5.

Public Benefits. The Board has taken these and other considerations
into account in reviewing the public benefits and possible adverse effects of the
proposal. The transaction is expected to enhance Morgan Stanley’s earnings
performance as a result of Morgan Stanley’s right to receive an additional
14 percent of the revenues generated by MSSB. In addition, Morgan Stanley has
improved the operations of MSSB through integration initiatives, and the proposed
transaction would provide additional incentive for Morgan Stanley to enhance
MSSB’s performance by further aligning Morgan Stanley’s economic interests
with its managerial control of MSSB. On the other hand, in light of Morgan
Stanley’s existing operational control and financial consolidation of MSSB,
consummation of the proposal is not likely to result in significant adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interests, unsound banking practices, risk to the stability of the United
States banking or financial system, or greater or more concentrated risks to global
or United States financial stability or the United States economy. Accordingly,
based on all the facts of record, the Board has determined that the balance of the
public benefits it must consider is consistent with approval.

Based on all the facts of record, the Board has determined that the
notice should be, and hereby is, approved. In making this determination, the Board
has relied on all the information and representations provided by Morgan Stanley
in connection with the notice, including the estimated purchase price of the
transaction. This determination also is subject to the Board’s authority to require
modification or termination of the activities of a bank holding company or any of
its subsidiaries as the Board finds necessary to ensure compliance with, or prevent
evasion of, the provisions and purposes of the BHC Act and the Board’s
regulations and orders issued thereunder.

Please advise the Federal Reserve Bank of New York in writing when
the transaction is consummated.

Sincerely yours,

Nhe TdY fre,

Robert deV. Frierson
Deputy Secretary of the Board

ec: Ivan J. Hurwitz, Vice President
Federal Reserve Bank of New York


4.

operational control of MSSB, and MSSB is included in Morgan Stanley’s
consolidated financial statements. Under Morgan Stanley’s operational control,
MSSB has devoted significant resources to initiatives designed to integrate legacy
business lines of Morgan Stanley and Citigroup, including the establishment of a
new operating platform. Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial resources of the
organizations involved in the proposal are consistent with approval.

Competitive Considerations. In addition, the Board has considered
the competitive effects of Morgan Stanley’s proposed acquisition of an additional
14 percent interest in MSSB. As noted above, Morgan Stanley currently owns
51 percent of MSSB. Morgan Stanley already is deemed to control MSSB for
purposes of the BHC Act, and MSSB is included in Morgan Stanley’s consolidated
financial statements. Accordingly, based on all the facts of record, the Board has
concluded that consummation of the proposed transaction would not have a
significantly adverse effect on competition or on the concentration of resources in
any relevant market and that competitive considerations are consistent with
approval.

Financial Stability. The Board also has considered risk to the stability
of the United States banking or financial system and the extent to which the
proposed acquisition would result in greater or more concentrated risks to global or
United States financial stability or the United States economy. In evaluating the
effects of the proposed transaction on financial stability, the Board considers the
size of the resulting firm; availability of substitute providers for any critical
products and services offered by the resulting firm; interconnectedness of the
resulting firm with the banking or financial system; extent to which the resulting
firm contributes to the complexity of the financial system; and extent of the
cross-border activities of the resulting firm. The Board has considered that
Morgan Stanley already owns a 51 percent interest in MSSB and currently
consolidates MSSB in its financial statements. The Board also has considered that
the proposed transaction could increase Morgan Stanley’s consolidated liabilities
and deposits by a relatively small amount. The transaction would not increase
Morgan Stanley’s interconnectedness, complexity, or cross-border activities; nor
would it affect the availability of substitute providers of Morgan Stanley or
MSSB’s products and services. Based on all the facts of record, the Board has
determined that considerations relating to financial stability are consistent with
approval.


BOARD OF GOVERNORS

OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD.

May 24, 2012

Eric F. Grossman, Esq.
Chief Legal Officer

Morgan Stanley

1585 Broadway

New York, New York 10036

Dear Mr. Grossman:

This is in response to the notice by Morgan Stanley requesting the
Board’s prior approval of its proposed acquisition of additional shares of Morgan
Stanley Smith Barney Holdings LLC (“MSSB”), a joint venture between Morgan
Stanley and Citigroup Inc. (“Citigroup”), all of New York, New York. The notice
is required under section 163(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Act”).'

Morgan Stanley is a financial holding company within the meaning of
the Bank Holding Company Act (“BHC Act”).? MSSB engages in the following
activities under the BHC Act: (1) underwriting, dealing in, and making a market in
securities pursuant to section 4(k)(4)(E);° (2) life insurance and annuity advisory
activities pursuant to section 4(k)(4)(B);* and (3) other financial activities that are
closely related to banking pursuant to section 4(k)(4)(F).°

' Pub. L. No. 111-203, § 163(b), 124 Stat. 1376, 1422-23 (2010), codified at
12 U.S.C. § 5363(b).

