May 23, 1997

Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549

Attention:Mr. Jonathan G. Katz, Secretary

Re:Proposed Changes to Rules 144 and 145 (File No. S7-07-97)

Ladies and Gentlemen:

Morgan Stanley & Co. Incorporated is pleased to submit this letter on behalf of ourselves and our affiliates (together, "Morgan Stanley") in response to the request of the Securities and Exchange Commission (the "Commission") for comments on Release No. 33-7391 (the "Release") regarding certain proposed amendments to Rules 144 and 145 under the Securities Act of 1933, as amended (the "Securities Act").

I. Manner-of-Sale Requirements

The Commission has proposed the elimination of Rule 144(f)'s manner-of-sale requirements, observing that those requirements currently hinder transactions that are not distributive in nature. We concur in the Commission's observation that the current requirements impose unnecessary obstacles to legitimate transactions. When a sale is made in accordance with the current public information, holding period, volume and notice requirements of Rule 144, the manner in which the sale is effected should not be determinative of a distribution. Therefore, we support the Commission's proposal.(1)

II. Change to the Rule 144 Definition of "Affiliate"

We generally support the Commission's proposal to adopt a non-exclusive safe harbor from the definition of "affiliate" for certain persons who are not in a position to control an issuer. The certainty that would be provided by such a safe harbor is important, especially in light of the Commission's expressed unwillingness to provide interpretive or no-action relief on the issue of affiliate status on a case-by-case basis. However, we believe that a 10% threshold, borrowed from Section 16 of the Securities Exchange Act, is not appropriate in the context of Rule 144. It is not realistic in today's market to believe that a 10% stockholder of an issuer, who is not an executive officer or a director of the issuer and who has no other affiliation with the issuer, will be in a position to control the issuer or to cause the issuer to undertake the expense and management commitment required by a registered secondary sale of securities (i.e. the registration process, the due diligence process, the underwriting process, etc.).(2)

As an alternative approach, we support a non-exclusive safe harbor based on the definition of "affiliate" put forth by the Advisory Committee on the Capital Formation and Regulatory Processes,(3) which would exclude persons other than the chief executive officer, inside directors, 20% stockholders and 10% stockholders that also have a representative on the board of directors (the "Advisory Committee Definition").(4) We believe that this definition comes closer to taking into account the reality of corporate control dynamics. We ask the Commission to make clear that no presumption of affiliate status would arise for a stockholder unable to meet the requirements of the safe harbor and that such a stockholder could potentially utilize a traditional facts-and-circumstances analysis to determine that it was not an affiliate.

If the Commission is unwilling to adopt the Advisory Committee Definition, we believe that the Commission should retain a facts-and-circumstances approach rather than adopting the 10% threshold proposed in the Release. While the Release makes clear that the 10% threshold would be stated as a non-exclusive safe harbor (and we assume that the release adopting such proposal would make clear that a failure to meet the requirements of the safe harbor would not raise a presumption of affiliate status), we are concerned that adoption of the proposed safe harbor would chill legitimate sales by persons who, as a practical matter, are not in a position to control the issuer. We note that current market practice is to treat many of the provisions of Rule 144 as if they were exclusive safe harbors.

Because Rule 144 provides a safe harbor for certain sales by affiliates, a narrower definition of "affiliate" in Rule 144, without corresponding clarification in other areas of the Securities Act, could have the perverse effect of denying certain persons the safe harbor of the Rule. For example, a 9.9% stockholder of an issuer that does not hold restricted securities could be concerned that it might be considered to be in a controlling position with respect to the issuer (and therefore an "issuer" for purposes of the definition of "underwriter" in Section 2(11) of the Securities Act) under the traditional facts-and-circumstances analysis, but could find itself unable to take advantage of the safe harbor provided by Rule 144 because it does not own restricted securities and does not fit the Rule's definition of "affiliate". We suggest that if the Commission adopts a "bright-line" safe harbor test for establishing non-affiliate status, the Commission make clear that compliance with the requirements imposed on affiliates by Rule 144 will enable any holder to take advantage of the Rule.

III. Rule 144(e) Volume Limitations

A Rule 144 seller determines the maximum amount of securities that can be sold pursuant to Rule 144 by taking the greatest amount resulting from any of the three separate tests set forth in Rule 144(e)(1). The Commission proposes to retain the test based on the number of outstanding shares of a particular class, while eliminating the two tests based on trading volume. We oppose this modification to Rule 144(e).

Each of the three tests provides a sensible and reasonable alternative method for determining an appropriate volume limitation. As such, we do not agree that any of the three tests should be eliminated. The outstanding shares test reflects the view, which we support, that the sale of an amount of shares equivalent to one percent of the outstanding shares of a particular class could not have a significant impact on the market. The two trading volume tests, each based on calculations of the average weekly volume of trading in the relevant security, similarly arrive at a number of securities whose sale pursuant to Rule 144 should not have a significant market impact--even if the average weekly trading volume exceeds 1% of the shares outstanding. Although elimination of the two trading volume tests would simplify Rule 144(e), it would only do so at the expense of reducing the flexibility of the current safe harbor. In our experience, substantially more than half of all Rule 144 sellers rely on the trading volume tests.

IV. Notice of Sale Requirement

Rule 144(h) requires a person selling a number of shares greater than 500 or with an aggregate sales price in excess of $10,000, in reliance on Rule 144 during any three-month period, to file a Form 144 notice with the Commission. We support the increase of the filing thresholds under Rule 144(h) from 500 shares or $10,000 to 1,000 shares or $40,000. We believe that such modification appropriately reflects changes in the market since the adoption of the original limits.

