SEC Division of Corporation Finance no-action letter: Morgan Stanley Smith Barney LLC

Securities Act of 1933 Section 5

November 22, 2016

Response of the Office of Chief Counsel Division of Corporation Finance

Re:

Morgan Stanley Smith Barney LLC Incoming letter dated November 21, 2016

Based on the facts and representations in your letter, and without necessarily agreeing with your analysis, the Division’s views are as follows. Capitalized terms have the same meanings as defined in your letter.

For purposes of Section 5(a) of the Securities Act of 1933, the Division is of the view that the proposed procedures for offering and selling securities in initial public offerings described in your request, to the extent they are followed, would not involve a pre-effective sale. In reaching this position, we particularly note your representations that:

Morgan Stanley will distribute a COB Process Summary to inform clients of their right to withdraw any conditional offer to buy (COB) up to and including the Withdrawal Time;

Morgan Stanley will send emails to clients confirming receipt of COBs and reminding clients of their ability to withdraw;

Morgan Stanley’s policies and procedures will provide, among other things, that financial advisors will be responsible for making sure clients understand their ability to withdraw;

Morgan Stanley will notify clients of the effectiveness or anticipated effectiveness of the registration statement, and provide clients a minimum of at least one hour following that notice to withdraw pending COBs;

In the event of a material change to the preliminary prospectus or final offering price that is outside of the COB Price Range, any prior COB would no longer be valid; and

Morgan Stanley will not collect any purchase funds for shares offered in an initial public offering until it accepts a client’s COB following effectiveness of the registration statement.

Because this position is based upon the representations made in your letter, any different facts or conditions might require the Division to reach a different conclusion. You have not raised, and we express no view on, the application of Securities Act Rule 134(d).

Sincerely,

David Fredrickson Chief Counsel and Associate Director

Incoming Letter:

The Incoming Letter is in Acrobat format.

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S1DIEY1 SIDLEY AUSTIN LLP BEIJING
1501 K STREET, N.W. BOSTON
WASHINGTON, D.C. 20005 BRUSSELS
+1 202 736 8000 CENTURY CITY
+1 202 736 8711 FAX CHICAGO
DALLAS
GENEVA thomas.kim@sidley.com
(202) 736 8615 FOUNDED 1866
By electronic mail
Office of Chief Counsel
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F St., NE
Washington, DC 20549
Re: Request for Interpretive Letter on IPO Procedures Ladies and Gentlemen:
HONG KONG SAN FRANCISCO
HOUSTON SHANGHAI
LONDON SINGAPORE
LOS ANGELES SYDNEY
MUNICH TOKYO
NEW YORK WASHINGTON, D.C.
PALO ALTO
Securities Act of 1933
Section 5(a)
We are writing on behalf of Morgan Stanley Smith Barney LLC, a registered broker￾dealer and investment adviser, and its affiliates (collectively, "Morgan Stanley" or the "Firm") to request an interpretive letter from the Staff confirming that Morgan Stanley's proposed process for offering and selling securities in initial public offerings ("IPOs") as outlined in this request does not involve a pre-effective sale for purposes of Section 5(a) of the Securities Act of 1933, as amended (the "Securities Act").
I. Background
Morgan Stanley operates one of the largest wealth management organizations in the world, with 608 locations and $1.985 trillion in client assets as of December 31, 2015. Morgan Stanley offers personalized services to its wealth management clients and communicates with them largely through its nearly 16,000 financial advisors ("F As"). Wealth management clients Sidley Austin (DC) LLP is a Delaware limited liability partnership doing business as Sidley Austin LLP and practicing in affiliation with other Sidley Austin partnerships. ACTIVE 2 I 3458499v. I 3

