Company Name: Morgan Stanley
Public Availability Date: January 8, 2007Document Sections:
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
November 27, 2006
U.S. Securities and Exchange Commission
Division of Corporate Finance
Office of the Chief Counsel
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir or Madam:
On behalf of Morgan Stanley, a Delaware corporation (the "Company" or "Morgan
Stanley"), and in accordance with Rule 14a-8(j) under the Securities Exchange
Act of 1934, as amended, we are filing this letter with respect to the
shareholder proposal and supporting statement submitted by the Free Enterprise
Action Fund (the "Proponent"), on October 27, 2006 (the "Proposal") for
inclusion in the proxy materials Morgan Stanley intends to distribute in
connection with its 2007 Annual Meeting of Shareholders (the "2007 Proxy
Materials"). We hereby request confirmation that the staff of the Office of
Chief Counsel (the "Staff") will not recommend any enforcement action if, in
reliance on Rule 14a-8, Morgan Stanley omits the Proposal from its 2007 Proxy
Materials. Morgan Stanley expects to file its definitive proxy materials with
the Securities and Exchange Commission (the "Commission") on or about February
15, 2007. Accordingly, pursuant to Rule 14a-8(j), this letter is being filed
with the Commission no later than 80 days before Morgan Stanley files its
definitive 2007 Proxy Materials.
Pursuant to Rule 14a-8(j), we are enclosing herewith six copies of each of this
letter and the Proposal and a copy of this submission is being sent
simultaneously to the Proponent as notification of the Company's intention to
omit the proposal from its 2007 Proxy Materials. This letter constitutes the
Company's statement of the reasons it deems the omission of the Proposal to be
proper. We have been advised by the Company as to the factual matters set forth
herein.
The Proposal states:
Resolved: The Shareholders request that the Board of Directors prepare by
October 2007, at a reasonable expense and omitting proprietary information, a
Sarbanes-Oxley Right-to-Know Report. The report should include:
1. An assessment of the costs and benefits of the Sarbanes-Oxley Act on the
Company's in-house operations; and
2. An assessment of the impacts of the Sarbanes-Oxley Act on the Company's
investment banking business.
The Proposal's supporting statement states that the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley") "may adversely impact Company operations without providing
the commensurate benefits intended by Congress." In addition, it states that
Sarbanes-Oxley "may be harming shareholder value through unnecessarily
burdensome compliance costs and by reducing the Company's investment banking
business," and that shareholders have "the right to know how Sarbanes-Oxley
impacts the Company so they can take appropriate action if warranted."
Statement of Reasons to Exclude
The Company believes that the Proposal may properly be excluded from its proxy
statement under Rule 14a-8(i)(7) and Rule 14a-8(i)(3) for the reasons discussed
below.
Rule 14a-8(i)(7)
Under Rule 14a-8(i)(7), a proposal may be excluded if it "deals with a matter
relating to the conduct of the ordinary business operations of the registrant,"
provided that it does not have "significant policy, economic or other
implications inherent in" it. Exchange Act Release No. 34-12999 (November 22,
1976). The Staff has indicated that where a proposal requests a report on a
specific aspect of the registrant's business, as is the case with the Proposal,
the Staff will consider whether the subject matter of the proposal relates to
the conduct of ordinary business operations. Where it does, such proposal,
although only requesting the preparation of a report, will be excludable.
Exchange Act Release No. 34-20091 (August 16, 1983).
The Commission has provided guidance on the policy behind the Rule 14a-8(i)(7)
exclusion for ordinary business operations. In Exchange Act Release No. 34-40018
(May 21, 1998) (the "1998 Release"), the Commission stated that the general
policy consideration behind the 14a-8(i)(7) exclusion "is consistent with the
policy of most state corporate laws: to confine the resolution of ordinary
business problems to management and the board of directors, since it is
impracticable for shareholders to decide how to solve such problems at an annual
shareholders meeting." The Commission went on to state that:
"The policy underlying the ordinary business exclusion rests on two central
considerations. The first relates to the subject matter of the proposal. Certain
tasks are so fundamental to management's ability to run a company on a
day-to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight....... The second consideration relates to the
degree to which the proposal seeks to "micro-manage" the company by probing too
deeply into matters of a complex nature upon which shareholders, as a group,
would not be in a position to make an informed judgment. This consideration may
come into play in a number of circumstances, such as where the proposal involves
intricate detail, or seeks to impose specific timeframes or methods for
implicating complex policies."
Morgan Stanley believes that the Proposal can be properly excluded under Rule
14a-8(i)(7) since compliance with Sarbanes-Oxley is "fundamental to management's
ability to run the company on a day-to-day basis," and "could not, as a
practical matter, be subject to direct shareholder oversight."
