SEC Company Response from MORGAN STANLEY (MS, MS-PA, MS-PE, MS-PF, MS-PI, MS-PK, MS-PL, MS-PO, MS-PP, MS-PQ) (CIK 0000895421) (MS) — Jul 26, 2012
MORGAN STANLEY (MS, MS-PA, MS-PE, MS-PF, MS-PI, MS-PK, MS-PL, MS-PO, MS-PP, MS-PQ) (CIK 0000895421)
Date: July 26, 2012 · CIK: 0000895421 · Accession: 0001193125-12-316971
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-11758
Letter
Division of Corporation Finance Securities and Exchange Commission Filed February 27, 2012 Form 10-Q for Quarterly Period Ended March 31, Filed May 7, 2012 File No. 001-11758
Dear Ms. Hayes:
Morgan Stanley (the “Company”) is pleased to respond to your letter of June 22, 2012 concerning its Form 10-K for the fiscal year ended December 31, 2011 (“2011 Form 10-K”), the April 5, 2012 Definitive Proxy Statement (“2012 Proxy Statement”) and the Form 10-Q for the quarterly period ended March 31, 2012 (“First Quarter Form 10-Q”).
For your convenience, we have restated your comments below.
Form 10-K for Fiscal Year Ended December 31, 2011
Item 1A. Risk Factors
We are subject to operational risk that could adversely affect our businesses, page 24
Comment:
1. We note that you are subject to operational risk, including potential vulnerability to “unauthorized access, mishandling or misuse, computer viruses or malware, cyber attacks and other events that could have a security impact on ‘your computer’ systems.” Furthermore, we note reports that the prevalence of cyber attacks have increased in your industry. If you have experienced any of these or other cyber incidents in the past, beginning with your next Form 10-Q, please state that fact in order to provide the proper context for your risk factor disclosure. Please refer to the Division of Corporation Finance’s Disclosure Guidance Topic No. 2 at http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm for additional information.
Response:
The Company considered Disclosure Guidance Topic No. 2 in preparing this risk factor disclosure. Disclosure Guidance Topic No. 2 states that a registrant may need to include a “description of cyber incidents experienced by the registrant that are individually, or in the aggregate, material.…” The Company has not experienced any cyber incident that was material, individually or in the aggregate. However, the Company will continue to monitor cyber incidents, including any computer viruses or malware, cyber attacks and other similar attacks, and evaluate the need for disclosure based on materiality, taking into account the Staff’s guidance provided in Disclosure Guidance Topic No. 2.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Performance Graph, page 43
Comment:
2. It appears that your presentation of the S&P 500 Stock Index and the S&P 500 Financials Index does not assume the reinvestment of dividends (cumulative total shareholder return) as required by Item 201(e) of Regulation S-K. Please confirm that future performance graphs will present cumulative total shareholder return for the indices.
Response:
Beginning with the Company’s 2012 Annual Report on Form 10-K, the Company’s performance graphs will present cumulative total return for the indices.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Net Revenues, page 57
Comment:
3. You disclose that you record gains and losses related to investments associated with certain employee deferred compensation plans in Principal Transactions – Trading and Principal Transactions – Investments. Please revise your disclosure in Management’s Discussion and Analysis or the Notes as appropriate to address the following:
•
Quantify the amount of compensation tied to the performance of investments held in your principal transaction portfolio;
•
More clearly describe the relationships between how compensation is calculated and the gains/losses absorbed on the referenced investments;
•
To the extent that the compensation expense and investment gain/losses offset, clarify whether this is always the case, and if not, describe the circumstances where compensation and gains/losses would not offset; and
•
Discuss the extent to which the employee does not bear the full gain/loss of the referenced investment portfolio due to guarantees that you provide in the compensation arrangement.
