Merrill Lynch & Co., Inc. , (May 16, 1996)

INQUIRY LETTER

MERRILL LYNCH

WORLD FINANCIAL CENTER

NORTH TOWER

NEW YORK, NEW YORK 10281-1334

TELEPHONE (212) 449-1000

April 08, 1996

Securities Act of 1933; Form S-8

Via Federal Express

Mr. Martin Dunn

Chief Counsel, Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC 20549

Re: Merrill Lynch & Co., Inc.

Dear Mr. Dunn:

On behalf of Merrill Lynch & Co., Inc. (the "Company"), I respectfully request that the Staff of the Division of Corporation Finance (the"Staff") confirm that it will not recommend any enforcement action to the Securities and Exchange Commission (the "Commission") if the Company continues to use Form S-8 to register shares issuable upon exercise of Transferable Stock Options (as defined below) by former employees and the estates and beneficiaries of employees and former employees.

I. Background

As part of its regular compensation practices, the Company grants annual stock-based incentive awards to key employees under the Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan (the "Plan"). These awards consist of restricted shares, restricted units ¹ and non-qualified stock options ("Stock Options"). Prior to December 1995, the Plan provided that Stock Options could not be assigned, pledged, or otherwise transferred except, in the event of a participants death, to his designated beneficiary or, in the absence of such a designation, by will or the laws of descent and distribution. In December 1995, the Plan was amended to provide that the Management Development and Compensation Committee (the "Committee") of the Companys Board of Directors could grant Stock Options which may be transferred during the participants lifetime to an immediate family member (child, stepchild or grandchild) or to a trust established for the exclusive benefit of one or more immediate family members ("Transferable Stock Options"). The purpose of this limited transferability feature is to permit an employee receiving a transferable grant to make a gift of Stock Options to such persons for estate planning purposes. As used herein, "Stock Option Transferee" refers to an immediate family member of a Plan participant (or such persons beneficiary, estate or other legal representative), or a trust for the benefit of one or more immediately family members, that has received Transferable Stock Options in a valid transfer.

All of the shares of the Companys common stock ("Common Stock") issuable pursuant to the Plan are currently registered on Form S-8 (File Nos. 33-33336 and 33-51831). The Companys current practice is to use the S-8 prospectus in connection with exercises of Stock Options by employees, former employees who have been permitted to retain Stock Options in accordance with the terms of the Plan, and the estates and beneficiaries of employees and former employees, as contemplated by General Instruction A(1)(a) to Form S-8. Since the immediate family members of employees that receive Transferable Stock Options clearly do not fall within the definition of "employee" under General Instruction A(1)(a), the Company has filed a registration statement on Form S-3 (File No. 333-02275) to cover the exercise of Transferable Stock Options by Stock Option Transferees. Exercises by these persons are not the subject of this letter. ²

In some cases, employees who receive Transferable Stock Options will choose not to transfer them, and they will therefore be exercised by the employee, either during or after employment, or by the employees beneficiary or estate. We intend to continue to use the S-8 prospectus in connection with exercises of Transferable Stock Options by Company employees, as permitted by Form S-8. We would also like to be able to use the S-8 prospectus for exercises of Transferable Stock Options by former employees and the estates and beneficiaries of employees and former employees in circumstances where the Transferable Stock Options are not transferred, and it is exercises by these persons that are the subject of this letter. General Instruction A(1)(a) indicates that the inclusion of such persons within the definition of "employee" is only to permit the exercise of employee benefit plan stock options that are non-transferable (except under the laws of descent and distribution). We are of the opinion that this limitation was not intended to prevent the registration on Form S-8 of Transferable Stock Option exercises by former employees and estates and beneficiaries of employees and former employees in the circumstances described herein.

II. The Plan

The purposes of the Plan are to enhance the growth and profitability of the Company and its subsidiaries by providing the incentive of long-term rewards to key employees, to attract and retain employees of outstanding competence and ability, to encourage long-term stock ownership by employees, and to further align the interests of such employees with those of stockholders by providing them with the incentive of long-term rewards through an opportunity for capital accumulation in the form of a proprietary interest in the Company. The Plan is not a pension, profit-sharing, or stock bonus plan designed to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended, or an employee benefit plan subject to any of the provisions of the Employee Retirement Income Security Act of 1974 (other than a one-time reporting requirement).