Since Sarbanes-Oxley came into effect, Morgan Stanley has invested significant
resources, both financial and human, to ensure its continued compliance with the
statute. It is an ongoing project, one that occurs on a daily basis, and one
that permeates many aspects of the Company's business. The "costs", "benefits"
and "impacts" of this compliance could not, as a practical matter, be subject to
direct shareholder oversight. The underlying subject matter of the Proposal
deals with the fundamental tasks of the Company's management and Board of
Directors to ensure compliance with Sarbanes-Oxley. Management and employees
across the organization are involved in Morgan Stanley's compliance with
Sarbanes-Oxley.
The creation of a report assessing the various "costs" and "benefits" of
Sarbanes-Oxley, even if its ultimate parameters were understood, would place an
undue burden on the Company, and we believe that such a report would not benefit
Morgan Stanley shareholders. Seeking such a report would, we believe, be an
instance of shareholders seeking to micro-manage ordinary business activities by
having the Company extend the scale of projects involved in Sarbanes-Oxley
compliance by now also having a new, invasive and expansive project of having to
record, document and report on its costs, benefits and impacts. The work
underlying the report would need to focus on micro-level detail of the ordinary
business tasks and operations involved in complying with Sarbanes-Oxley to
compile and analyze the data needed to assess and report on these costs,
benefits and impacts. This, we believe, is the very essence of ordinary business
operations. Further, such a report (especially as to the impact on Morgan
Stanley's investment banking business), would likely involve publication of
information that is competitively sensitive and therefore potentially harmful to
the Company.
Moreover, the Proponent should not be able to rely on the exception that the
Commission has made for proposals that might touch on ordinary business
operations, but truly focus on significant issues of social policy. In the 1998
Release, the Commission noted that such proposals focusing on "sufficiently
significant social policy issues.... would not be considered to be excludable,
because the proposals would transcend the day-to-day business matters...."
While certain aspects of Sarbanes-Oxley may currently be a matter of public
debate, the Staff has found proposals excludable when they request reports
regarding compliance with law or seek to involve the company in the political or
legislative process and are ultimately directed at a company's ordinary business
operations, the inverse of the situation contemplated in the 1998 release.
In International Business Machines Corporation ("IBM") (March 2, 2000), the
proponent sought a report on the potential impact on the company of
pension-related proposals being considered by national policy makers. IBM had
recently adopted a pension plan that had been subjected to scrutiny in the
public arena, the proponent being one of the plan's most vocal critics.
Ultimately, the Staff concurred with IBM that while the proposal in question may
have touched on certain policy questions being debated in both public and
legislative forums, the true nature of the report was directed at IBM's ordinary
business operations developing pension plans, making sure they were in legal
compliance with government regulations, and assessing the effect that any future
government action may have on such plans. In their response letter, the Staff
found that the proposal was excludable as it "appear[ed] directed at involving
IBM in the political or legislative process." Applying the Staff's reasoning to
the Proposal, we believe that it should be excludable as seeking to involve
Morgan Stanley in the political or legislative process.
We believe that the Proposal also should be excludable as ultimately calling for
a report on the "costs", "benefits" and "impacts" of Morgan Stanley's
Sarbanes-Oxley compliance program. In Allstate Corporation (February 16, 1999),
the Staff allowed a proposal, though touching on matters of public controversy,
to be excluded where the main focus of the report sought was directed at the
company's ordinary business operations. Allstate is particularly analogous to
the situation at hand in that the proposal requested a report that essentially
measured the general conduct of a legal compliance program. Though the proponent
in Allstate tried to frame its argument for inclusion around the publicity that
Allstate had received for allegedly illegal activities, the Staff looked to the
language of the proposal and the relief sought - a report on the company's
compliance with applicable laws - and concluded that it was excludable as the
conduct of a legal compliance program was quintessentially a part of Allstate's
ordinary business operations. We believe that, applying the Staff's reasoning in
Allstate to the Proposal, it should be excludable as calling for a report
regarding Morgan Stanley's compliance with Sarbanes-Oxley, which is part of
Morgan Stanley's ordinary business operations.
Sarbanes-Oxley is a law that the Company must comply with, not a matter of
choice. The Company's compliance with that law is a matter of ordinary business
operations. As Allstate and IBM make clear, these issues are "fundamental to
management's ability to run the company on a day-to-day basis," and they "could
not, as a practical matter, be subject to direct shareholder oversight."
Based on the foregoing, the Company believes that the Proposal may properly be
excluded from its 2007 Proxy Materials under Rule 14a-8(i)(7), as it deals with
the ordinary business operations of the Company.
