Seal of Board of Governors of the Federal Reserve System 

BOARD FEDERAL • F GOVERNORS OF THE WASHINGTON, RESERVE D. C.20551 SYSTEM 

ADDRES S OFFICIAL CORRESPONDENC E 

T O THE BOARD 

June 20, 2013 

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 Barney of additional shares of Morgan Stanley Smith Holdings LLC ("MSSB"), currently a joint venture between Morgan Stanley and Citigroup Inc. ("Citigroup"), all of New York, New York. The notice is required under section Consumer 163(b) of the Dodd-Frank Wall Street Reform and Protection Act ("Dodd-Frank Act").[Footnote 1. Pub. L. No. 111-203, § 163(b), 124 Stat. 1376, 1422-23 (2010), Morgan codified at 12 U.S.C. § 5363(b).End footnote.] Stanley is a financial holding company within the meaning of the Bank Holding Company Act ("BHC Act"). [Footnote MSSB 2. 12 U.S.C. § 1843(7).End footnote.] 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); [Footnote 3. 12 U.S.C. § 1843(k)(4)(E).End footnote.](2) life insurance and annuity advisory activities pursuant to section End 4(k)(4)(B);[Footnote 4. 12 U.S.C. § 1843(k)(4)(B). footnote.] and (3) other financial activities that are closely related to banking pursuant toThose section 4(k)(4)(F).[Footnote 5. 12 U.S.C. § 1843(k)(4)(F). other activities include credit extensions (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)), securities brokerage and other agency transactional services (12 CFR 225.28(b)(7)), and investing and trading activities inand foreign exchange, forward contracts, options, futures (12CFR 225.28(b)(8)).End footnote.] 
Morgan as Stanley and Citigroup established MSSB Stanley's a joint venture in 2009 by combining Morgan global wealth management group with various Citigroup business lines. Morgan Stanley initially owned 51 percent of MSSB and held options to acquire Citigroup's 49 percent interest in three one-year increments, beginning in 2012. [Footnote Stanley 6. Under the initial agreement, Morgan had options to acquire the following interests in MSSB: (1) 14 percent, exercisable beginning June 1,2012; (2) 15 percent, exercisable beginning June exercisable 1, 2013; and (3) the remaining 20 percent, On beginning June 1,2014.End footnote.] May 24, 2012, the Board approved Morgan Stanley's proposal acquire to exercise the first of the options and an additional 14 percent interest in MSSB from Citigroup ("2012 Approval").[Footnote 7. See dated Board Letter to Eric F. Grossman, Esq., Morgan May 24,2012. End footnote.] Subsequently, agreement Stanley and Citigroup amended their original of to permit Morgan Stanley to acquire all Citigroup's remaining ownership interest in MSSB at any time. Morgan Stanley now proposes to acquire the Section remaining 35 percent interest in MSSB from Citigroup. holding 4(k) of the BHC Act generally permits financial conduct companies to acquire shares of companies that prior End Board ctivities approval.[Footnote that are financial 8.12 in U.S.C. nature § without 1843(k)(6). Dodd-Frank footnote.] However, section 163(b) of the Act provides an exception to the general rule company and requires Board approval before a bank holding 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.[Footnote Morgan 9.As of March 31,2013, of Stanley had total consolidated assets assets $801 billion, and MSSB had total consolidated Morgan of $46.9 billion.End footnote.] Accordingly, Stanley's acquisition of the remaining 35 percent interest in MSSB requires the Board's prior approval.[Footnote 10. Section an 163(b)(2) of the Dodd-Frank Act provides 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 Stanley's BHC Act. 12 U.S.C. § 5363(b)(4). Morgan proposed acquisition of additional shares of MSSB is not eligible for the exemptions in section 4(c). In addition, because MSSB engages inor activities other than underwriting, dealing in, making a market in securities, the proposed transaction does not qualify for the exemption in section 4(k)(4)(E) of the BHC Act.End footnote.] 
Section 163(b) of the Dodd-Frank Act provides that of the standards listed in section 4(j)(2) the BHC Act shall apply to transactions subject § to section 163.[Footnote 11.12 U.S.C. Board 5363(b)(4).End footnote.] Accordingly, the acquisition has considered whether the proposed can "reasonably be expected to produce convenience, benefits to the public, such as greater increased competition, or gains ineffects, efficiency, that outweigh possible adverse decreased such as undue concentration of resources, of or unfair competition, conflicts interests, unsound banking practices, or risk banking to the stability of the United States or financial system."[Footnote 12.12 U.S.C. as § 1843Q)(2).End footnote.] In addition, Dodd-Frank required by section 163(b)(4) of the 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," [Footnote Under 13.12 U.S.C. § 5363(b)(4).End footnote.] more those standards, and as discussed fully below, the Board has considered the financial and managerial resources of the proposal companies involved, the effect of the markets, on competition in the relevant and the risk to financial stability to the United States banking and financial system Financial and economy, and the public benefits of the proposal. and Managerial Resources. In reviewing the financial resources of Morgan Stanley and MSSB, the both Board organizations, has considered including the financial their capital condition adequacy, of asset also quality, and earnings performance. The Board of has evaluated the pro forma financial condition projected Morgan Stanley after consummation, including its projections, capital position, asset quality, and earnings of and the impact of the proposed funding the transaction. The proposed transaction is structured as a cash purchase of shares for a total of $4.72-5 billion.[Footnote 14.In addition to the purchase price, Morgan Stanley expects that itbillion or an affiliate will repay approximately $2 and in preferred equity interests of MSSB of $880 million in outstanding long-term debt use MSSB held by Citigroup. Morgan Stanley will 35 existing resources to purchase the remaining equity percent interest in MSSB and repay the preferred Morgan interests and long-term debt.End footnote.] Stanley's regulatory capital ratios exceed the minimums required and of well-capitalized bank holding companies 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 because of its right to receive an additional 

