assuming the risks inherent in hedging our obligations under the notes and, in certain circumstances, the estimated cost of hedging our obligations under the notes. As a result, assuming no change in market conditions, the price, if any, at which JPMS is willing to buy the notes may decrease over time until those amounts have been fully amortized.
Use of Proceeds and Reasons for Offerings
4. Issuers often provide disclosure explaining that they will use the proceeds of a structured note offering for general corporate purposes and may use an unquantified portion for hedging transactions. Item 504 of Regulation S-K requires that issuers disclose the approximate amounts intended to be used for each purpose. If the issuer does not have specific plans for a significant portion of the proceeds of the offering, it should note the reasons for the offering.
The Issuer acknowledges this comment. Because the Note offerings are not conducted for financing and liquidity purposes as discussed in the response to Comment 5 below, and because the portion of the net proceeds that will be required to be used to hedge the Issuer’s obligations under the Notes may not be quantifiable at pricing, consistent with long-standing market practice, the Issuer has historically disclosed the use of the net proceeds with language to the following effect:
The net proceeds we receive from the sale of the notes will be used for general corporate purposes and, in part, by us or by one or more of our affiliates in connection with hedging our obligations under the notes.
In the case of the Note offerings, the Issuer does not believe that quantifying the use of proceeds provides meaningful information to investors.
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In future filings, the Issuer proposes to provide additional disclosure that is substantially similar to the following:
The reason we offer the Notes is to meet investor demand for products that reflect certain risk-return profiles and specific market exposure, [with other product features to be described on a product-by-product basis].
5. Please explain to us in your response letter with a view toward disclosure in your future Exchange Act reports, the purpose of your structured notes program generally, and the purposes of particular types of offerings or products. Explain to us how significant structured notes are to your overall plan of financing and liquidity position. Please tell us about any material trends or changes in your use of, or your experience with, structured notes in the past few years, including trends or changes in your reliance on structured notes as a liquidity source. Also tell us about trends or changes in note types and/or the referenced asset classes or referenced indices. Please include quantitative information about outstanding structured note obligations in recent periods.
The purpose of the Notes program and of the individual offerings is to meet investor demand for products that reflect certain risk-return profiles and specific market exposure. The Issuer distributes the Notes through JPMS to certain clients of JPMorgan’s wealth management business, as well as to, or through, unaffiliated broker-dealers, private banks, registered investment advisers and institutional investors. The Issuer does not rely on the issuance of the Notes for financing and liquidity purposes.
When the Issuer began issuing structured notes with some frequency in 2003, most notes were linked to indices that referenced the prices of equity securities. Since that time, the Issuer has increasingly offered structured notes linked to other assets or indices, such as interest rates, equity securities, currencies and commodities to meet investor demand.
The Issuer currently discloses the amount of long-term structured notes1 that are issued, as well as those that have matured or been redeemed, in its quarterly and annual reports. In addition, in its annual reports, the Issuer discloses the aggregate amount of long-term structured notes outstanding. Quantitative information about the Issuer’s outstanding long-term debt and long-term structured notes in recent periods is included in the table below.
1 Long-term structured notes include those issued on a registered basis (i.e., the Notes) and those issued on an unregistered basis, primarily to non-U.S. clients in Latin America, Europe, the Middle East and Asia. Long-term structured notes exclude those (a) that have a duration of less than one year, (2) that are automatically callable pursuant to market events or (c) that include early redemption or repurchase features exercisable by investors at any time during the term of the structured notes.
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Year ended
December 31, 2011
(in billions)
Year ended
December 31, 2010
(in billions)
Issued2
Total long-term debt
$53.0
$54.8
Total long-term structured notes
$14.8
$14.6
Matured or redeemed2
Total long-term debt
$67.7
$72.0
Total long-term structured notes
$18.7
$22.8
Outstanding at period end3
Total long-term debt
$256.8
$270.7
Total long-term structured notes
$34.7
$38.8
The principal amount of Notes outstanding under the Registration Statement (File No. 333-177923) and predecessor registration statements as of December 31, 2011 was $8.5 billion and as of December 31, 2010 was $6.0 billion.
