Company Name: Morgan Stanley & Co. Inc.
Public Availability Date: June 30, 1993

INQUIRY LETTER

Sullivan & Cromwell

125 Broad Street

New York 10004-2498

TELEPHONE (212) 558-4000

March 16, 1993

Office of the Chief Counsel,

Division of Corporation Finance,

Securities and Exchange Commission,

450 Fifth Street, N.W.,

Washington, D.C. 20549.

Re: Securities Act of 1933 -- Rule 144(d)(3)(ii)

Dear Sirs:

On behalf of our client Morgan Stanley & Co. Incorporated ("Morgan Stanley"), we request interpretive advice of the staff of the Securities and Exchange Commission with respect to the treatment under Rule 144(d)(3)(ii) under the Securities Act of 1933 (the "Securities Act") of the amending of a convertible security to provide that it will be convertible or exercisable only for the securities into which such security is convertible or exercisable.

Morgan Stanley in its capacity as a broker-dealer and market maker from time to time acquires various convertible securities, including warrants and options, which require the holder thereof to make a cash payment in order to exercise the conversion privilege or exercise right. In addition, certain of Morgan Stanleys clients similarly may, on occasion, hold warrants, options or other convertible securities. Certain of these convertible securities constitute "restricted securities" within the meaning of Rule 144(a)(3). As such, these convertible securities cannot be resold by Morgan Stanley or its client pursuant to Rule 144 until the applicable holding period has been met.

After acquiring a convertible security, Morgan Stanley or its client holding such a security may, with the consent of the issuer of the convertible security, amend the terms of the convertible security to permit the holder to exercise the conversion or exercise right by delivering a number of the underlying securities received upon conversion or exercise with a market value equal to the exercise price (a so-called "cashless exercise"). ¹ In effecting such a cashless exercise, Morgan Stanley or its client would not pay or deliver to the issuer any consideration other than the surrender of the requisite number of underlying securities received upon conversion or exercise.

We are seeking the staffs concurrence with our view that the amending of a convertible security to provide for a cashless exercise will pursuant to Rule 144(d)(3)(ii) permit the holder upon effecting a cashless exercise to treat the underlying security acquired as if it had been acquired at the time the convertible security was acquired, i.e., to "tack" the holding period of the convertible security to that of the underlying security. We believe that our view is consistent with prior staff interpretations and the policies behind the Rule 144 holding period.

Rule 144(d)(3)(ii) permits a holder of a convertible security to treat the underlying security received upon conversion or exercise as acquired at the time the convertible security was acquired. As recently indicated by the staff, the rationale behind this Rule is that the holder of the security should be at investment risk for the entire holding period. See Bell Sports Holding Corp. (Available May 19, 1992). This rationale appears equally applicable to convertible securities which have been amended to provide for a cashless exercise, and the staff in a number of instances has permitted the holders of convertible instruments, which have been amended to provide for cashless exercise, to "tack" the holding period of the convertible security to that of the underlying security. See, e.g., Savin Rosen Bayless Borovoy (Available October 30, 1992) (warrants amended to permit cashless exercise); Bell Sports Holding Corp. (Available May 19, 1992) (warrants amended to permit cashless exercise); Northrop Corporation (Available June 6, 1991) (warrants amended to permit cashless exercise); Superior TeleTec Inc. (Available October 26, 1990) (options amended to permit cashless exercise); ADAC Laboratories (Available April 12, 1989) (warrants amended to permit cashless exercise); Digital Switch Corporation (Available August 30, 1982) (warrants amended to permit cashless exercise); Donaldson, Lufkin & Jenrette (Available July 30, 1981) (warrants amended to permit cashless exercise).

These letters reflect a recognition by the staff that a distinction cannot be drawn between convertible securities which do not permit cashless exercise at the time of issuance but are subsequently amended to permit cashless exercise and those which permit cashless exercise at the time of issuance. In both cases, upon conversion or exercise the holder only surrenders the underlying securities in payment of the conversion or exercise price and in both cases no additional consideration is paid by the holder to the issuer.

For the foregoing reasons, we request the staff to concur in our interpretation of Rule 144(d)(3)(ii) that the holder of a convertible security, which has been amended after its issuance to permit cashless exercise, may include the holding period of the convertible security with that of the underlying security received upon the cashless exercise.

In the event that further information is desired, or there is any difficulty with respect to a favorable response, please contact the undersigned at (212) 558-3755 or, in my absence, Steven M. Bunkin at (212) 558-3121.

Very truly yours,

Robert W. Reeder

cc: Robin Roger

(Morgan Stanley & Co. Incorporated)

STAFF REPLY LETTER

June 30, 1993

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: Morgan Stanley & Co., Inc.

Incoming letter dated March 16, 1993

Your letter raises interpretive issues regarding the application of Rule 144 to a convertible security that is amended after its issuance to permit a cashless exercise. The Divisions responses to these issues are as follows:

1. The Division has indicated the general position that a security holder may "tack" through the "cashless exercise" of warrants or options ("Convertible Securities") in determining the holding period for the securities ("Underlying Securities") received upon such exercise. ¹

2. The Division has also noted, however, that the holding period of restricted securities acquired upon the exercise of certain Convertible Securities may not be tacked to the holding period of the Convertible Securities themselves under Rule 144(d)(4)(ii), because, unlike the case of a security purchased for cash or property, the grant of those Convertible Securities did not create any investment risk in the holder in a manner that would justify identification of the Convertible Securities holding period with that of the Underlying Securities in a "cashless exercise." ²

3. The amendment of a Convertible Security to permit cashless exercise (creating a "Cashless Convertible Security") would start a new Rule 144 holding period for that Cashless Convertible Security. In calculating the Rule 144 holding period, the holder may tack the holding period of the Cashless Convertible Security to the holding period for the Convertible Security, in reliance upon Rule 144(d)(4)(ii), so long as the consideration provided by the holder in connection with the amendment of a Convertible Security to permit cashless exercise consists solely of other securities of the same issuer. ³ If the consideration provided by the holder in connection with the amendment of a Convertible Security to permit cashless exercise does not consist solely of the securities of the same issuer, the holding period for the Cashless Convertible Security would begin on the date of that amendment and could not be tacked to the holding period for the Convertible Security.

Because these positions are based upon the representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion.

Sincerely,

Martin P. Dunn

Deputy Chief Counsel

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