The Plan was adopted by the Board of Directors of the Company on February 27, 1989 and was approved by the stockholders of the Company on April 28, 1989. On April 22, 1991, the stockholders of the Company approved an increase, to 40,000,000, in the number of shares authorized to be distributed under the Plan. On January 27, 1992, the Board of Directors of the Company amended the Plan to limit to 40,000,000 the total number of units payable in cash under the Plan. On October 11, 1993, the Board of Directors of the Company declared a two-for-one stock split, effected in the form of a 100% stock dividend, payable on November 24, 1993 to the holders of record of shares of Common Stock at the close of business on October 22, 1993. Therefore, total authorization pursuant to the Plan is 80,000,000 shares of Common Stock and 80,000,000 units payable in cash. As of December 29, 1995, 18,265,877 shares were available for distribution under the Plan (net of shares reserved for issuance upon the exercise of outstanding Stock Options), and unexercised Stock Options to purchase 30,075,851 shares of Common Stock were outstanding under the Plan.

The Plan provides for grants of "Performance Shares," "Performance Units," "Restricted Shares," "Restricted Units," "Stock Options," "Stock Appreciation Rights," and "Other ML & Co. Securities" to eligible employees as the Committee may determine. The Committee determines, after receiving the recommendations of the management, the employees to whom grants will be made, when such grants will be made, the size of such grants, and other terms of grants.

The Plan is administered by the Committee, which is constituted to meet the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). ³ The Committee members serve at the pleasure of the Companys Board of Directors. The Committee has the power to interpret the Plan and to prescribe rules and regulations relating thereto.

III. The Stock Options; Limited Transferability

As stated above, the Plan provides for the grant of Stock Options to purchase shares of Common Stock. Stock Options may be either nonqualified stock options or incentive stock options, but the Company has never issued any incentive stock options under the Plan, and it is not expected that incentive stock options would ever be granted with the limited transferability feature. At the time of grant, the Committee establishes the exercise price (which may not be less than 50% of the fair market value of the underlying Common Stock on the date of grant), the expiration date (which may not be more than 10 years from the date of grant), and the times and installments in which the Stock Options may be exercised.

All outstanding Stock Options have expiration dates ten-years from the date of grant with an exercise price equal to the fair market value of the Common Stock on the date of grant. Such Stock Options become exercisable in equal annual installments over the four or five-year period following the date of grant.

The Plan provides that Stock Options are generally not transferable by a Plan participant except by will or the laws of descent and distribution and are exercisable during the participants lifetime only by the participant. Notwithstanding the foregoing, under certain circumstances, the Committee may grant (or sanction by amending an existing grant) Stock Options that may be transferred by the participant during his or her lifetime to any member of his or her immediate family or a trust established for the exclusive benefit of one or more members of his or her immediate family in order to permit participants who receive transferable grants to make a gift of Stock Options to such persons for estate planning purposes. The term "immediate family" is defined for such purpose as children, stepchildren and grandchildren, including relationships arising from legal adoption. It is expected that Transferable Stock Options will only be granted to the relatively small group of senior executives who are most likely to require the estate planning flexibility that they offer.

Upon transfer to a Stock Option Transferee, a Transferable Stock Option continues to be governed by and subject to the terms and limitations of the Plan and the relevant grant, and the Stock Option Transferee is entitled to the same rights as the participant transferor thereunder, as if no transfer had taken place. Accordingly, the rights of the Stock Option Transferee are subject to the terms and limitations of the original grant to the participant transferor, including provisions relating to expiration date, exercisability, exercise price and forfeiture. Once a Stock Option has been transferred to a Stock Option Transferee, it may not be subsequently transferred by the Stock Option Transferee except by will or the laws of descent and distribution.

IV. Registration of Common Stock Deliverable Upon Exercise of Transferable Options

As mentioned above, the Company has filed a Registration Statement on Form S-3 to register the Common Stock to be delivered upon the exercise of Transferable Stock Options by Stock Option Transferees. Exercises by these persons are not the subject of this letter. The Company has previously registered all of the shares of Common Stock issuable under the Plan on Form S-8. The related S-8 prospectus is currently used in connection with the exercise of non-transferable Stock Options by employees, former employees and the beneficiaries and estates of employees and former employees. The Company intends to use the S-8 prospectus in connection with the exercise of Transferable Stock Options by employees, as permitted by the form. We would also like to use the S-8 prospectus in connection with the exercise of Transferable Stock Options (which are not in fact transferred) by former employees and the beneficiaries and estates of employees and former employees. The purpose of this letter is to confirm our ability to use S-8 for these exercises, in light of the ambiguity introduced by General Instruction A(1)(a) to that Form.