Plan of Distribution
6. We have found that some issuers of structured notes disclose that their affiliates might change the price and selling terms if all notes are not sold at the public offering price disclosed on the cover page. Please explain to us with a view toward disclosure, the manner in which you conduct structured no
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CORRESP 1 filename1.htm FOIA Confidential Treatment Requested Pursuant to Rule 83 by JPMorgan Chase & Co. Page 2012.05.01.1 CONFIDENTIAL TREATMENT OF CERTAIN DESIGNATED PORTIONS OF THIS LETTER HAS BEEN REQUESTED BY JPMORGAN CHASE & CO. THOSE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED, AS INDICATED BY [REDACTED] IN THE TEXT, AND HAVE BEEN SUBMITTED TO THE COMMISSION. May 1, 2012 VIA EDGAR AND E-MAIL Ms. Amy M. Starr Chief Office of Capital Markets Trends Division of Corporation Finance United States Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Re: JPMorgan Chase & Co. 424 Prospectuses relating to Registration Statement on Form S-3ASR Filed November 14, 2011 File No. 333-177923 Dear Ms. Starr: We are in receipt of the letter, dated April 12, 2012, to the undersigned from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), regarding your review of offerings of JPMorgan Chase & Co.’s (the “Issuer”) Global Medium-Term Notes, Series E (the “Notes”) that are registered under the Securities Act of 1933, as amended (the “Securities Act”) under the Registration Statement on Form S-3ASR (File No. 333-177923) (the “Registration Statement”) filed on November 14, 2011. We appreciate your extension of the response deadline to May 1, 2012. We believe that structured notes can be a valuable tool for our clients, especially in the current market environment, and welcome the opportunity to cooperate with the Staff in improving disclosure and establishing best industry practices in structured note offerings. To assist in your review of the Issuer’s responses to the comments set forth in the Staff’s letter, the Issuer has set forth below in full the comments contained in the letter, together with its responses. JPMorgan Chase & Co. • 270 Park Avenue, New York, New York 10017 Tel: 212 270 6000 FOIA Confidential Treatment Requested Pursuant to Rule 83 by JPMorgan Chase & Co. Page 2012.05.01.2 Product Names 1. The staff in the Division of Corporation Finance has previously indicated that note titles using the term “principal protected” should also include balanced information about limitations to the principal protection feature. We believe this concern regarding potential confusion over the titles of securities may exist for note titles across various product categories. Issuers should evaluate the titles used for their different types of structured notes and should revise to clearly describe the product in a balanced manner and avoid titles that stress positive features without also identifying limiting or negative features. The Issuer acknowledges this comment. The Issuer has evaluated and will continue to evaluate the appropriateness of the titles of its Notes. As a result of extensive discussions with the Staff between June 2010 and November 2010, which discussions involved other market participants, the Securities Industry and Financial Markets Association and other issuers of structured notes, the Issuer has removed “principal protected” from the titles of its Notes. The Notes that were formerly referred to as “principal protected notes linked to [underlying asset or index]” are now titled “notes linked to [underlying asset or index].” Product Pricing and Value 2. We note that issuers of structured notes often include disclosure, including in risk factors, explaining that the value of the notes at issuance and/or the price that the affiliate would pay for the notes in the secondary market, assuming no change in market conditions, will be less than the public offering price. In order for investors to be able to understand the relationship of the note purchase price to its fair value (as estimated by the issuer or its affiliate) and potential secondary market prices, we believe issuers should consider prominently disclosing the difference between the public offering price of the note and the issuer or its affiliate’s estimate of the fair value of the note or discuss with us the reasons such disclosure should not be provided. Issuers also should consider identifying the specific amounts being paid from the note proceeds for costs and expenses. The Issuer acknowledges this comment. The Issuer believes that “fair value” is subject to various market interpretations and would welcome clarifying guidance regarding the expected definition. The Issuer’s practice is to disclose the fair value of the Notes as the offer price at which the Issuer would not expect to realize a profit over the term of the Notes. This fair value is equal to the Notes’ public offer price less the sales commissions paid to affiliated or third-party distributors and less the projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging its obligations under the Notes. The Issuer also discloses the presence of estimated costs of hedging the Issuer’s obligations under the notes through one or more of its affiliates. In determining the price at which the Issuer may be willing to immediately