|MORGAN STANLEY & CO.
NEW YORK, NEW YORK 10036
|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
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.
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
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.