have dedicated F As or FA teams, and clients can only purchase shares in IPOs by communicating directly with an FA. 1 · Morgan Stanley Smith Barney LLC's affiliate, Morgan Stanley & Co. LLC, is a significant and leading underwriter in the capital markets on behalf of its issuer clients and provides access to IPOs for Morgan Stanley's wealth management clients, many of whom value and benefit from this access. In 2014 and 2015, Morgan Stanley wealth management clients participated in more than 125 IPOs, with over 30,000 unique accounts receiving allocations to invest over $2.45 billion. In offering and selling shares in IPOs to clients, Morgan Stanley's current policy is to solicit indications of interest ("IO Is") from clients after the filing of the registration statement and prior to the effectiveness of the registration statement for the offering (the ''Pre-Effective Period") and to reconfirm these IO Is after effectiveness and the pricing of the offering to form contracts of sale. This process requires Morgan Stanley's clients to be available to their F As during the relatively narrow period of time between pricing and the start of trading to reconfirm their interest in the offering by submitting a firm purchase order. Unlike institutional clients, which are staffed to react to market conditions, wealth management clients' schedules are typically not market driven, and this reconfirmation requirement can represent an inconvenience and even a hardship. To simplify this process for clients and the Firm alike, Morgan Stanley is considering adopting procedures whereby it would solicit conditional offers to buy ("COBs") from its clients during the Pre-Effective Period (as further described below in Section II of this request, the "COB Process"). 2 These COBs would not be binding on clients and could be withdrawn at any time up to and including the Withdrawal Time (as defined below in Section II). After the Withdrawal Time, Morgan Stanley could accept these COBs and form contracts of sale. Morgan Stanley believes that adopting the COB Process would have benefits for both its clients and for the Firm. Specifically, for clients, the COB Process would improve the client experience by eliminating the requirement to reconfirm IO Is and the associated inconvenience to the client; would provide enhanced transparency and consistency during the offering process; and would be in line with how clients typically instruct their F As to purchase securities in secondary market transactions and in shelf offerings. Separately, for Morgan Stanley, the COB 1 The one exception to this statement is the "friends and family" directed share programs that Morgan Stanley may offer in an IPO to persons as directed by the issuer. The procedures for Morgan Stanley's "friends and family" directed share programs are not included within the scope of this request. 2 There may be circumstances in which Morgan Stanley does not use the COB Process to offer and sell securities in IPOs,
such as in IPOs of business development companies and closed end funds. Any procedures by which Morgan Stanley may conduct IPOs other than the COB Process are not included within the scope of this request. ACTIVE 2 l 3458499v. l 3

Process would decrease market risk for the Firm in allocating shares in its underwritten IPOs and would be scalable, consistent with the size and character of Morgan Stanley's retail wealth management business.
II. Proposed COB Process
The COB Process that Morgan Stanley proposes to adopt for IPOs would be as follows:
Prior to Transitioning to the COB Process

1. Morgan Stanley will distribute a written communication to inform clients about the
   COB Process for IPOs (the "COB Process Summary"). The COB Process Summary will be distributed to clients on an annual basis.
2. The Firm will revise its policies and procedures to incorporate the COB Process and
   will conduct training for its F As on the COB Process. Such policies and procedures would provide, among other things, that when soliciting COBs from clients in IPOs, FAs will inform clients about the IPO's COB Price Range, as defined below. FAs will also be responsible for making sure that their clients understand that, in submitting COBs, they are not bound and can withdraw their COBs at any time up to and including the Withdrawal Time without any obligation. During the Pre-Effective Period
3. An FA will initiate electronic delivery of the IPO preliminary prospectus (which must
   include a price range) to the FA's selected clients through the Firm's prospectus delivery email systems. 3 The Firm will send all subsequent amendments to the prospectus for the offering, as well as any free writing prospectuses and pricing term sheets used in the IPO, to clients who received the preliminary prospectus.
4. Following the delivery of the preliminary prospectus, the FA will speak to his or her
   clients to determine if the clients would like to make COBs.
5. At the client's direction, the FA will complete and record a COB on behalf of the
   client by obtaining either the number or the dollar amount of shares that the client is offering to purchase. The offering price that the client is offering to pay will be a 3 The Firm currently requires and will continue to require all clients who participate in equity syndicate offerings, including IPOs, to enroll in electronic delivery of documents, thereby ensuring that clients receive information about the offering in a timely manner. ACTIVE 2 I 3458499v. l 3