Rule 14a-8(i)(3)
Under Rule 14a-8(i)(3), a proposal may be excluded if "the proposal or
supporting statement is contrary to any of the Commission's proxy rules,
including Rule 14a-9, which prohibits materially false or misleading statements
in the proxy materials." In Staff Legal Bulletin No. 14B (CF), released
September 15, 2004, the Staff stated that
"reliance on rule 14a-8(i)(3) to exclude or modify a statement may be
appropriate where..... the company demonstrates objectively that a factual
statement is materially false or misleading [or] the resolution contained in the
proposal is so inherently vague or indefinite that neither the stockholders
voting on the proposal, nor the company in implementing the proposal (if
adopted), would be able to determine with any reasonable certainty exactly what
actions or measures the proposal requires."
We believe that Morgan Stanley may properly exclude the Proposal under Rule
14a-8(i)(3) due to vague, misleading and overly broad wording that would leave
stockholders voting on the Proposal uncertain as to exactly what actions would
be taken if the Proposal were approved. At the outset, the Proponent uses a
seemingly defined term to describe the ultimate report that the Proposal seeks
when labeling it a "Sarbanes-Oxley Right to Know Report." No such report is
contemplated by Sarbanes-Oxley and the Proponent has not defined the term
"Right-to-Know Report." The use of this vague and undefined term would mislead
shareholders into believing that they were voting for a report that was mandated
or at least permitted under Sarbanes-Oxley, when in fact, the Proposal seeks
exactly the opposite; to question the very foundation of the statute by
characterizing it as "adversely impacting Company operations" and as
"unnecessarily burdensome."
The first prong of the Proposal employs broad, undefined terms such as "costs"
and "benefits" that are vague, difficult to interpret and potentially misleading
to shareholders. Some shareholders may believe that this language speaks only in
economic terms while others may interpret it to call for a more open-ended
analysis, one that measures such intangibles as public policy and goodwill.
The second prong of the Proposal asks Morgan Stanley to measure the "impact" of
Sarbanes-Oxley on the Company's investment banking business. Again, due to the
multitude of ways one could measure the "impact" of Sarbanes-Oxley, shareholders
could not be expected to clearly understand the limits of what actions or
measures such a proposal would require.
In addition to misleading and confusing shareholders, the Proposal, if adopted,
would leave Morgan Stanley uncertain as to what exactly its implementation would
require. The "costs," "benefits" and "impacts" of a significant piece of
legislation such as Sarbanes-Oxley are numerous and diffuse and Morgan Stanley
would be forced to expend considerable resources in attempting to comply with
the Proposal as a result of its vagueness.
Given the above, a shareholder voting on the Proposal would not be able to
properly assess its ultimate scope, and the Company would be unable to determine
what actions should be taken if the Proposal were to be implemented.
Accordingly, we believe that the Proposal is excludable under Rule 14a-8(i)(3)
as containing factual statements that are materially false or misleading. As
such, we believe that Morgan Stanley should be allowed to exclude the Proposal
in its entirety. "[W]hen a proposal and supporting statement will require
detailed and extensive editing in order to bring them into compliance with the
proxy rules, we may find it appropriate for companies to exclude the entire
proposal, supporting statement, or both, as materially false or misleading."
Staff Legal Bulletin No. 14 (July 21, 2001). In the alternative, if the Staff
does not agree that the Proposal should be excluded in its entirety under Rule
14a-8(i)(3), we request that the Staff recommend appropriate revisions to the
Proponent.
* * *
The Company respectfully requests confirmation that the Staff will not recommend
any enforcement action if, in reliance on the foregoing, Morgan Stanley omits
the Proposal from its 2007 Proxy Materials. If the Staff does not concur with
the Company's position, we would appreciate an opportunity to confer with the
Staff concerning these matters prior to the issuance of its response.
Please call the undersigned at (212) 450-4539 if you should have any questions
or need additional information or as soon as a Staff response is available.
Please acknowledge receipt of this filing by date-stamping the enclosed
additional copy of this letter and returning it to our messenger.
Respectfully yours,
/s/
Louis Goldberg
Attachment
cc w/ att: Steven J. Milloy, Action Fund Management, LLC William O'Shaughnessy
(Morgan Stanley)
[INQUIRY LETTER]
BY FAX AND OVERNIGHT MAIL
October 27, 2006
Mr. Thomas R. Nides
Corporate Secretary
Morgan Stanley
1585 Broadway
New York, NY 10036
Dear Mr. Secretary:
I hereby submit the enclosed shareholder proposal ("Proposal") for inclusion in
the Morgan Stanley (the "Company") proxy statement to be circulated to Company
shareholders in conjunction with the next annual meeting of shareholders. The
Proposal is submitted under Rule 14(a)-8 (Proposals of Security Holders) of the
U.S. Securities and Exchange Commission's proxy regulations.