Response:
The Company plans to clarify the relationship between the deferred compensation investment performance and compensation expense. Beginning with the Company’s Form 10-Q for the quarterly period ended June 30, 2012 (“Second Quarter Form 10-Q”) filing, the Company will revise its disclosure as follows (changes marked from the First Quarter Form 10-Q):
Principal Transactions—Trading. Principal transactions—Trading revenues include revenues from customers’ purchases and sales of financial instruments in which the Company acts as a market maker and gains and losses on the Company’s related positions. Principal transactions—Trading revenues includes the realized gains and losses from sales of cash instruments and derivative settlements, unrealized gains and losses from ongoing fair value changes of the Company’s positions related to market-making activities, and gains and losses related to investments associated with certain employee deferred compensation plans. In many markets, the realized and unrealized gains and losses from the purchase and sale transactions will include any spreads between bids and offers. Certain fees received on loans carried at fair value and dividends from equity securities are also recorded in this line item since they relate to market-making positions. Commissions received for purchasing and selling listed equity securities and options are recorded separately in the Commissions and fees line item. Other cash and derivative instruments typically do not have fees associated with them and fees for related services would be recorded in Commissions and fees.
The Company often invests directly, as a principal, in investments or other financial instruments to economically hedge its obligations under its deferred compensation plans. Changes in value of such investments made by the Company are recorded in Principal transactions—Trading and Principal transactions—Investments. Expenses associated with the related deferred compensation plans are recorded in Compensation and benefits. Compensation expense is calculated based on the notional value of the award granted, adjusted for upward and downward changes in fair value of the referenced investment and is recognized ratably over the prescribed vesting period for the award. Generally, changes in compensation expense resulting from changes in fair value of the referenced investment will be offset by changes in fair value of investments made by the Company. However, there may be a timing difference between the immediate revenue recognition of gains and losses on the Company’s investments and the deferred recognition of the related compensation expense over the vesting period.
Compensation expense will not include any offsets for cost of capital and other administrative charges associated with the investments made by the Company. The Company’s deferred compensation plans do not provide investment performance guarantees to employees related to the referenced investments.
Historically, the deferred compensation plan expense resulting from the changes in the fair value of the referenced investment has not been material to the Company’s Principal transactions trading and investment revenue or to the Company’s total compensation expense. If this amount was to become material in future periods, the Company will reevaluate the appropriate disclosures.
Critical Accounting Policies, page 79
Goodwill and Intangible Assets, page 80
Comment:
4. Please revise your disclosure in future filings to state, if true, that each of your reporting units has a fair value that is substantially in excess of carrying value. If that is not true, please revise your disclosure in future filings to include the following disclosures for each reporting unit that is at risk of failing step one of your goodwill impairment test:
•
The percentage by which fair value exceeded carrying value as of the date of the most recent test.
•
A discussion of the methods and key assumptions used in your impairment analysis and how the key assumptions were determined.
•
A discussion of the degree of uncertainty associated with the key assumptions, and how those assumptions were determined. The discussion regarding uncertainty should provide specifics to the extent possible (e.g., the valuation model assumes recovery from a business downturn within a defined period of time).
•
Description of specific, potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions and outcome.
Response:
Beginning with the Second Quarter Form 10-Q filing, the Company will include a statement on whether each of its reporting units which currently have goodwill has a fair value that is substantially in excess of carrying value. In the event a reporting unit’s fair value is not substantially in excess of the carrying value, the Company will include in future filings the disclosures requested above. As of December 31, 2011 and March 31, 2012, each of the Company’s reporting units with goodwill had a fair value that was substantially in excess of carrying value.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Risk Management, page 100
Comment:
5. Please expand your discussion to explain the interactions among the various committees and groups responsible for monitoring risk and clarify how information relating to risks is communicated up to senior management and the Board of Directors. For example, we note that with respect to market risk, the business units and trading desks ensure that the risks are measured monitored and made transparent to senior management. Additionally, we note that the Market Risk Department is responsible escalating risk concentrations to senior management. How is this information conveyed to the Board of Directors?
