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) — Apr 27, 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: April 27, 2012 · CIK: 0000895421 · Accession: 0000950103-12-002228
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 333-178081
Letter
Office of Capital Markets Trends Division of Corporation Finance Securities and Exchange Commission Morgan Stanley 424 Prospectuses relating to Registration Statement on Form S-3ASR Filed November 21, 2011 File No. 333-178081
Dear Ms. Starr:
Morgan Stanley is pleased to respond to your letter of April 12, 2012 concerning its 424 Prospectuses relating to Registration Statement on Form S-3ASR Filed November 21, 2011.
Morgan Stanley believes it has always provided investors in its structured notes with straightforward disclosures about the particular economic exposure offered by each structured note and a fair and balanced presentation of benefits and risks. As we have noted in the past, we consider our current disclosures to be both fair and balanced, and have continually reviewed them for possible areas of enhancement.
In response to your comments, we have attached a marked offering document to provide an example of the type of disclosure that would address the nature of the Staff’s concerns. We are offering the mark-up as a road-map of the type of disclosure we believe would bring desirable consistency to structured note disclosure. However, we believe that it will be crucial for the industry, with the guidance and assistance of the Staff, to adopt a common approach to such detailed quantitative disclosure and to coordinate the timing of its implementation. Given that structured products offered by different issuers are often sold through common distribution channels, divergent disclosure practices could have the unwanted effect of creating confusion rather than consistency and transparency across the market.
For your convenience, we have restated your comments below.
Product Names
Comment:
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.
Response:
Morgan Stanley does not use the term “principal protected” in the title of its securities, and will continue to evaluate its structured note titles so that they are balanced and do not stress positive features without also identifying limits and risks.
With respect to each issuance of structured notes that exposes investors to the risk of a significant loss of principal at maturity, Morgan Stanley proposes to add the sub-title “Principal at Risk Securities” to the name of the product, or to make equivalent disclosure.
In connection with Comment 1, please see the addition of a sub-title to the branded salesmark on the cover page of Exhibit A and in the header of each page in the preliminary terms.
Product Pricing and Value
Comment:
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.
Response:
To explain the relationship of the note purchase price to its fair value in a manner that also achieves transparency and consistency across the market, the attached example outlines additional quantitative and qualitative disclosure about the relationship between the issue price, the costs borne by the investor and the estimated model-based value of each structured note.
The offering document would first set out the basic relationship between the issue price, costs and model-based value and provide our then current estimate of the model-based value and costs.
The offering document would then explain the basis on which we have estimated the model-based value and the costs of the structured note. The disclosure highlights that the model-based value is only an estimate determined by reference to our pricing models and inputs as of a particular day and that it will change with changing market conditions. We also undertake to provide a bring-down of the estimated model-based value and costs in the final pricing supplement.
We believe that our model-based value, based on issuer funding rates rather than secondary market credit spreads, gives investors the most comparable information across structures, because the funding rate, which is the floating interest rate payable by the issuer in its hedging arrangements, is one of the inputs used when setting the terms of the offered structured note.
The offering document would then go on to explain the other factors that would affect the secondary market price of the offered structured note, including the bid-offer spread a dealer would charge and our credit spreads, and state that those prices would, absent changes in market conditions related to the underlying asset, often, but not always, be lower than the model-based value.
We understand that some modification to the proposed disclosure may be required in order to reach widespread acceptance of these changes in the marketplace.
Please see pages 3, 7, 9 and 12 of Exhibit A.
Comment:
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.
Response:
Morgan Stanley believes that the essential relationship between the issue price of a structured note, the costs borne by the investors and the estimated value of the structured note has been laid out in the changes proposed in response to comment 2. Comment 3 addresses the point that the costs borne by the investor may not all be reflected immediately in the secondary market price at which Morgan Stanley & Co. LLC (“MS & Co.”) may make a market. (As discussed in our response to Comment 8, MS & Co. provides indicative prices to data service providers and to dealers, who in turn use them as a basis for determining the prices provided to investors in account statements.)
To address this point, the offering document includes, in the risk factor relating to the adverse impact of including costs associated with selling, structuring and hedging structured notes in the original issue price, a caution that, while the prices at which MS & Co. might be willing to make a market could initially be higher than if those prices had fully reflected all of the costs, investors should nonetheless take into account that they may bear all of such costs, both when making the decision to purchase a structured note and when deciding to sell it into the secondary market. The offering document addresses this point on pages 12 and 13 of Exhibit A.