The Free Enterprise Action Fund (the "FEAF") is the beneficial owner of
approximately 554 shares of the Company's common stock, 415 shares of which have
been held continuously for more than a year prior to this date of submission.
The FEAF intends to hold the shares through the date of the Company's next
annual meeting of shareholders. The attached letter contains the record holder's
appropriate verification of the FEAF's beneficial ownership of the
afore-mentioned Company stock.
The FEAF's designated representatives on this matter are Mr. Steven J. Milloy
and Dr. Thomas J. Borelli, both of Action Fund Management, LLC, 12309 Briarbush
Lane, Potomac, MD 20854. Action Fund Management, LLC is the investment adviser
to the FEAF. Either Mr. Milloy or Dr. Borelli will present the Proposal for
consideration at the annual meeting of shareholders.
If you have any questions or wish to discuss the Proposal, please contact Mr.
Milloy at 301-258-2852. Copies of correspondence or a request for a "no-action"
letter should be forwarded to Mr. Milloy c/o Action Fund Management, LLC, 12309
Briarbush Lane, Potomac, MD 20854.
Sincerely,
/s/
Steven J. Milloy
Managing Partner
Investment Adviser to the FEAF, Owner of Morgan Stanley. Common Stock
Enclosures: Shareholder Resolution: Sarbanes-Oxley Right-to-Know Report Letter
from Huntington National Bank
[APPENDIX]
SARBANES-OXLEY RIGHT-TO-KNOW REPORT
Resolved: The shareholders request that the Board of Directors prepare by
October 2007, at reasonable expense and omitting proprietary information, a
Sarbanes-Oxley Right-to-Know Report. The report should include:
1. An assessment of the costs and benefits of the Sarbanes-Oxley Act on the
Company's in-house operations; and
2. An assessment of the impacts of the Sarbanes-Oxley Act on the Company's
investment banking business.
Supporting Statement:
Since the Company operates for the benefit of shareholders, they have the right
to know how laws and regulations impact Company operations.
The Sarbanes-Oxley Act of 2002 (SOX) was intended to improve investor protection
and confidence. SOX, however, may adversely impact Company operations without
providing the commensurate benefits intended by Congress. Shareholders have the
right to know how SOX impacts the Company so they can take appropriate action if
warranted.
SOX may be barming shareholder value through unnecessarily burdensome compliance
costs and by reducing the Company's investment banking business.
"[In 2005,] only one of the world's 25 biggest initial public offerings listed
in the U.S. So far in 2006, just one of the 10 biggest IPOs have priced here.
Six years ago, in comparison, the U.S. hosted nine of the top 10 IPOs. Many
executives here and abroad blame U.S. regulation. High on their hit list is
Sarbanes-Oxley - SOX -, the 2002 corporate-governance law that many CEOs find
overly restrictive and costly. [Wall Street Journal, Fixing SOX No Quick Fix,
September 22, 2006]
"...Anguish over SOX in this country is not abating... As the CEO of a U.S.
stock market, I am in frequent contact with a broad spectrum of business
leaders, many of whom list on our exchange. When it comes to SOX, their message
is clear: The burden of compliance is onerous, the cost is significant, and it
falls disproportionately on smaller companies that are least able to pay. Our
research has shown that the burden on small companies, on a percentage of
revenue basis, is 11 times that of large companies." [Bob Greifeld, Nasdaq
President, Wall Street Journal, March 6, 2006]
"That is only part of the problem. In my travels to countries like China, India
and Israel, I meet with the new generation of international entrepreneurs who
are building businesses and dreaming of the day they can take their companies
public. The constant refrain I hear is that when it comes time to do an IPO,
they will be reluctant to list on American markets. They will look elsewhere to
raise capital, and the main reason they cite is SOX. Indeed, a recent piece in
these pages suggested that 90% of international small companies intending to go
public are choosing to list abroad because of SOX costs and concerns. Despite
the compelling advantages of listing with the world's most efficient markets and
having access to our vast pool of sophisticated investors, many of these
companies are likely to follow the line of least resistance and list abroad.
[Ibid.]
[INQUIRY LETTER]
December 1, 2006
BY OVERNIGHT DELIVERY
U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F Street, N.E.