Response:
The Company disclosed on pages 100 and 101 of its 2011 Form 10-K the Company’s risk management framework, including the members and responsibilities of the Firm Risk Committee and its reporting obligations to the full Board of Directors, the Audit Committee of the Board, the Operations and Technology Committee of the Board and the Risk Committee of the Board. In addition, the Company respectfully submits that with respect to market risk management, the Company disclosed on page 102 of its 2011 Form 10-K that “the various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. The control groups help ensure that these risks are measured and closely monitored and are made transparent to senior management.” As such, it is the risk management control groups within the Company that ensure market risks are monitored closely. In response to the Staff’s comment, the Company will provide the following disclosure in its Annual Report on Form 10-K for the year ending December 31, 2012 (“2012 Form 10-K”):
The Chief Risk Officer, who reports to the Chief Executive Officer and the Risk Committee of the Board of Directors, among other things, monitors market risk through the Market Risk Department, which reports to the Chief Risk Officer and is independent of the business units, and has close interactions with senior management and the risk management control groups in the business units. The Chief Risk Officer is a member of the Firm Risk Committee, chaired by the Chief Executive Officer, which includes the most senior officers of the Company, and regularly reports on market risk matters to this committee as well as the Board of Directors and its Risk Committee.
VaR Methodology, Assumptions and Limitations, page 104
Comment:
6. We note your disclosure that your Value-at-Risk (VaR) model evolves over time in response to changes in the composition of trading portfolios and to improvements in modeling techniques and systems capabilities. We further note that you are committed to continuous review and enhancement of VaR methodologies and assumptions in order to capture evolving risks associated with changes in market structure and dynamics. Please respond to the following and expand your disclosure in future filings as appropriate:
•
Tell us the number of different VaR models that are used to determine your total trading VaR, and discuss the drivers regarding the need to use multiple different models.
•
Tell us how all of the different VaR models used are aggregated to arrive at your total trading VaR as well as the individual market risk categories disclosed. For example, clarify whether you simply aggregate the outputs from the different models or whether adjustments are made, and if so, how the adjustments are determined.
•
Clarify whether your stress VaR (S-VaR) scenarios use all of the base VaR models with more stressed assumptions or if you use different models than your unstressed VaR scenarios. To the extent that different models are used to capture that risk, please tell us the drivers as to why.
•
Tell us whether the VaR models used for regulatory capital purposes are the same as the VaR models used for your market risk disclosures. To the extent that certain of the models used for both purposes differ, please tell us the drivers behind those differences.
•
Discuss the process and validation procedures in place prior to implementing significant model and assumption changes. For example, discuss the approval process required, back-testing procedures performed, and periods of parallel model runs before implementation.
•
To the extent that all or some of your VaR models used for your market risk disclosures are different than those used to calculate regulatory capital, please tell us whether the model review process and model oversight processes are the same for both. As part of your response, please clarify when approval is required from any of your regulators regarding VaR model changes.
•
Given that your VaR models are evolving over time, tell us how you consider when disclosure is required under Item 305(a)(1)(iii)(4) of Regulation S-K regarding model, assumptions and parameter changes.
Response:
The Company has one VaR model and uses that VaR model to estimate the probability distribution of its trading portfolio’s profit/loss over a 1-day risk period. From such estimated probability distribution, a measure of loss at a 95% or 99% statistical confidence level is calculated. At its most general level, the VaR model uses historical simulation of general market risk factors (i.e., one-day changes, observed or simulated, of market prices/rates) and Monte Carlo simulations of certain specific risk factors, such as corporate issuer-specific credit risk factors.
The VaR model is complex and consists of a collection of a) statistical and econometric methodologies, b) input data on positions (i.e., market risk exposures) and market risk factors, c) specific associations between positions and market risk factors (i.e., position to risk factor mappings) and d) quantitative methods for simulation of risk factors, calculation of profit/loss of positions and aggregation of profit/loss across positions to calculate the profit/loss of the Company’s portfolio.