Use of Proceeds and Reasons for Offerings
Comment:
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.
Response:
Morgan Stanley generally uses all of the proceeds of structured note offerings, including any up front payments it receives from its hedging counterparties, for general corporate purposes.
While, as a holding company, our general corporate purposes include providing funding to our subsidiaries, including those which are our hedging counterparties, inter-company advances are made out of our general corporate funds and are not sourced on a pass-through basis from any specific offerings. In addition, our subsidiaries have additional sources of funding, including repurchase agreements, and other secured and term funding programs on which they can draw to fund their trading activities, including those activities undertaken in connection with the hedging transactions for our structured notes.
In our disclosure, we propose adding further detail specifying that the stated costs borne by the investor will cover the selling, structuring and hedging costs related to each structured note. Please see page 7 of Exhibit A.
Comment:
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.
Response:
The purpose of Morgan Stanley’s structured note issuance program is two-fold: to help Morgan Stanley meet its goal of diversifying its unsecured funding sources by product, investor type and region and to support the ability of its subsidiaries’ business units to structure and supply structured notes to the market in response to investor demand. Morgan Stanley’s funding management policies focus on diverse funding sources in order to reduce refinancing risk. The relative importance of one source over another varies at different points in time depending on market conditions and management’s strategy of keeping multiple funding sources active and available. Demand for structured products typically comes from different types of investors than Morgan Stanley’s other funding sources, and Morgan Stanley has found that investors in structured products tend to provide relatively durable sources of funding. Morgan Stanley believes that its management’s focus on diverse funding sources, including the issuance of structured products, has provided more stable access to liquidity and capital resources.
Morgan Stanley’s use of structured products as a liquidity source has remained stable over the past three years. As of December 31, 2011, 2010 and 2009, Morgan Stanley had approximately $[*], $[*] and $[*], respectively, of structured notes outstanding, which are primarily accounted for at fair value. Structured notes issued from Morgan Stanley’s registration statement are generally linked to interest rates, equities, commodities and currencies, in proportions that shift depending on market interest. To the extent that the variety of underlying assets accommodates buyers with differing investment strategies,
Morgan Stanley considers it helpful to its funding management goal of widening its investor base.
Morgan Stanley discusses structured products in the context of its funding plans on page 89 of its annual report on Form 10-K for the year ended December 31, 2011 and on page 126 of its quarterly report on Form 10-Q for the quarterly period ended September 30, 2011. To highlight further the manner in which structured products contribute to Morgan Stanley’s express goal of widening its investor base “(by product, by investor and by region)”, Morgan Stanley will consider adding additional language about the role of structured products in its funding plans and consider specifying the level of its outstanding structured product obligations in its annual and quarterly reports.
Plan of Distribution
Comment:
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 note offerings, including the forms of underwriting involved. Also please explain whether any notes are sold to broker-dealers, including your affiliates, and not immediately resold to investors or are resold to investors at differing prices. In this situation, please explain why there may be different prices and what type of investor may receive a “better” price. Please explain the process in detail.
Response:
A substantial majority of Morgan Stanley’s structured notes are sold at a fixed price pursuant to a firm commitment underwriting by its affiliated broker-dealer, MS & Co., as part of Morgan Stanley’s Medium-Term Note program under the U.S. Distribution Agreement, filed with the Commission as an exhibit to its shelf registration statement. (See the response to Comment 14 below regarding Morgan Stanley’s Medium-Term Note program and related exhibits.) The fixed price for these notes, typically par, is specified on the cover page of the pricing supplement.1
In many cases, MS & Co. relies on dealers to assist in the distribution of the notes, which may be third party dealers or its affiliate, Morgan Stanley Smith Barney LLC (“MSSB”). The dealers generally receive a specified portion of the underwriting discounts and commissions, as a selling concession. Unlike a traditional securities offering where the issuer is seeking to raise a fixed amount of capital, the principal amount of each offering is solely determined based upon investor demand for the offering as discovered during
1 For some of these fixed price offerings, Morgan Stanley will offer discounts to investors who purchase a substantial number of notes. These discounts are available to any investor who meets the specified purchase volumes. In keeping with the Staff’s and FINRA’s guidance on fixed price offerings, Morgan Stanley provides prominent cover page disclosure of the discounts available to the investor if it purchases a specified volume of notes.
the marketing period. As a result, all of Morgan Stanley’s structured notes are typically sold as part of the initial distribution.
