JP Morgan Chase 2006 Annual Report Download - page 84

MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
82 JPMorgan Chase & Co. / 2006 Annual Report
A firm’s success depends not only on its prudent management of the liquidity,
credit, market and operational risks that are part of its business risks, but
equally on the maintenance among many constituents – clients, investors,
regulators, as well as the general public – of a reputation for business practices
of the highest quality. Attention to reputation always has been a key aspect
of the Firm’s practices, and maintenance of reputation is the responsibility of
everyone at the Firm. JPMorgan Chase bolsters this individual responsibility
in many ways, including through the Firm’s Code of Conduct, training, main-
taining adherence to policies and procedures, and oversight functions that
approve transactions. These oversight functions include a Conflicts Office,
which examines wholesale transactions with the potential to create conflicts
of interest for the Firm, and a Policy Review Office that reviews certain trans-
actions with clients, especially complex derivatives and structured finance
transactions that have the potential to affect adversely the Firm’s reputation.
Policy Review Office
The Policy Review Office is the most senior approval level for client transactions
involving reputation risk issues. The mandate of the Policy Review Office is to
opine on specific transactions brought by the Regional Reputation Risk Review
Committees and consider changes in policies or practices relating to reputation
risk. The head of the Policy Review Office consults with the Firm’s most senior
executives on specific topics and provides regular updates. The Policy Review
Office reinforces the Firm’s procedures for examining transactions in terms of
appropriateness, ethical issues and reputation risk. It focuses on the purpose
and effect of its transactions from the client’s point of view, with the goal that
these transactions are not used to mislead investors or others.
Primary responsibility for adherence to the policies and procedures designed
to address reputation risk lies with the business units conducting the transac-
tions in question. The Firm’s transaction approval process requires review
from, among others, internal legal/compliance, conflicts, tax and accounting
groups. Transactions involving an SPE established by the Firm receive particu-
lar scrutiny intended to ensure that every such entity is properly approved,
documented, monitored and controlled.
Business units also are required to submit to regional Reputation Risk Review
Committees proposed transactions that may give rise to heightened reputa-
tion risk. The committees may approve, reject or require further clarification
on or changes to the transactions. The members of these committees are sen-
ior representatives of the business and support units in the region. The com-
mittees may escalate transaction review to the Policy Review Office.
Fiduciary risk management
The risk management committees within each line of business include in
their mandate the oversight of the legal, reputational and, where appropriate,
fiduciary risks in their businesses that may produce significant losses or
reputational damage. The Fiduciary Risk Management function works with the
relevant line-of-business risk committees with the goal of ensuring that busi-
nesses providing investment or risk management products or services that
give rise to fiduciary duties to clients perform at the appropriate standard rel-
ative to their fiduciary relationship with a client. Of particular focus are the
policies and practices that address a business’ responsibilities to a client,
including client suitability determination, disclosure obligations and communi-
cations, and performance expectations with respect to risk management
products or services being provided by the Firm, that give rise to such fiduciary
duties. In this way, the relevant line-of-business risk committees, together with
the Fiduciary Risk Management function, provide oversight of the Firm’s
efforts to monitor, measure and control the risks that may arise in the delivery
of the products or services to clients that give rise to such duties, as well as
those stemming from any of the Firm’s fiduciary responsibilities to employees
under the Firm’s various employee benefit plans.
REPUTATION AND FIDUCIARY RISK MANAGEMENT