The Company’s usage of the model for the various types of market risks reflects its assessment of the model features that are required to correctly capture the risks as well as reflects the specific comments, suggestions
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CORRESP 1 filename1.htm SEC Response Letter CONFIDENTIAL TREATMENT OF CERTAIN DESIGNATED PORTIONS OF THIS LETTER HAS BEEN REQUESTED BY MORGAN STANLEY. SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED, AS INDICATED BY [*] IN THE TEXT, AND SUBMITTED TO THE COMMISSION. July 26, 2012 By U.S. Mail & Facsimile to 202-772-9292 Ms. Suzanne Hayes Assistant Director Division of Corporation Finance Securities and Exchange Commission 100 F Street, N.E. Mail Stop 4561 Washington, DC 20549 Re: Morgan Stanley Form 10-K for Fiscal Year Ended December 31, 2011 Filed February 27, 2012 Form 10-Q for Quarterly Period Ended March 31, 2012 Filed May 7, 2012 File No. 001-11758 Dear Ms. Hayes: Morgan Stanley (the “Company”) is pleased to respond to your letter of June 22, 2012 concerning its Form 10-K for the fiscal year ended December 31, 2011 (“2011 Form 10-K”), the April 5, 2012 Definitive Proxy Statement (“2012 Proxy Statement”) and the Form 10-Q for the quarterly period ended March 31, 2012 (“First Quarter Form 10-Q”). For your convenience, we have restated your comments below. Form 10-K for Fiscal Year Ended December 31, 2011 Item 1A. Risk Factors We are subject to operational risk that could adversely affect our businesses, page 24 Comment: 1. We note that you are subject to operational risk, including potential vulnerability to “unauthorized access, mishandling or misuse, computer viruses or malware, cyber attacks and other events that could have a security impact on ‘your computer’ systems.” Furthermore, we note reports that the prevalence of cyber attacks have increased in your industry. If you have experienced any of these or other cyber incidents in the past, beginning with your next Form 10-Q, please state that fact in order to provide the proper context for your risk factor disclosure. Please refer to the Division of Corporation Finance’s Disclosure Guidance Topic No. 2 at http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm for additional information. Response: The Company considered Disclosure Guidance Topic No. 2 in preparing this risk factor disclosure. Disclosure Guidance Topic No. 2 states that a registrant may need to include a “description of cyber incidents experienced by the registrant that are individually, or in the aggregate, material.…” The Company has not experienced any cyber incident that was material, individually or in the aggregate. However, the Company will continue to monitor cyber incidents, including any computer viruses or malware, cyber attacks and other similar attacks, and evaluate the need for disclosure based on materiality, taking into account the Staff’s guidance provided in Disclosure Guidance Topic No. 2. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Performance Graph, page 43 Comment: 2. It appears that your presentation of the S&P 500 Stock Index and the S&P 500 Financials Index does not assume the reinvestment of dividends (cumulative total shareholder return) as required by Item 201(e) of Regulation S-K. Please confirm that future performance graphs will present cumulative total shareholder return for the indices. Response: Beginning with the Company’s 2012 Annual Report on Form 10-K, the Company’s performance graphs will present cumulative total return for the indices. 2 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Net Revenues, page 57 Comment: 3. You disclose that you record gains and losses related to investments associated with certain employee deferred compensation plans in Principal Transactions – Trading and Principal Transactions – Investments. Please revise your disclosure in Management’s Discussion and Analysis or the Notes as appropriate to address the following: • Quantify the amount of compensation tied to the performance of investments held in your principal transaction portfolio; • More clearly describe the relationships between how compensation is calculated and the gains/losses absorbed on the referenced investments; • To the extent that the compensation expense and investment gain/losses offset, clarify whether this is always the case, and if not, describe the circumstances where compensation and gains/losses would not offset; and • Discuss the extent to which the employee does not bear the full gain/loss of the referenced investment portfolio due to guarantees that you provide in the compensation arrangement. Response: The Company plans to clarify the relationship between the deferred compensation investment performance and compensation expense. Beginning with the Company’s Form 10-Q for the quarterly period ended June 30, 2012 (“Second Quarter Form 10-Q”) filing, the Company will revise its disclosure as follows (changes marked from the First Quarter Form 10-Q): Principal Transactions—Trading. Principal transactions—Trading revenues include revenues from customers’ purchases and sales of financial instruments in which the Company acts as a market maker and gains and losses on the Company’s related positions. Principal transactions—Trading