A lesser number of Morgan Stanley’s offerings, particularly structured rate offerings, are made on a variable price offering bas
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CORRESP 1 filename1.htm 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. April 27, 2012 By EDGAR & Email Ms. Amy M. Starr Chief Office of Capital Markets Trends Division of Corporation Finance Securities and Exchange Commission 100 F Street, N.E. Mail Stop 4561 Washington, DC 20549 Re: Morgan Stanley 424 Prospectuses relating to Registration Statement on Form S-3ASR Filed November 21, 2011 File No. 333-178081 Dear Ms. Starr: Morgan Stanley is pleased to respond to your letter of April 12, 2012 concerning its 424 Prospectuses relating to Registration Statement on Form S-3ASR Filed November 21, 2011. Morgan Stanley believes it has always provided investors in its structured notes with straightforward disclosures about the particular economic exposure offered by each structured note and a fair and balanced presentation of benefits and risks. As we have noted in the past, we consider our current disclosures to be both fair and balanced, and have continually reviewed them for possible areas of enhancement. In response to your comments, we have attached a marked offering document to provide an example of the type of disclosure that would address the nature of the Staff’s concerns. We are offering the mark-up as a road-map of the type of disclosure we believe would bring desirable consistency to structured note disclosure. However, we believe that it will be crucial for the industry, with the guidance and assistance of the Staff, to adopt a common approach to such detailed quantitative disclosure and to coordinate the timing of its implementation. Given that structured products offered by different issuers are often sold through common distribution channels, divergent disclosure practices could have the unwanted effect of creating confusion rather than consistency and transparency across the market. For your convenience, we have restated your comments below. Product Names Comment: 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. Response: Morgan Stanley does not use the term “principal protected” in the title of its securities, and will continue to evaluate its structured note titles so that they are balanced and do not stress positive features without also identifying limits and risks. With respect to each issuance of structured notes that exposes investors to the risk of a significant loss of principal at maturity, Morgan Stanley proposes to add the sub-title “Principal at Risk Securities” to the name of the product, or to make equivalent disclosure. In connection with Comment 1, please see the addition of a sub-title to the branded salesmark on the cover page of Exhibit A and in the header of each page in the preliminary terms. Product Pricing and Value Comment: 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 2 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. Response: To explain the relationship of the note purchase price to its fair value in a manner that also achieves transparency and consistency across the market, the attached example outlines additional quantitative and qualitative disclosure about the relationship between the issue price, the costs borne by the investor and the estimated model-based value of each structured note. The offering document would first set out the basic relationship between the issue price, costs and model-based value and provide our then current estimate of the model-based value and costs. The offering document would then explain the basis on which we have estimated the model-based value and the costs of the structured note. The disclosure highlights that the model-based value is only an estimate determined by reference to our pricing models and inputs as of a particular day and that it will change with changing market conditions. We also undertake to provide a bring-down of the estimated model-based value and costs in the final pricing supplement. We believe that our model-based value, based on issuer funding rates rather than secondary market credit spreads, gives investors the most comparable information across structures, because the funding rate, which is the floating interest rate payable by the issuer in its hedging arrangements, is one of the inputs used when setting the terms of the offered structured note. The offering document would then go on to explain the other factors that would affect the secondary market price of the offered structured note, including the bid-offer spread a dealer would charge and our credit spreads, and state that those prices would, absent changes in market conditions related to the underlying asset, often, but not always, be lower than the model-based value. We understand that some modification to the proposed disclosure may be required in order to reach widespread acceptance of these changes in the marketplace. Please see pages 3, 7, 9 and 12 of Exhibit A. Comment: 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 3 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. Response: Morgan Stanley believes that the essential relationship between the issue price of a structured note, the costs borne by the investors and the estimated value of the structured note has been laid out in the changes proposed in response to comment 2. Comment 3 addresses the point that the costs borne by the investor may not all be reflected immediately in the secondary market price at which Morgan Stanley & Co. LLC (“MS & Co.”) may make a market. (As discussed in our response to Comment 8, MS & Co. provides indicative prices to data service providers and to dealers, who in turn use them as a basis for determining the prices provided to investors in account statements.) To address this point, the offering document includes, in the risk factor relating to the adverse impact of including costs associated with selling, structuring and hedging structured notes in the original issue price, a caution that, while the prices at which MS & Co. might be willing to make a market could initially be higher than if those prices had fully reflected all of the costs, investors should nonetheless take into account that they may bear all of such costs, both when making the decision to purchase a structured note and when deciding to sell it into the secondary market. The offering document addresses this point on pages 12 and 13 of Exhibit A. Use of Proceeds and Reasons for Offerings Comment: 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. Response: Morgan Stanley generally uses all of the proceeds of structured note offerings, including any up front payments it receives from its hedging counterparties, for general corporate purposes. 