S1DiEY1 range that is 20% below the bottom end and 20% above the top end of the price range 4 set forth in the preliminary prospectus (the "COB Price Range").
6. To all clients who have submitted COBs, Morgan Stanley will send a generic email
confirming receipt of the COB (the "COB Confirmation") and informing the client that (a) the client will receive a Notice of Effectiveness, as defined below, (b) the client can withdraw the COB at any time up to and including the Withdrawal Time, as defined below, and ( c) after the Withdrawal Time, Morgan Stanley will commence accepting COBs and allocating available shares.
7. If a client is not prepared to make a COB during the Pre-Effective Period, but
expresses interest in the offering, then the FA may follow up after effectiveness and pricing to obtain an order to buy.
8. For internal administrative purposes only, an FA may make preliminary internal
allocations to the FA's clients, based on the estimated overall allotment to the FA and on the COBs collected from clients. Preliminary internal allocations are not binding contracts and will not be communicated to clients.
9. Prior to the time at which the registration statement for the offering is anticipated to
be declared effective or once the registration statement has been declared effective, the Firm will so notify clients by email ("Notice of Effectiveness") and provide them with at least one hour or until the time of effectiveness, whichever is later, to withdraw their COBs ("Withdrawal Time"). This will give clients a "one last chance" opportunity to withdraw their COBs before they are bound. 5
10. If there is a material change to the preliminary prospectus, the existing CO Bs are no
longer valid, and an FA will need to reconfirm a client's COB or obtain a new COB after the amended preliminary prospectus has been delivered to clients. 6 4 The 20% of the top and bottom ends of the price range would be calculated in accordance with Rule 430A under the Securities Act and Securities Act Rules CDI 627.01 (Apr. 24, 2009). 5 It is possible that the Notice of Effectiveness and the Withdrawal Time could also occur after the effectiveness of the registration statement. 6 The FA has the flexibility to follow up with only those clients who are likely to receive an allocation, as well as to reconfirm a COB or obtain a new COB at any time following the material change to the preliminary prospectus. If the FA follows up with a client after pricing, the client would be giving an order or offer to buy that is not conditional - i.e., the registration statement has been declared effective and the actual offering price is known - and therefore such offer can be accepted immediately. ln this circumstance, the FA will make clear that he or she is taking a customer order for a securities purchase. ACTIVE 213458499v.13

11. In the event a client's COB has been outstanding (i.e., not accepted) for more than 20
    days from the date it was submitted, such COB will no longer be valid and an FA will need to obtain a new COB from the client. 7 After the Effectiveness of the Registration Statement
12. The offering is priced.
13. If the offering prices outside of the COB Price Range, the existing COBs are no
    longer valid, and an FA will need to obtain a new order to buy from a client based on the actual offering price in order to allocate any shares to such client. 8 After the Withdrawal Tilne
14. In the event the offering prices within the COB Price Range, a client's COB can be
    accepted by Morgan Stanley without fmiher action by the client.
15. Either (a) preliminary internal allocations become final allocations or (b) the FA
    makes final allocations in the system to clients who provided COBs.
16. No monies to fund purchases of shares in IPOs will be collected from any clients until
    after their COBs have been accepted.
17. The Firm will send confirmations of sales to clients in accordance with Rule 1Ob-10
    under the Securities Exchange Act of 1934, as amended.
    III. Analysis
    Section 5( c) prohibits an "offer to sell or offer to buy ... unless a registration statement has
    been filed." Once a registration statement has been filed, offers for securities may be solicited;
    Section 2( a)(3) of the Securities Act defines the terms "offer to sell," "offer for sale," and "offer"
    as ''every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in 7 The FA has the flexibility to follow up with only those clients who are likely to receive an allocation. If the FA follows up with a client after pricing, the client would be giving an order or offer to buy that is not conditional - i.e., the registration statement has been declared effective and the actual offering price is known - and therefore such offer can be accepted immediately. In this circumstance, the FA will make clear that he or she is taking a customer order for a securities purchase. 8 The FA has the flexibility to follow up with only those clients who are likely to receive an allocation, and as the client would be giving an order or offer to buy that is not conditional - i.e., the registration statement has been declared effective and the actual offering price is known - such offer can be accepted immediately. In this circumstance, the FA will make clear that he or she is taking a customer order for a securities purchase. ACTIVE 2IJ458499v.13