revenues includes the realized gains and losses from sales of cash instruments and derivative settlements, unrealized gains and losses from ongoing fair value changes of the Company’s positions related to market-making activities, and gains and losses related to investments associated with certain employee deferred compensation plans. In many markets, the realized and unrealized gains and losses from the purchase and sale transactions will include any spreads between bids and offers. Certain fees received on loans carried at fair value and dividends from equity securities are also recorded in this line item since they relate to market-making positions. Commissions received for purchasing and selling listed equity securities and options are recorded separately in the Commissions and fees line item. Other cash and derivative instruments typically do not have fees associated with them and fees for related services would be recorded in Commissions and fees. 3 The Company often invests directly, as a principal, in investments or other financial instruments to economically hedge its obligations under its deferred compensation plans. Changes in value of such investments made by the Company are recorded in Principal transactions—Trading and Principal transactions—Investments. Expenses associated with the related deferred compensation plans are recorded in Compensation and benefits. Compensation expense is calculated based on the notional value of the award granted, adjusted for upward and downward changes in fair value of the referenced investment and is recognized ratably over the prescribed vesting period for the award. Generally, changes in compensation expense resulting from changes in fair value of the referenced investment will be offset by changes in fair value of investments made by the Company. However, there may be a timing difference between the immediate revenue recognition of gains and losses on the Company’s investments and the deferred recognition of the related compensation expense over the vesting period. Compensation expense will not include any offsets for cost of capital and other administrative charges associated with the investments made by the Company. The Company’s deferred compensation plans do not provide investment performance guarantees to employees related to the referenced investments. Historically, the deferred compensation plan expense resulting from the changes in the fair value of the referenced investment has not been material to the Company’s Principal transactions trading and investment revenue or to the Company’s total compensation expense. If this amount was to become material in future periods, the Company will reevaluate the appropriate disclosures. Critical Accounting Policies, page 79 Goodwill and Intangible Assets, page 80 Comment: 4. Please revise your disclosure in future filings to state, if true, that each of your reporting units has a fair value that is substantially in excess of carrying value. If that is not true, please revise your disclosure in future filings to include the following disclosures for each reporting unit that is at risk of failing step one of your goodwill impairment test: • The percentage by which fair value exceeded carrying value as of the date of the most recent test. • A discussion of the methods and key assumptions used in your impairment analysis and how the key assumptions were determined. 4 • A discussion of the degree of uncertainty associated with the key assumptions, and how those assumptions were determined. The discussion regarding uncertainty should provide specifics to the extent possible (e.g., the valuation model assumes recovery from a business downturn within a defined period of time). • Description of specific, potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions and outcome. Response: Beginning with the Second Quarter Form 10-Q filing, the Company will include a statement on whether each of its reporting units which currently have goodwill has a fair value that is substantially in excess of carrying value. In the event a reporting unit’s fair value is not substantially in excess of the carrying value, the Company will include in future filings the disclosures requested above. As of December 31, 2011 and March 31, 2012, each of the Company’s reporting units with goodwill had a fair value that was substantially in excess of carrying value. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Risk Management, page 100 Comment: 5. Please expand your discussion to explain the interactions among the various committees and groups responsible for monitoring risk and clarify how information relating to risks is communicated up to senior management and the Board of Directors. For example, we note that with respect to market risk, the business units and trading desks ensure that the risks are measured monitored and made transparent to senior management. Additionally, we note that the Market Risk Department is responsible escalating risk concentrations to senior management. How is this information conveyed to the Board of Directors? Response: The Company disclosed on pages 100 and 101 of its 2011 Form 10-K the Company’s risk management framework, including the members and responsibilities of the Firm Risk Committee