General Instruction A(1)(a) to Form S-8 states that the inclusion of former employees and beneficiaries and estates within the definition of the term "employee" is only to permit registration on Form S-8 of securities to be delivered upon the exercise of employee benefit plan stock options that are non-transferable (except under the laws of descent and distribution) and the subsequent sale of the securities ⁴, provided that such exercises are not prohibited under the terms of the plan. While at first blush this instruction would appear to prevent the Company from using the S-8 prospectus in connection with exercises of Transferable Stock Options by former employees and beneficiaries and estates of employees and former employees, for the reasons set forth below, we are of the opinion that the use of Form S-8 for these transactions is entirely consistent with the intention of General Instruction A(1)(a).

General Instruction A to Form S-8 was amended in 1990 to expand the "employee" definition to cover exercises by former employees and beneficiaries and estates. ⁵ The amendment was apparently intended to codify the Staffs pre-1990 no-action letter position ⁶ in a limited way, so as to distinguish ordinary compensatory plan transactions (where the issuance has a clear compensatory or incentive purpose) from capital raising transactions or transferable option schemes that result in option exercises by members of the general public. The Transferable Stock Options that may be granted under the Plan do not result in the type of offering that the amendment sought to exclude.

The limited transferability feature merely allows the employee to make an inter vivos gift of Stock Options to his or her children or grandchildren for estate planning purposes. Once they are so transferred, they may not be subsequently transferred except pursuant to the laws of descent and distribution. Moreover, given the relationship between the employee and the Stock Option Transferee, the transferred Stock Options still provide a meaningful incentive to the employee from the Companys point of view, because they remain subject to the same restrictions after transfer (i.e. they remain subject to forfeiture) and their value continues to be dependent upon the value of the Common Stock. In other words, the limited transferability feature does not in any way convert the grant or exercise of Transferable Stock Options from ordinary compensatory plan transactions into capital-raising transactions or an indirect distribution to the public.

There is also little meaningful difference between Stock Options that are transferable to family members by will upon death and Stock Options that may be transferred to family members by way of gift during an employees lifetime. In our opinion, the Transferable Stock Options should be considered "non-transferable" within the meaning of General Instruction A(1)(a), because of the extremely limited nature of the transferability feature and by analogy to the exception for transfers to beneficiaries and estates.

Any other conclusion leads to anomalous results. Since Transferable Stock Options are only transferable by the employee during his lifetime, the Transferable Stock Options are not even transferable in the hands of an estate or beneficiary at the time of exercise, making them absolutely no different from any non-transferable Stock Options the estate or beneficiary may also hold. Also, the Companys practice is to deliver the S-8 prospectus to employees upon grant, updating this prospectus at or prior to exercise only if necessary. Accordingly, if the exercise of Transferable Stock Options by former employees is not registrable on Form S-8, then we will be forced to deliver two prospectuses for the same sale, once at grant and once when the employee leaves the Company.

In our opinion, the Common Stock issuable upon the exercise of Transferable Stock Options by former employees and the estates and beneficiaries of employees and former employees may be registered on Form S-8 for the reasons set out herein. Please confirm that the Staff will not recommend any enforcement action to the Commission if the Company uses its S-8 prospectus in connection with such exercises, rather than separately registering the Common Stock on Form S-3 for such purpose.

In accordance with Securities Act Release No. 33-6269 (December 4, 1980), seven additional copies of this letter are enclosed herewith. If you have any questions or require any additional information, please contact the undersigned at (212) 449-6374 or Margaret E. Nelson at (212) 449-9812.

Very truly yours,

Richard B. Alsop

STAFF REPLY LETTER

May 16, 1996

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: Merrill Lynch & Co., Inc. (the "Company")

Incoming letter dated April 8, 1996

Based on the facts presented, the Division will not raise any objection if the Company uses Form S-8 in connection with exercises of Transferable Stock Options (as defined in your letter) by former employees and by executors, administrators and beneficiaries of estates of employees or former employees, provided that the Transferable Stock Options being exercised have never been transferred by the original grantees and are only exercisable by executors, administrators and beneficiaries of their estates due to such grantees deaths. In reaching this position, we have particularly noted that a Transferable Stock Option is not transferable by any person other than the original grantee or the estate of the original grantee (which is permitted to transfer such Transferable Stock Option only to the beneficiaries of such estate).

Because this position is based on the representations made to the Division in your letter, it should be noted that different facts or conditions might require a different conclusion. Further, this response expresses the Divisions position only on enforcement action and does not purport to express any legal conclusions on the questions presented.

Sincerely,

Anita Klein

Special Counsel

SEC_CODE_REF_0090001192884