Washington, D.C. 20549
Re: Morgan Stanley; Shareowner Proposal of the Free Enterprise Action Fund;
Securities Exchange Act of 1934Rule 14a-8
Dear Ladies and Gentleman,
This letter is on behalf of the Free Enterprise Action Fund ("FEAOX") in
response to the November 27, 2006 request by Morgan Stanley ("MS" or the
"Company") for a letter from the staff of the Division of Corporate Finance (the
"Staff") concurring with the Company's view that the above-referenced Shareowner
Proposal (the "Proposal") is excludable pursuant to Rule 14a-8.
Action Fund Management, LLC is the investment adviser for FEAOX and is
authorized to act on behalf of FEAOX. FEAOX believes the Proposal is not
excludable for any of the reasons claimed by MS.
THE PROPOSAL
The Proposal states in its entirety:
SARBANES-OXLEY RIGHT-TO-KNOW REPORT
Resolved: The shareholders request that the Board of Directors prepare by
October 2007, at reasonable expense and omitting proprietary information, a
Sarbanes-Oxley Right-to-Know Report. The report should include:
1. An assessment of the costs and benefits of the Sarbanes-Oxley Act on the
Company's in-house operations; and
2. An assessment of the impacts of the Sarbanes-Oxley Act on the Company's
investment banking business.
Supporting Statement:
Since the Company operates for the benefit of shareholders, they have the right
to know how laws and regulations impact Company operations.
The Sarbanes-Oxley Act of 2002 (SOX) was intended to improve investor protection
and confidence. SOX, however, may adversely impact Company operations without
providing the commensurate benefits intended by Congress. Shareholders have the
right to know how SOX impacts the Company so they can take appropriate action if
warranted.
SOX may be harming shareholder value through unnecessarily burdensome compliance
costs and by reducing the Company's investment banking business.
"[In 2005,] only one of the world's 25 biggest initial public offerings listed
in the U.S. So far in 2006, just one of the 10 biggest IPOs have priced here.
Six years ago, in comparison, the U.S. hosted nine of the top 10 IPOs. Many
executives here and abroad blame U.S. regulation. High on their hit list is
Sarbanes-Oxley - SOX -, the 2002 corporate-governance law that many CEOs find
overly restrictive and costly. [Wall Street Journal, Fixing SOX No Quick Fix,
September 22, 2006]
"... Anguish over SOX in this country is not abating ... As the CEO of a U.S.
stock market, I am in frequent contact with a broad spectrum of business
leaders, many of whom list on our exchange. When it comes to SOX, their message
is clear: The burden of compliance is onerous, the cost is significant, and it
falls disproportionately on smaller companies that are least able to pay. Our
research has shown that the burden on small companies, on a percentage of
revenue basis, is 11 times that of large companies." [Bob Greifeld, Nasdaq
President, Wall Street Journal, March 6, 2006]
"That is only part of the problem. In my travels to countries like China, India
and Israel, I meet with the new generation of international entrepreneurs who
are building businesses and dreaming of the day they can take their companies
public. The constant refrain I hear is that when it comes time to do an IPO,
they will be reluctant to list on American markets. They will look elsewhere to
raise capital, and the main reason they cite is SOX. Indeed, a recent piece in
these pages suggested that 90% of international small companies intending to go
public are choosing to list abroad because of SOX costs and concerns. Despite
the compelling advantages of listing with the world's most efficient markets and
having access to our vast pool of sophisticated investors, many of these
companies are likely to follow the line of least resistance and list abroad.
[Ibid.]
RESPONSE TO MS' CLAIMS
I. Summary of the Proposal
The Proposal requests that Morgan Stanley prepare a report on the costs and
benefits to the Company of the Sarbanes-Oxley Act of 2002 ("SOX"). Although SOX
was enacted to improve investor protection and confidence, significant public
debate about whether SOX's costs outweigh its benefits to companies.
Given the ongoing public debate about SOX, the Proposal views SOX as the sort
"significant social policy issue" contemplated in Exchange Act Release No.
40,018 (May 21, 1998). That is, because it addresses a significant social policy
issue - i.e., balancing the costs and benefits of the investor protection
offered by SOX - the Proposal is not excludable from proxy materials merely
because it may relate in some manner to some aspect of ordinary business
operations.
The purpose of the Proposal is in the nature of disclosure. That is,
shareholders are entitled to know how the significant social policy issue of SOX
impacts their investment in Morgan Stanley.
The Proposal requests information about costs and benefits incurred by Morgan
Stanley in the implementation of SOXa similar request to what the Staff
previously deemed appropriate for the shareholder proposal in General Electric
Company (January 17, 2006).
Contrary to Morgan Stanley's claims, the Proposal does not seek to monitor or
micro-manage the Company's implementation of SOX; it does not seek to engage
Morgan Stanley in public debate about SOX; it does not contain false and/or
misleading statements; and it is not vague or confusing to shareholders.