repurchase the Notes in the secondary market, some of these components are subject to the amortization policy of J.P. Morgan Securities LLC (“JPMS”) as discussed in the response to Comment 3 below. Because expenses related to offerings of the Notes are managed on an aggregate basis FOIA Confidential Treatment Requested Pursuant to Rule 83 by JPMorgan Chase & Co. Page 2012.05.01.3 instead of being accounted for or allocated on a per issuance basis, the Issuer does not factor these expenses into the price of the Notes paid by investors. In many Note offerings, the Issuer discloses in the fee table on the front cover the commission paid to the relevant agent, which commission also includes the projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging the Issuer’s obligations under the Notes. While the Issuer has not disclosed the estimated amount of expected hedging costs associated with the pricing and managing of risks related to the Notes, the Issuer includes qualitative disclosures about their existence on the front cover of its term sheets, preliminary pricing supplements and final pricing supplements related to these offerings with language to the following effect: The price to the public includes the estimated cost of hedging our obligations under the notes through one or more of our affiliates. In certain Note offerings, the Issuer participates in a competitive bid process with other issuers of structured notes, which is sometimes referred to as “open architecture” by distributors of structured notes. Open architecture developed as a result of the desire of these distributors to offer issuer credit risk diversification and competitive pricing on economic terms to their clients. In these open architecture offerings, the Issuer discloses the commission paid to the relevant agent. The maximum amount of projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging the Issuer’s obligations under the Notes is disclosed in the “Use of Proceeds and Hedging” section of the relevant product supplement. As with the offerings described in the preceding paragraph, the Issuer includes qualitative disclosures about the existence of hedging costs on the front cover of its term sheets, preliminary pricing supplements and final pricing supplements related to these offerings. 3. We have observed that some issuers of structured notes or their affiliates will, for a limited period of time immediately following an offering, use values on account statements or provide repurchase prices to customers at levels that temporarily exceed the issuer’s or affiliate’s own estimate of the fair value of the product. Further, we understand that after a given period of time such values and prices will be readjusted to better reflect the issuer’s or affiliate’s own estimate of the fair value of the product. If applicable, we ask that you disclose, including in risk factor disclosure as appropriate, your usage of different values and prices in this manner and explain the potential impacts on post-offering pricing, valuation, and trading. The Issuer acknowledges this comment. The price at which the Issuer may be willing to immediately repurchase the Notes in the secondary market will typically exceed the “fair value” of the Notes using the fair value described in the response to Comment 2 above. The amount of this excess includes the projected profits that the Issuer’s affiliates expect to realize for assuming the risks inherent in hedging the Issuer’s obligations under the Notes and, in certain circumstances, the estimated cost of hedging the Issuer’s obligations under the notes through one or more of its affiliates. [Redacted] FOIA Confidential Treatment Requested Pursuant to Rule 83 by JPMorgan Chase & Co. Page 2012.05.01.4 As a result, assuming no change in market conditions or other relevant factors, indicative bid prices provided by the Issuer for the Notes will generally exceed the “fair value” of the Notes using the fair value described in the response to Comment 2 above until this amortization is complete. As described in more detail in the response to Comment 8 below, JPMS generally publishes indicative bid prices for the Notes. The distributors of the Notes are responsible for providing account statements to customers. These distributors may use JPMS’ indicative bid prices for completing customer account statements or they may source the valuation of the Notes from independent pricing vendors. In future filings, the Issuer proposes to include risk factor disclosure substantially similar to the following in term sheets, preliminary pricing supplements and final pricing supplements, if applicable: For purposes of determining the price, if any, at which J.P. Morgan Securities LLC, which we refer to as JPMS, is willing to buy the notes, JPMS may amortize over time the projected profits that our affiliates expect to realize for assuming the risks inherent in hedging our obligations under the notes and, in certain circumstances, the estimated cost of hedging our obligations under the notes. As a result, assuming no change in market conditions, the price, if any, at which JPMS is willing to buy the notes may decrease over time until those amounts have been fully amortized. Use of Proceeds and Reasons for Offerings 4. Issuers often provide disclosure explaining that