4 While, as a holding company, our general corporate purposes include providing funding to our subsidiaries, including those which are our hedging counterparties, inter-company advances are made out of our general corporate funds and are not sourced on a pass-through basis from any specific offerings. In addition, our subsidiaries have additional sources of funding, including repurchase agreements, and other secured and term funding programs on which they can draw to fund their trading activities, including those activities undertaken in connection with the hedging transactions for our structured notes. In our disclosure, we propose adding further detail specifying that the stated costs borne by the investor will cover the selling, structuring and hedging costs related to each structured note. Please see page 7 of Exhibit A. Comment: 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. Response: The purpose of Morgan Stanley’s structured note issuance program is two-fold: to help Morgan Stanley meet its goal of diversifying its unsecured funding sources by product, investor type and region and to support the ability of its subsidiaries’ business units to structure and supply structured notes to the market in response to investor demand. Morgan Stanley’s funding management policies focus on diverse funding sources in order to reduce refinancing risk. The relative importance of one source over another varies at different points in time depending on market conditions and management’s strategy of keeping multiple funding sources active and available. Demand for structured products typically comes from different types of investors than Morgan Stanley’s other funding sources, and Morgan Stanley has found that investors in structured products tend to provide relatively durable sources of funding. Morgan Stanley believes that its management’s focus on diverse funding sources, including the issuance of structured products, has provided more stable access to liquidity and capital resources. Morgan Stanley’s use of structured products as a liquidity source has remained stable over the past three years. As of December 31, 2011, 2010 and 2009, Morgan Stanley had approximately $[*], $[*] and $[*], respectively, of structured notes outstanding, which are primarily accounted for at fair value. Structured notes issued from Morgan Stanley’s registration statement are generally linked to interest rates, equities, commodities and currencies, in proportions that shift depending on market interest. To the extent that the variety of underlying assets accommodates buyers with differing investment strategies, 5 Morgan Stanley considers it helpful to its funding management goal of widening its investor base. Morgan Stanley discusses structured products in the context of its funding plans on page 89 of its annual report on Form 10-K for the year ended December 31, 2011 and on page 126 of its quarterly report on Form 10-Q for the quarterly period ended September 30, 2011. To highlight further the manner in which structured products contribute to Morgan Stanley’s express goal of widening its investor base “(by product, by investor and by region)”, Morgan Stanley will consider adding additional language about the role of structured products in its funding plans and consider specifying the level of its outstanding structured product obligations in its annual and quarterly reports. Plan of Distribution Comment: 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 note offerings, including the forms of underwriting involved. Also please explain whether any notes are sold to broker-dealers, including your affiliates, and not immediately resold to investors or are resold to investors at differing prices. In this situation, please explain why there may be different prices and what type of investor may receive a “better” price. Please explain the process in detail. Response: A substantial majority of Morgan Stanley’s structured notes are sold at a fixed price pursuant to a firm commitment underwriting by its affiliated broker-dealer, MS & Co., as part of Morgan Stanley’s Medium-Term Note program under the U.S. Distribution Agreement, filed with the Commission as an exhibit to its shelf registration statement. (See the response to Comment 14 below regarding Morgan Stanley’s Medium-Term Note program and related exhibits.) The fixed price for these notes, typically par, is specified on the cover page of the pricing supplement.1 In many cases, MS & Co. relies on dealers to assist in the distribution of the notes, which may be third party dealers or its affiliate, Morgan Stanley Smith Barney LLC (“MSSB”). The dealers generally receive a specified portion of the underwriting discounts and commissions, as a selling concession. Unlike a traditional securities offering where the issuer is seeking to raise a fixed amount of capital, the principal amount of each offering is solely determined based upon investor demand for the offering as discovered during 1 For some of these fixed price offerings, Morgan Stanley will offer discounts to investors who purchase a substantial number of notes. These discounts are available to any investor who meets the specified purchase volumes. In keeping with the Staff’s and FINRA’s guidance on fixed price offerings, Morgan Stanley provides prominent cover page disclosure of the discounts available to the investor if it purchases a specified volume of notes. 6 the marketing period. As a result, all of Morgan Stanley’s structured notes are typically sold as part of the initial distribution. A lesser number of Morgan Stanley’s offerings, particularly structured rate offerings, are made on a variable price offering bas