The Proposal merely requests information that is material to shareholders and
that is not available from any place other than Morgan Stanley. With the
information requested by the Proposal in the hands of shareholders, they may
take any action on their own that they deem appropriate including increasing or
decreasing their investment in Morgan Stanley and/or petitioning the government
to amend the law.
II. The Proposal is not excludable as pertaining to "ordinary business
operations."
MS asserts that the Proposal is excludable because compliance with SOX is
"fundamental to management's ability to run the company on a day-to-day basis"
and "could not as a practical matter, be subject to shareholder oversight."
But the Proposal does not seek to interfere with management's ability to run the
Company or subject management to inappropriate shareholder oversight. Nor does
the Proposal interfere with management's implementation of SOX. The Proposal
merely seeks a report on the impacts of SOX on the company.
SOX is a public law that imposes significant costs on MS and also may also
impact MS' business opportunities. MS admits in its request to the Staff that,
Morgan Stanley has invested significant resources, both financial and human, to
ensure it continued compliance with the statute.
MS staff has recently publicly discussed that SOX may impact the firm's ability
to do investment banking business:
"A lot of companies are now talking about going private just to avoid the 404
and Sarbanes-Oxley cost, which is obviously not the goal of the regulation, to
make it unattractive to be publicly traded," says Josh Connor at Morgan Stanley.
[LatinFinance, September, 2006].
MS is the unique repository of information pertaining to the "significant
investment" and potential lost business that may be attributable to SOX.
Shareholders are entitled to know whether and to what extent laws and
regulations are adversely impacting their investments. Such disclosure of
material information is a basic tenet of the federal securities laws.
Given the information requested by the Proposal, shareholders might then be able
to make more informed decisions with respect to increasing or decreasing their
investment in Morgan Stanley or perhaps petitioning the government for
appropriate changes in the law. Without the information requested by the
Proposal, shareholders are effectively left in the dark.
The issue at hand is not how management is implementing SOX, but how SOX may be
impacting shareholders. The Proposal seeks information about the impacts of SOX
on the Company, not oversight of management. The Proposal in no way questions
management's compliance with SOX. We assume that management is in compliance
with SOX. The information requested by the Proposal would shed light on whether
the benefits of the law outweigh its costs and thereby provide shareholders with
relevant information to make appropriate decisions.
Contrary to MS' assertion of confusion, the meaning of the Proposal's request
for an assessment of the "costs" and "benefits" of SOX is plain on its face and
is well understood by MS which, after all, states in its letter to the Staff
that,
Morgan Stanley has invested significant resources, both financial and human, to
ensure continued compliance with the statute.
The Proposal seeks, in part, a more detailed description of those "significant
resources."
MS asserts, but does not explain how the Proposal seeks to micro-manage the
Company. Without support, this assertion cannot stand.
MS also asserts that the Proposal "would likely involve publication of
information that is competitively sensitive and therefore potential harmful to
the Company." But the Proposal clearly states that proprietary information
should be omitted.
MS claims that the Proposal may not rely on Exchange Act Release No. 40,018 (May
21, 1998) because earlier Staff decisions found other proposals excludable when
they requested reports regarding compliance with a law or sought to involve the
company in the political or legislative process.
The Proposal, however, does not request a report concerning MS' compliance with
SOX. The Proposal requests a report about the impacts of SOX on the Company.
The Proposal does not seek to involve the Company in the political or
legislative process. The Proposal, in fact, states that the purpose of the
report is to provide information to shareholders so that shareholders may take
whatever action they deem appropriate, such as increasing or decreasing their
investment in the Company, or petitioning the Government themselves to amend the
law.
MS's reliance on International Business Machines (March 2, 2000) is misplaced.
The Proposal does not seek a speculative report on the potential impacts of
proposed legislation. Rather it seeks a report on the actual impacts already
enacted legislation.
Shareholders are entitled to know how a significant social policy - such as SOX
- as implemented by a company is affecting their investments. In General
Electric Company (January 17, 2006), a proposal seeking the costs and benefits
of the company's adoption of a global warming policy was not excludable. As in
the case of the company's adoption of a global warming policy in General
Electric Company, shareholders were permitted by the Staff to request a report
on the costs and benefits of MS' implementation of SOX.
MS' reliance on Allstate Corporation (February 16, 1999) is misplaced because in
that instance, as MS readily admits, the proposal requested a report on the
conduct of a legal compliance program. The Proposal, however, does not request
information pertaining to how or in what manner MS complies with SOX. Rather,
the Proposal requests a report on the "costs" and "benefits" to the Company of
the law. The Proposal does not seek to monitor the Company's SOX compliance. It
seeks information on how SOX may be directly impacting shareholders' investment.