S1I5CEY1 a security, for value." Section 5( a) prohibits any sale of the securities until the registration statement has been declared effective; Section 2(a)(3) defines the terms "sale" and "sell" as to "include every contract of sale or disposition of a security or interest in a security, for value." The use of conditional offers to ultimately form a contract in compliance with Section 5 is widely accepted and non-controversial. For example, the Senate and House reports to the 1954 amendments to Section 5(a) explain that:
In substance, section 5 ... permits the making of offers but not sales, contracts of sale or contracts to sell prior to the effective date. Issuers, underwriters, and dealers should find no difficulty in regulating their conduct during the waiting period so as not to make "sales" before the registration statement becomes effective. This may be done by conditioning offers, limiting activity to solicitation of offers to buy, or by other means that keep the transaction short of a "sale. " 9 (emphasis added) In addition, the Loss securities treatise identifies conditional offers as "[p ]erhaps the safest technique" a seller of securities can implement to ensure compliance with Section 5. 10 Morgan Stanley's policies and procedures are, and will continue to be, designed to prevent sales in registered offerings prior to the effectiveness of the registration statement. Under the COB Process, FAs would solicit COBs during the Pre-Effective Period, and the conditions of these COBs, to the extent they are not withdrawn up to and including the Withdrawal Time, would be the effectiveness of the registration statement, the IPO pricing within the COB Price Range and no material change to the preliminary prospectus. Unless and until these conditions are satisfied, Morgan Stanley would not have the ability to accept the COB, and the client would not be bound and would be able to freely withdraw the COB without obligation. Put differently, a COB is not and cannot be accepted until after the Withdrawal Time, which will always be after the registration statement has been declared effective. Accordingly, in our opinion, any such contract of sale resulting from the acceptance of the COB would be consistent with Section 5(a) because contract formation would only occur post￾effectiveness. The COB Process contains several steps to protect investors. First, as outlined in Step 1 above, the Firm will educate clients about the COB Process by distributing the COB Process Summary prior to transitioning to the COB Process and annually thereafter. At the point in time when a client decides to submit a COB to his or her FA, the client will have received a copy of the COB Process Summary; the client will have received the preliminary prospectus with a price 9 See S. Rep. No. 83-1036, at 15 (1954); H.R. Rep. No. 83-1542, at 23 (1954). 10 See Louis Loss et al., FUNDAMENTALS OF SECURITIES REGULATION 159 (6th ed. 2011 ). ACTIVE 2 l 3458499v. I 3

S1D'LEY1 . November 21, 2016 range; and the client will have had an opportunity to discuss the IPO with his or her FA, including whether the IPO is consistent with the client's investment objectives, as well as any questions about the COB Process. Indeed, although Morgan Stanley provides an online platform for its wealth management clients to use, Morgan Stanley does not permit its wealth management clients to use the online platform to purchase shares in IPOs. Rather, clients form and communicate their decisions to submit COBs in IPOs in the context of their discussions with their dedicated F As or FA teams. As outlined in Step 6 above, Morgan Stanley will send a COB Confirmation to clients who have submitted COBs to remind them that they can withdraw their COBs at any time up to and including the Withdrawal Time without any obligation. Finally, as outlined in Step 9 above, Morgan Stanley will send a Notice of Effectiveness to clients who have submitted COBs, thereby informing them of the Withdrawal Time and providing them with a period of at least one hour to decide whether to withdraw their COBs before they are bound. As clients will have been informed about the COB Process and will have had the opportunity to discuss the COB Process with their F As, their decision as to whether to take advantage of this final opportunity to withdraw their COBs will be an informed one. If the offering prices within the COB Price · Range and there is no material change to the preliminary prospectus, then Morgan Stanley can accept the client's COB, either in whole or in part, after the Withdrawal Time. In Morgan Stanley's view, the COB Process has been designed to and will protect investors by promoting transparency and informed decision-making throughout the COB Process.
IV. Conclusion
We are of the opinion that the COB Process as outlined in Section II of this request would not involve a pre-effective sale for purposes of Section 5(a) of the Securities Act. We hereby respectfully request your concurrence with our opinion. Sincerely, ~I~ Thomas J. Kim ACTIVE 2 I 34 58499v. 13