they will use the proceeds of a structured note offering for general corporate purposes and may use an unquantified portion for hedging transactions. Item 504 of Regulation S-K requires that issuers disclose the approximate amounts intended to be used for each purpose. If the issuer does not have specific plans for a significant portion of the proceeds of the offering, it should note the reasons for the offering. The Issuer acknowledges this comment. Because the Note offerings are not conducted for financing and liquidity purposes as discussed in the response to Comment 5 below, and because the portion of the net proceeds that will be required to be used to hedge the Issuer’s obligations under the Notes may not be quantifiable at pricing, consistent with long-standing market practice, the Issuer has historically disclosed the use of the net proceeds with language to the following effect: The net proceeds we receive from the sale of the notes will be used for general corporate purposes and, in part, by us or by one or more of our affiliates in connection with hedging our obligations under the notes. In the case of the Note offerings, the Issuer does not believe that quantifying the use of proceeds provides meaningful information to investors. FOIA Confidential Treatment Requested Pursuant to Rule 83 by JPMorgan Chase & Co. Page 2012.05.01.5 In future filings, the Issuer proposes to provide additional disclosure that is substantially similar to the following: The reason we offer the Notes is to meet investor demand for products that reflect certain risk-return profiles and specific market exposure, [with other product features to be described on a product-by-product basis]. 5. Please explain to us in your response letter with a view toward disclosure in your future Exchange Act reports, the purpose of your structured notes program generally, and the purposes of particular types of offerings or products. Explain to us how significant structured notes are to your overall plan of financing and liquidity position. Please tell us about any material trends or changes in your use of, or your experience with, structured notes in the past few years, including trends or changes in your reliance on structured notes as a liquidity source. Also tell us about trends or changes in note types and/or the referenced asset classes or referenced indices. Please include quantitative information about outstanding structured note obligations in recent periods. The purpose of the Notes program and of the individual offerings is to meet investor demand for products that reflect certain risk-return profiles and specific market exposure. The Issuer distributes the Notes through JPMS to certain clients of JPMorgan’s wealth management business, as well as to, or through, unaffiliated broker-dealers, private banks, registered investment advisers and institutional investors. The Issuer does not rely on the issuance of the Notes for financing and liquidity purposes. When the Issuer began issuing structured notes with some frequency in 2003, most notes were linked to indices that referenced the prices of equity securities. Since that time, the Issuer has increasingly offered structured notes linked to other assets or indices, such as interest rates, equity securities, currencies and commodities to meet investor demand. The Issuer currently discloses the amount of long-term structured notes1 that are issued, as well as those that have matured or been redeemed, in its quarterly and annual reports. In addition, in its annual reports, the Issuer discloses the aggregate amount of long-term structured notes outstanding. Quantitative information about the Issuer’s outstanding long-term debt and long-term structured notes in recent periods is included in the table below. 1 Long-term structured notes include those issued on a registered basis (i.e., the Notes) and those issued on an unregistered basis, primarily to non-U.S. clients in Latin America, Europe, the Middle East and Asia. Long-term structured notes exclude those (a) that have a duration of less than one year, (2) that are automatically callable pursuant to market events or (c) that include early redemption or repurchase features exercisable by investors at any time during the term of the structured notes. FOIA Confidential Treatment Requested Pursuant to Rule 83 by JPMorgan Chase & Co. Page 2012.05.01.6 Year ended December 31, 2011 (in billions) Year ended December 31, 2010 (in billions) Issued2 Total long-term debt $53.0 $54.8 Total long-term structured notes $14.8 $14.6 Matured or redeemed2 Total long-term debt $67.7 $72.0 Total long-term structured notes $18.7 $22.8 Outstanding at period end3 Total long-term debt $256.8 $270.7 Total long-term structured notes $34.7 $38.8 The principal amount of Notes outstanding under the Registration Statement (File No. 333-177923) and predecessor registration statements as of December 31, 2011 was $8.5 billion and as of December 31, 2010 was $6.0 billion. Plan of Distribution 6. We have found that some issuers of structured notes disclose that their affiliates might change the price and selling terms if all notes are not sold at the public offering price disclosed on the cover page. Please explain to us with a view toward disclosure, the manner in which you conduct structured no