III. The Proposal is not excludable as false and/or misleading.
MS asserts that the Proposal is excludable because of its title, "Sarbanes-Oxley
Right-to-Know Report." MS claims that this title is materially false or
misleading. But the Proposal's title is not materially false or misleading as it
makes no statement or assertion. It is simply a title that indicates the subject
matter of the Proposal.
MS objects to the title on the grounds that the report requested by the Proposal
is not contemplated by SOX and that the term "Right-to-Know Report" is not
defined by the Proposal.
First, the Proposal does not assert or imply that the requested report is
contemplated by SOX. Next, the term "right-to-know" is defined in the Proposal's
Supporting Statement, which states in relevant part,
... Shareholders have the right to know how SOX impacts the Company...
This statement is a straightforward assertion that shareholders can reasonably
interpret for themselves when they vote on the Proposal. The statement does not
cite SOX or anything else as the source of the assertion. It is merely a general
proposition subject to commonsense understanding.
However, if clarification of the title and or Supporting Statement is deemed
warranted by the Staff, we request the opportunity to amend the Proposal without
prejudice to its inclusion in Morgan Stanley's proxy materials.
IV. The Proposal is not excludable as vague.
MS wrongly asserts that the terms "costs" and "benefits" are "vague, difficult
to interpret and potentially misleading to shareholders."
First, the Staff has already determined in General Electric Company (January 17,
2006) that the "costs" and "benefits" terminology is not excludable. Second, the
Proposal does not dictate how MS is to produce the report. Even if the Proposal
received a majority of shareholder support, MS would not be compelled to produce
a report. The Proposal, in fact, affords MS much latitude to define the contents
of and terms used in the requested report.
MS assertion that measuring the "impact" of SOX on the Company's investment
banking business won't be understood by shareholders is without foundation.
There have been numerous recent articles in major media about how SOX may be
impacting the investment banking business.
In addition to those news articles cited in the Proposal's Supporting Statement,
recent major media articles spotlight the vigorous debate over the impacts of
SOX, including: "U.S. competitiveness is at risk, says report; Sarbanes-Oxley,
regulations hampering capital markets' strength, say CEOs (MarketWatch.com,
November 30, 2006); and "Sarbanes-Oxley Brings U.S. Firms IPO Earnings Abroad"
(Bloomberg.net, October 30, 3006).
Shareholders are quite aware of the debate over SOX's impact on the investment
banking business. What shareholders lack, though, is information that the
Proposal would provide to help them sort fact from fiction.
MS asserts that "Morgan Stanley would be forced to expend considerable resources
in attempting to comply with the Proposal as a result of its vagueness." As
previously discussed, however, the Proposal's request is not vague as evidenced
by: (1) MS' acknowledgement that it has invested significant resources to ensure
compliance with SOX - MS obviously already has some idea of what SOX compliance
costs; and (2) the ongoing, well-publicized public debate over whether SOX has
impacted investment banking revenue.
There is nothing genuinely vague about the Proposal. In any event, to the extent
that uncertainty exists, MS is free to use its best judgment in determining how
to do the report.
CONCLUSION
Based upon the forgoing analysis, we respectfully request that the Staff reject
MS' request for a "no-action" letter concerning the Proposal. If the Staff deems
the Proposal should be modified, we request the opportunity to make such
modifications without prejudice to the Proposals inclusion in MS' proxy
materials. If the Staff does not concur with our position, we would appreciate
the opportunity to confer with the Staff concerning these matters prior to the
issuance of its response. Also, we request to be party to any and all
communications between the Staff and MS and its representatives concerning the
Proposal.
Pursuant to Rule 14a-8(j), enclosed herewith are six copies of this letter. A
copy of this correspondence has been timely provided to MS and its counsel. In
the interest of a fair and balanced process, we request that the Staff notify
the undersigned if it receives any correspondence on the Proposal from MS or
other persons, unless that correspondence has specifically confirmed to the
Staff that the Proponent or the undersigned have timely been provided with a
copy of the correspondence. If we can provide additional correspondence to
address any questions that the Staff may have with respect to this
correspondence or MS's no-action request, please do not hesitate to call me at
301-258-2852.
