(212) 761-4000

December 10, 1998

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009

Attention: Mr. Jonathan G. Katz, Secretary

Re: Proposed Rule 10b-18 Amendment (File No. S7-27-98)

Ladies and Gentlemen:

        Morgan Stanley & Co. Incorporated is pleased to submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on Release No. 34-40617 (the "Release"). The proposal described in the Release would amend Rule 10b-18 ("Rule 10b-18" or the "Rule") under the Securities Exchange Act of 1934, as amended (the "Exchange Act") to exempt from the Rule's time of purchase limitations purchases or bids made by issuers or affiliated purchasers following a market-wide trading suspension (as defined in proposed Rule 10b-18(a)(15)). The proposal would define as complying "10b-18 purchases" bids for or purchases of an issuer's common stock from the reopening of trading until the close of trading on the day in which a market-wide trading suspension occurs or, if the market suspension continues through the regular close of trading, at the next day's opening, so long as those bids or purchases meet all of the other applicable Rule 10b-18 requirements (i.e., single broker dealer, price and volume limitations).

I. We Support the Proposed Amendment

        We strongly support the goals advanced by the Commission's proposed amendment. During significant drops in the market, stock specialists and market-makers have provided liquidity and made important contributions towards stabilizing the market, but may not have been able to eliminate entirely sell order imbalances. Expanding the Rule 10b-18 safe harbor to allow an issuer or its affiliated purchasers to purchase the issuer's own stock following a market-wide trading suspension should provide enhanced liquidity that should help reestablish market equilibrium. We note that, in the face of the October 1987 Market Break, governmental authorities expressly recognized the important role that issuer repurchase programs can provide with respect to stabilizing the market and providing additional liquidity in the face of a downturn.(1)

II. Volume Limits Should be Relaxed

        In the Release, the Commission requested comment as to whether the current volume limitations in Rule 10b-18 should be relaxed. We believe that they should be relaxed following a market-wide trading suspension. In our view, the proposed amendment to Rule 10b-18 would be far more effective in enhancing liquidity and restoring market equilibrium if it also removed the current Rule 10b-18 volume limitations during a brief period following a market suspension. We would recommend relaxing the volume limitations for the remainder of any trading day during which a market-wide trading suspension occurs and, in the event that the suspension results in the absence of a regular market close, for the opening of the next trading day.

        The primary purpose of removing the volume limitations under these narrow circumstances would be to provide liquidity to retail investors who may have difficulty executing sell orders during large-scale market downturns. The limited time period during which the easing would be in effect, as well as the fact that triggering of the suspension is wholly outside the issuer's control and is difficult to foresee, should prevent issuers from capitalizing on the easing for manipulative purposes.

        We observe that under revised NYSE Rule 80B(2) and the Market Closing Policy of the National Association of Securities Dealers ("NASD"), a market-wide trading suspension would have occurred only once since 1970 (i.e., October 19, 1987). Accordingly, the relief from the Rule 10b-18 volume limitations that we are seeking will very rarely be available. For these reasons, we think that this proposal will not give rise to the types of abuses that Sections 9(a)(2) and 10(b) of the Securities Act and Rule 10b-5 thereunder were designed to prevent.(3)

        Although we understand that Rule l0b-18 is a safe harbor and not a proscriptive rule, we believe that it is important to provide certainty in this area. As the Staff has recognized in the past, positive guidance in this area plays an important role in facilitating legitimate repurchase programs. See Exchange Act Release No. 6248 (Fed. Sec. L. Rep., Oct. 17, 1980) ¶82,669 at 83,672. ("[Rules relating to issuer repurchase programs] can assist issuers, broker-dealers and others in avoiding what might otherwise be a substantial and unpredictable risk of securities law liability. By providing that guidance, it can facilitate the operation of legitimate repurchase programs").