35 percent of the revenues generated by MSSB. 

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 

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. Since the 2012 Approval, MSSB 

has completed the establishment of, and transitioned nearly all of its clients to, 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 the remaining 

35 percent interest in MSSB. As noted above, Morgan Stanley currently owns 

65 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. 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 the proposal 

may pose to the stability of the United States banking and 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 and 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 the extent of the cross-border activities of the resulting firm. The 

proposed transaction would increase Morgan Stanley's consolidated liabilities and 

deposits by approximately $56 billion. The Board has also considered that Morgan 

Stanley already owns 65 percent of the voting shares of MS SB and currently 

consolidates MSSB in its financial statements. The transaction would not increase 

Morgan Stanley's complexity or cross-border activities, and it would not affect the 

availability of substitute providers of Morgan Stanley or MSSB's products and 

services. In addition, the elimination of MSSB's joint venture structure would 

significantly reduce the degree to which Morgan Stanley and Citigroup are 

interconnected. Based on all the facts of record, the Board has determined that 

considerations relating to financial stability are consistent with approval. 

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 its right to receive an additional 35 percent of the 

revenues generated by MSSB. The transaction also is expected to reduce operating 

costs and operational risks by allowing the termination of agreements that 

previously required MSSB to route certain customer orders through Citigroup. As 

noted above, the severance of the joint venture relationship between Morgan 

Stanley and Citigroup will significantly reduce the interconnections between the 

two firms and decrease the possibility that financial distress at one firm could be 

transmitted to the other. Further, elimination of the joint venture structure would 

remove barriers to the marketability of MSSB if Morgan Stanley were to sell its 

interest in the company. 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 fully aligning Morgan Stanley's economic interests with its managerial control 

of MSSB. 

Moreover, 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. 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, 

(Signed Deputy by) Margarer McCloskey Shanks Secretary of the Board 

cc: Ivan J. Hurwitz, Vice President 

Federal Reserve Bank of New York