> 12 U.S.C. § 1843(D.

3 12 U.S.C. § 1843(k)(4)(E).

* 12 U.S.C. § 1843(k)(4)(B).

> 12US.C.§ 1843(k)(4)(F). Those other activities include extending credit

(12 CFR 225.28(b)(1)), trust company functions (12 CFR 225.28(b)(5)), financial
and investment advisory activities (12 CFR 225.28(b)(6)), agency transactional
services (12 CFR 225.28(b)(7)), and investing and trading activities in foreign
exchange, forward contracts, options, and futures (12 CFR 225.28(b)(8)).


Morgan Stanley and Citigroup established MSSB as a joint venture in
2009 by combining Morgan Stanley’s global wealth management group with
various Citigroup business lines. Morgan Stanley currently owns 51 percent of
MSSB and holds options to acquire Citigroup’s 49 percent interest in MSSB in
three one-year increments.° Morgan Stanley proposes to exercise the first of the
options and acquire an additional 14 percent interest in MSSB from Citigroup.

Section 4(k) of the BHC Act generally permits financial holding
companies to acquire shares of companies that conduct activities that are financial
in nature without prior Board approval.” However, section 163(b) of the
Dodd-Frank Act provides an exception to the general rule and requires prior Board
approval before a bank holding company with assets of $50 billion or more may
acquire shares of a company with assets of $10 billion or more that is engaged in
activities under section 4(k) of the BHC Act. Morgan Stanley and MSSB exceed
those asset thresholds.* Accordingly, Morgan Stanley’s acquisition of an
additional 14 percent interest in MSSB requires the Board’s prior approval.”

Section 163(b) of the Dodd-Frank Act provides that the standards
listed in section 4(j)(2) of the BHC Act shall apply to transactions subject to
section 163.'° Accordingly, the Board has considered whether the proposed

® Morgan Stanley has options to acquire the following interests in MSSB:

(1) 14 percent, exercisable beginning June 1, 2012; (2) 15 percent, exercisable
beginning June 1, 2013; and (3) the remaining 20 percent, exercisable beginning
June 1, 2014.

T 12US.C. § 1843(k)(6).

8 As of December 31, 2011, Morgan Stanley had total consolidated assets of
$750 billion, and MSSB had total consolidated assets of $34.3 billion.

? Section 163(b)(2) of the Dodd-Frank Act provides an exemption to the prior
notice requirement for the acquisition of shares that would qualify for the
exemptions in sections 4(c) or 4(k)(4)(E) of the BHC Act. 12 U.S.C. § 5363(b)(4).
Morgan Stanley’s proposed acquisition of additional shares of MSSB is not
eligible for the exemptions in section 4(c) of the BHC Act. In addition, because
MSSB engages in activities other than underwriting, dealing in, or making a
market in securities, the proposed transaction does not qualify for the exemption in
section 4(k)(4)(E) of the BHC Act.

0 12 U.S.C. § 5363(b)(4).


3.

acquisition can “reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interests, unsound banking practices, or risk to the
stability of the United States banking or financial system.”'! In addition, as
required by section 163(b)(4) of the Dodd-Frank Act, the Board has considered the
extent to which the proposed acquisition “would result in greater or more
concentrated risks to global or United States financial stability or the United States
economy.”"” Under those standards, and as discussed more fully below, the Board
has considered the financial and managerial resources of the companies involved,
the effect of the proposal on competition in the relevant markets, the risk to global
financial stability and the stability of the United States banking or financial system
and economy, and the public benefits of the proposal.

Financial and Managerial Resources. In reviewing the financial
resources of Morgan Stanley and MSSB, the Board has considered the financial
condition of both organizations, including information about capital adequacy,
asset quality, and earnings performance. The Board also has evaluated the pro
forma financial condition of Morgan Stanley after consummation, including its
projected capital position, asset quality, and earnings projections, and the impact of
the proposed funding of the transaction. Morgan Stanley’s regulatory capital ratios
exceed the minimums required of well-capitalized bank holding companies and
would continue to do so on consummation of the proposal. Consummation of the
proposed transaction is also expected to enhance Morgan Stanley’s earnings
performance as a result of Morgan Stanley’s right to receive an additional
14 percent of the revenues generated by MSSB. Based on its review of the record,
the Board finds that Morgan Stanley has sufficient financial resources to effect the
proposal.

The Board also has considered the managerial resources of the
organizations involved and, in particular, has reviewed the examination records of
Morgan Stanley and its subsidiary depository institutions, including assessments of
their management, risk-management systems, and operations. In addition, the
Board has considered its supervisory experience with Morgan Stanley since it
became a financial holding company in late 2008. Morgan Stanley currently has

12 US.C. § 1843(@)(2).
2 12 U.S.C. § 5363(b)(4).

' Morgan Stanley proposes to fund the transaction with available cash resources.