        Accordingly, as stated above, we believe the Commission should remove all volume limitations for the remainder of any trading day during which a market-wide trading suspension occurs and, in the event that the suspension results in the absence of a regular market close, for the opening of the next trading day. In the alternative, the Commission could provide some relief by substantially increasing the amount of shares an issuer can purchase under the volume limitation beyond 25% of the average daily trading volume. While we believe that it is important for the Commission to provide relief from the volume limitations in Rule 10b-18 during periods of market turmoil, we do not believe it is necessary for the Commission otherwise to modify the manner of purchase conditions in Rules 10b-18(b)(1) and (2) or the price condition in Rule 10b-18(b)(3) following market-wide trading suspensions.

III. Rule 10b-18 Should Not be Narrowed

        In the Release, the Commission requested comments regarding Rule 10b-18 generally. We believe that Rule 10b-18 has substantially met the Commission's originally stated goals of (1) ensuring that investors can rely on a market that is set by market forces and not influenced in any manipulative manner by the issuer or persons closely related to the issuer and (2) providing certainty with respect to the scope of permissible issuer market behavior. See introduction to Exchange Act Release No. 33-6434 (Fed. Sec. L. Rep., Nov. 17, 1982) ¶ 83,276 at 85,477. We believe that easing the requirements of Rule 10b-18 following significant market downturns benefits investors and the marketplace generally by providing additional liquidity without undermining the concerns that Rule 10b-18 was designed to address. The balancing inherent in the proposal is consistent the Staff's own recognition that issuer repurchase programs provide tangible benefits to the marketplace and that rules governing their operation should avoid "complex and costly restrictions that impinge on the operation of issuer repurchase programs." Id. at 95,478. We support the expansion proposed in the Release and urge the Commission to adopt the proposal with the modification that we have suggested (i.e., eliminating the Rule 10b-18 volume restrictions during the limited periods when the proposal would apply). Further, we applaud the Commission's review of Rule 10b-18 and urge the Commission to consider other ways in which the Rule could be broadened to encourage issuer repurchase programs. We do not believe that any narrowing of the Rule l0b-18 safe harbor is warranted.

* * * * *

        We commend the Commission's initiative in improving the effectiveness of Rule 10b-18 and are pleased to have this opportunity to express our views on the important issues raised in the Release. Please feel free to call the undersigned if you would like to discuss these views or if we can be of any further assistance.


Ivan K. Freeman
Managing Director

cc:   The Honorable Arthur Levitt, Chairman
        The Honorable Norman S. Johnson
        The Honorable Isaac C. Hunt, Jr.
        The Honorable Paul R. Carey
        The Honorable Laura S. Unger
        Richard R. Lindsey, Director, Division of Market Regulation
        Robert L.D. Colby, Deputy Director, Division of Market Regulation
        Larry E. Bergmann, Associate Director, Division of Market Regulation
        Catherine McGuire, Associate Director and Chief Counsel, Division of Market Regulation
        Nancy J. Sanow, Senior Special Counsel, Divison of Market Regulation
        James A. Brigagliano, Assistant Director, Division of Market Regulation
        Denise Landers, Attorney, Division of Market Regulation
        Jerome Roche, Attorney, Division of Market Regulation

bcc: Vikram Pandit, Morgan Stanley Dean Witter
        Alan Sheuer, Morgan Stanley Dean Witter
        John Havens, Morgan Stanley Dean Witter
        Ralph Pellecchio, Morgan Stanley Dean Witter
        Robin Roger, Morgan Stanley Dean Witter
        Thomas McManus, Morgan Stanley Dean Witter
        Georgia Bullitt, Morgan Stanley Dean Witter
        John Brandow, Davis Polk & Wardwell
        Bruce Dallas, Davis Polk & Wardwell

1. For example, during the October 1987 Market Break, Howard Baker, the White House Chief-of-Staff, personally telephoned certain major U.S. corporations to encourage them to repurchase their shares in hopes of restoring liquidity and stability to the markets. R. Karmel, "What is the Point of Circuit Breakers?", New York L. J. (Apr. 16, 1998) text accompanying n.43.

2. Exchange Act Release No. 39846 (April 19, 1998).

3. Furthermore, as the Rule 10b-18 adopting release noted, in some situations an issuer may be justified in exceeding the twenty five percent limit, see Exchange Act Release No. 6434 (Fed. Sec. L. Rep., Nov. 17, 1982) ¶ 83,276 at 85,484, n.37.