Sincerely,
/s/
Steven J. Milloy
Cc: William O'Shaughnessy, Morgan Stanley Louis Goldberg,
Davis Polk & Wardwell
[INQUIRY LETTER]
December 15, 2006
U.S. Securities and Exchange Commission
Division of Corporate Finance
Office of the Chief Counsel
100 F Street, N.E.
Washington, D.C. 20549
Dear Sir or Madam:
Re: Proposal of Free Enterprise Action Fund
Please let this letter serve to reply to the letter dated December 1, 2006
submitted by Steven J. Milloy (the "Response") on behalf of the Free Enterprise
Action Fund (the "Proponent") in response to Morgan Stanley's letter dated
November 27, 2006 to the Commission seeking to exclude the Proposal referred to
below from Morgan Stanley's proxy materials for its 2007 Annual Meeting of
Shareholders. A copy of the Response is attached hereto.
Contrary to the Proponent's claims in the Response, Morgan Stanley ("Morgan
Stanley" or the "Company") continues to believe that the proposal submitted by
the Proponent on October 27, 2006 (the "Proposal") seeks a report implicating
nothing more than ordinary business matters. In the Response, the Proponent
attempts to characterize the Proposal as raising substantial policy issues.
However, when viewed for what it seeks, a report on the "costs" and "benefits"
of Morgan Stanley's compliance with a federally mandated regime, Sarbanes-Oxley,
we believe the Staff should concur that the Proposal is excludable as relating
to ordinary business operations.
The Proponent makes multiple references throughout the Response to the requested
information being "material" to shareholders. In addition, the Proponent argues
that the disclosure of the "material" information it seeks in its report, the
"costs" and "benefits" of complying with Sarbanes-Oxley, is "a basic tenet of
the federal securities laws." As a major public company, Morgan Stanley
understands its disclosure obligations under the Securities and Exchange Act of
1934. Public disclosure of information material to investors is circumscribed by
the federal securities laws and is required to be carried out in periodic
reports under the 1934 Act; Morgan Stanley has no obligation to create or
provide to investors new types of reports beyond those required under the 1934
Act. Morgan Stanley's compliance with its disclosure obligations is the very
essence of ordinary business operations.
The Response also states that the Proponent "does not seek to involve the
Company in the political or legislative process." However, on three separate
occasions in the Response, the Proponent states that the information it seeks
could be used by shareholders to take action such as "petitioning the government
to amend [the] law." Morgan Stanley believes that this is a clear indication
that Proponent does in fact wish to embroil Morgan Stanley in a political
process and that the Proposal is excludable on this basis following the Staff's
reasoning in International Business Machines Corporation ("IBM") (March 2, 2000)
(finding the proposal in question excludable on the grounds that it "appear[ed]
directed at involving IBM in the political or legislative process.").
Finally, the Proponent cites General Electric Company ("GE") (January 17, 2006),
to support its assertion that the Proposal is not excludable. However, the GE
letter is easily distinguishable from the facts at hand. In GE, the proponent
(also the Free Enterprise Action Fund) sought a report on the "costs" and
"benefits" of General Electric's global warming policy. While the Staff did not
give its reasoning for rejecting General Electric's request to exclude the
proposal, it was precisely the sort of proposal that the Staff had held
includable on multiple occasions under their social policy exception. A report
on the "costs" and "benefits" of complying with an internal environmental policy
and a report on the "costs" and "benefits" of complying with a federal law are
not comparable. General Electric was not, in implementing its global warming
policy, complying with federal law. It was making a choice, involving matters of
social policy and the balancing of diverging interests, which the Staff felt are
matters of social policy and therefore not excludable.
Otherwise, in relation to the other points made in the Response, we continue to
stand by all of the arguments set forth in our initial request under Rules
14a-8(i)(7) and (i)(3). Please call the undersigned at (212) 450-4539 if you
should have any questions or need additional information or as soon as a Staff
response is available. Please acknowledge receipt of this letter and its
attachments by date-stamping the enclosed additional copy of this letter and
returning it to our messenger.
Respectfully yours,
/s/
Louis Goldberg
Attachment
Cc w/att: Steven J. Milloy, Action Fund Management, LLC
William O'Shaughnessy (Morgan Stanley)
STAFF REPLY LETTER]
January 8, 2007
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Morgan Stanley Incoming letter dated November 27, 2006
The proposal requests that the board of directors prepare, by October 2007, a
report on the costs, benefits and impacts of the Sarbanes-Oxley Act on Morgan
Stanley.
There appears to be some basis for your view that Morgan Stanley may exclude the
proposal under rule 14a-8(i)(7) as relating to its ordinary business operations
(i.e., general legal compliance program). Accordingly, we will not recommend
enforcement action to the Commission if Morgan Stanley omits the proposal from
its proxy materials in reliance on rule 14a-8(i)(7). In reaching this position,
we have not found it necessary to address the alternative basis for omission
upon which Morgan Stanley relies.
Sincerely,
/s/
Rebekah Toton
Attorney-Adviser
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