and its reporting obligations to the full Board of Directors, the Audit Committee of the Board, the Operations and Technology Committee of the Board and the Risk Committee of the Board. In addition, the Company respectfully submits that with respect to market risk management, the Company disclosed on page 102 of its 2011 Form 10-K that “the various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. The control groups help ensure that these risks are measured and closely monitored and are made transparent to senior management.” As such, it is the risk management control groups within the Company that ensure market risks are monitored closely. In response to the Staff’s comment, the Company will provide the following disclosure in its Annual Report on Form 10-K for the year ending December 31, 2012 (“2012 Form 10-K”): The Chief Risk Officer, who reports to the Chief Executive Officer and the Risk Committee of the Board of Directors, among other things, monitors market risk through the Market Risk Department, which reports to the Chief Risk Officer and is independent of the business units, and has close interactions with senior management and the risk management control groups in the business units. The Chief Risk Officer is a member of the Firm Risk Committee, chaired by the Chief Executive Officer, which includes the most senior officers of the Company, and regularly reports on market risk matters to this committee as well as the Board of Directors and its Risk Committee. 5 VaR Methodology, Assumptions and Limitations, page 104 Comment: 6. We note your disclosure that your Value-at-Risk (VaR) model evolves over time in response to changes in the composition of trading portfolios and to improvements in modeling techniques and systems capabilities. We further note that you are committed to continuous review and enhancement of VaR methodologies and assumptions in order to capture evolving risks associated with changes in market structure and dynamics. Please respond to the following and expand your disclosure in future filings as appropriate: • Tell us the number of different VaR models that are used to determine your total trading VaR, and discuss the drivers regarding the need to use multiple different models. • Tell us how all of the different VaR models used are aggregated to arrive at your total trading VaR as well as the individual market risk categories disclosed. For example, clarify whether you simply aggregate the outputs from the different models or whether adjustments are made, and if so, how the adjustments are determined. • Clarify whether your stress VaR (S-VaR) scenarios use all of the base VaR models with more stressed assumptions or if you use different models than your unstressed VaR scenarios. To the extent that different models are used to capture that risk, please tell us the drivers as to why. • Tell us whether the VaR models used for regulatory capital purposes are the same as the VaR models used for your market risk disclosures. To the extent that certain of the models used for both purposes differ, please tell us the drivers behind those differences. • Discuss the process and validation procedures in place prior to implementing significant model and assumption changes. For example, discuss the approval process required, back-testing procedures performed, and periods of parallel model runs before implementation. 6 • To the extent that all or some of your VaR models used for your market risk disclosures are different than those used to calculate regulatory capital, please tell us whether the model review process and model oversight processes are the same for both. As part of your response, please clarify when approval is required from any of your regulators regarding VaR model changes. • Given that your VaR models are evolving over time, tell us how you consider when disclosure is required under Item 305(a)(1)(iii)(4) of Regulation S-K regarding model, assumptions and parameter changes. Response: The Company has one VaR model and uses that VaR model to estimate the probability distribution of its trading portfolio’s profit/loss over a 1-day risk period. From such estimated probability distribution, a measure of loss at a 95% or 99% statistical confidence level is calculated. At its most general level, the VaR model uses historical simulation of general market risk factors (i.e., one-day changes, observed or simulated, of market prices/rates) and Monte Carlo simulations of certain specific risk factors, such as corporate issuer-specific credit risk factors. The VaR model is complex and consists of a collection of a) statistical and econometric methodologies, b) input data on positions (i.e., market risk exposures) and market risk factors, c) specific associations between positions and market risk factors (i.e., position to risk factor mappings) and d) quantitative methods for simulation of risk factors, calculation of profit/loss of positions and aggregation of profit/loss across positions to calculate the profit/loss of the Company’s portfolio. The Company’s usage of the model for the various types of market risks reflects its assessment of the model features that are required to correctly capture the risks as well as reflects the specific comments, suggestions