We suggest, however, that the deadline for filing Form 144 notice be modified. Currently, Rule 144(h) requires filing concurrently with either the placing of an order with a broker or the execution of a sale directly with a market maker. We believe that the purposes of Rule 144 can be accomplished by requiring the filing to be made promptly after the receipt of the order, but in no event later than the settlement date. If filing a Rule 144 notice is a condition for use of Rule 144's safe harbor, the failure to file a timely notice pursuant to Rule 144(h) would cause the seller to fall out of the safe harbor, but would not indicate that a violation of Section 5 had occurred. We believe that our suggested modification of the required time of filing will lessen the burdens the Rule imposes on sellers without any harmful effect on the public market.

V. Holding Period -- Conversions, Exchanges, and Holding Company Formations

The Commission proposes to amend Rule 144 to codify the staff's interpretive position that tacking is allowed, with regard to calculating the holding period (i) for securities acquired upon conversion of other securities of the same issuer, whether or not the surrendered securities are convertible by their terms and (ii) for securities acquired from the issuer solely in exchange for other securities of the issuer. The Commission also proposes to amend Rule 144 to codify an interpretive position allowing tacking of the Rule 144 holding period in connection with transactions effected solely for the purpose of forming a holding company. We support these initiatives.

VI. Definition of Restricted Securities

Section 4(6) of the Securities Act provides a transactional exemption for non-public offerings to accredited investors in an amount that does not exceed $5 million. We support the Commission's proposed revision to Rule 144 that will codify a staff interpretive position that deems securities acquired pursuant to Section 4(6) to be restricted securities under Rule 144.

VII. Rule 145

The Commission proposes eliminating the presumptive underwriter and resale provisions of Rule 145(c) and (d). The Commission suggests that Rule 144 and traditional considerations can adequately determine whether persons who had been covered by Rule 145(c) are indeed underwriters in connection with resales.

We support the Commission's proposal in the Release to eliminate the presumptive underwriter doctrine in Rule 145(c) and (d). We do not believe that there is sufficient justification for presuming that holders of securities received in a registered transaction covered by Rule 145 (a "Rule 145 transaction") that are not affiliates of the issuer of those securities are underwriters for purposes of the Securities Act. If Rule 145(c) and (d) are eliminated, holders of securities received in a Rule 145 transaction that are not affiliates of the issuer of those securities would be free to sell those securities in the open market.

We note that it is important that the Commission make clear in the release adopting the proposals regarding Rule 145(c) and (d) that such securities could be freely sold by such holders without such holders being deemed underwriters for purposes of the Securities Act. If the Commission were not to make this clear, significant uncertainty would remain as to the status of a holder that was an affiliate of the target company in a Rule 145 transaction but is not an affiliate of the surviving company.

VIII. Rule 144 Holding Periods

We believe that the recently-adopted one-year and two-year holding periods under Rule 144 strike an appropriate balance between facilitating capital formation through private offerings of securities and ensuring that purchasers of securities in unregistered placements do not act as "conduits" for unregistered distributions of those securities into the open market. These holding periods provide adequate separation between the unregistered placement of the securities and any subsequent movement of such securities into the open market. We suggest that the Commission obtain experience under the recent changes to the holding periods prior to considering any future reductions.

IX. Possible Regulatory Approaches to Hedging Transactions

Our views with regard to hedging activities are set out in the joint letter that we have submitted with Goldman, Sachs & Co., J.P. Morgan Securities Inc. and Salomon Brothers Inc. We will not repeat or summarize those views here in the interest of economy. We would, however, emphasize our own enthusiastic support for the views expressed in that letter.

We are pleased to have this opportunity to express our views on the important issues raised by the Release. Please feel free to call the undersigned at (212) 761-4765 if you would like to discuss these views or if we can be of any further assistance.

/s/ Robin Roger
Robin Roger
Counsel and Principal

1. Even if the Commission retains the current manner-of-sale requirements of Rule 144, we urge the Commission to reconsider the staff's position in Bear Stearns & Co. Inc. (available April 4, 1991). In Bear Stearns, the staff indicated that the delivery of stock upon the exercise of an over-the-counter option did not comply with the manner-of-sale requirements of Rule 144. We believe that this position is inconsistent with Rule 144(f), which expressly permits "transactions directly with a 'market maker'". So long as the counterparty to the hedging transaction is a "market maker" and the other requirements of Rule 144 are satisfied at the time of exercise, we believe that Rule 144 should be available to permit the delivery of restricted and control securities upon the exercise of an over-the-counter option. We perceive no basis upon which to distinguish between a direct sale to a market maker by a holder of control or restricted securities and a sale made to a market maker through the exercise of an over-the-counter option.

2. The legislative history of the Securities Act suggests that the principal reason for equating "control persons" with issuers for purposes of Section 2(11) thereof is that such persons are presumably able to compel the issuer to initiate the registration process. H.R. Rep. No. 85, 73d Cong., 1st Sess. 13-14 (1933).

3. We have not changed our opposition to the other aspects of the Advisory Committee's report, however, as expressed in our letter of December 9, 1996 in response to Release No. 33-7314. See also the letters of the Capital Markets Committee of the Securities Industry Association of November 13, 1996 in response to Release No. 33-7314 and of November 2, 1995 in response to the Term Sheet (Draft 10/13/95) that was the then current outline of the Advisory Committee's proposed report.

4. In calculating the 10% and 20% thresholds, traditional "control group" aggregation principles would continue to apply.