April 22, 2009

Paul E. Glotzer, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NewYork 10006

Dear Mr. Glotzer: 

This is in response to your request on behalf of Morgan Stanley Bank, 

N.A. (“MS Bank”), Salt Lake City, Utah, for exemptions from section 23A of the 

Federal Reserve Act and the Board’s Regulation W1 and an exception from the 

anti-tying restrictions in section 106 of the Bank Holding Company Act 

Amendments of 1970.

2

You have indicated that Morgan Stanley (“Morgan Stanley”), 

New York, New York, proposes to reorganize its business in connection with 

MS Bank’s conversion from an industrial loan company to a national bank.

 Granting these requests would permit MS Bank to acquire 

assets from certain affiliates in connection with a proposed internal reorganization. 

3

 

1

 12 U.S.C. § 371c; 12 CFR part 223. 

2

 12 U.S.C. § 1971 et seq. 

3

 The Office of the Comptroller of the Currency (“OCC”) approved MS Bank’s 

application to convert from a Utah state-chartered industrial bank to a national 

banking association on September 23, 2008.

 As 

part of that reorganization, MS Bank proposes to acquire certain assets (“Assets”) 

from Morgan Stanley and other affiliates to expand its banking book and 

investment portfolio. The Assets include commercial and consumer loans; 

corporate, municipal, and sovereign bonds; commercial paper; and asset-backed 

securities. MS Bank also proposes to extend credit to affiliates secured by the 

Assets. The Assets may include loans that contain conditions that would have 
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violated the anti-tying restrictions in section 106 if the loans had been extended by 

a bank.

Section 23A Exemption Requests

 Section 23A and Regulation W limit the amount of “covered 

transactions” between a bank and any single affiliate to 10 percent of the bank’s 

capital stock and surplus and limit the amount of covered transactions between a 

bank and all its affiliates to 20 percent of the bank’s capital stock and surplus.4

 

“Covered transactions” include the purchase of assets by a bank from an affiliate, 

the extension of credit by a bank to an affiliate, the issuance of a guarantee by a 

bank on behalf of an affiliate, and certain other transactions.

5

 The statute and 

regulation also require a bank to secure its extensions of credit to, and guarantees 

on behalf of, affiliates with prescribed amounts of collateral.6

 In addition, 

section 23A and Regulation W prohibit a bank from purchasing low-quality assets 

from an affiliate7 and require that all covered transactions between a bank and an 

affiliate be on terms and conditions that are consistent with safe and sound banking 

practices.

8

 MS Bank’s purchase of the Assets from affiliates and its extensions of 

credit secured by the Assets to affiliates would be covered transactions subject to 

the quantitative limits and qualitative requirements of section 23A and 

Regulation W.

 

9

 The aggregate value of these covered transactions for purposes of 

Regulation W would be up to [ ].10

 

4

 12 U.S.C. § 371c(a)(1) and 12 CFR 223.11 and 223.12.

5

 12 U.S.C. § 371c(b)(7) and 12 CFR 223.3(h).

6

 12 U.S.C. § 371c(c) and 12 CFR 223.14.

7

 12 U.S.C. § 371c(a)(3) and 12 CFR 223.15.

8

 12 U.S.C. § 371c(a)(4) and 12 CFR 223.13.

9

 See 12 U.S.C. § 371c(b)(7)(A) and (C); 12 CFR 223.3(h)(1) and (3). 

10 See 12 CFR 223.22(a).

 This amount would exceed MS Bank’s 

quantitative limits under the statute and rule. 
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To facilitate the reorganization, MS Bank has requested exemptions 

from section 23A and Regulation W. Section 23A and Regulation W specifically 

authorize the Board to exempt, in its discretion, transactions or relationships from 

the requirements of the statute and rule if the Board finds the exemption to be in 

the public interest and consistent with the purposes of section 23A.

11 The Board 

previously has indicated that the twin purposes of section 23A are (i) to protect 

against a depository institution suffering losses in transactions with affiliates; and 

(ii) to limit the ability of an institution to transfer to its affiliates the subsidy arising 

from the institution’s access to the federal safety net.12

 The Board previously has granted to other banks exemptions from 

section 23A and Regulation W that are similar to the exemptions requested by MS 

Bank. The Board has routinely approved exemptions under section 23A for onetime asset transfers that are part of a corporate reorganization and that are 

structured to ensure the quality of the transferred assets.

 

A. Asset Purchase Exemption Request

13

• The Assets must be externally rated B- or higher by a nationally 

registered statistical rating organization (“NSRO”) or, if unrated, of 

equivalent credit quality under the bank’s internal rating system. In 

addition, the Assets must not include low-quality assets (as defined in 

Regulation W).

 To ensure the quality of 

the transferred Assets and to protect MS Bank, the Board has determined to impose 

several conditions in connection with this exemption: 

• Morgan Stanley must, at the request of the Federal Reserve or the OCC, 

in either supervisor’s full discretion, repurchase any transferred Asset 

from the bank at the bank’s original purchase price.

• For the life of each transferred Asset, Morgan Stanley must (i) reimburse 

the bank for any credit-related loss upon sale by the bank of a transferred 

 

11 12 U.S.C. § 371c(f)(2); 12 CFR 223.43(a).

12 67 Federal Register 76560 (Dec. 12, 2002).

13 See, e.g., Board letters dated July 1, 2008, to Kathryn V. McCulloch, Esq. 

(JPMorgan Chase & Co.); March 25, 2008, to Karen Grandstrand, Esq. (Minnwest 

Corporation); December 21, 2007, to Andres L. Navarette, Esq. (Capital One 

Financial Corporation); and June 30, 2007, to Carl Howard, Esq. (Citigroup Inc). 
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Asset and (ii) repurchase any transferred Asset that becomes a 

low-quality asset (as defined in Regulation W) at the bank’s original 

purchase price.14

• In support of its guarantee, Morgan Stanley must pledge to MS Bank

collateral that is acceptable to the Federal Reserve and in an amount 

equal to [ ] percent of the aggregate covered-transaction amount for the 

life of the transferred Assets.

 Such reimbursements and repurchases must occur 

quarterly or more frequently. 

15 If a decline in value of the collateral 

causes Morgan Stanley to breach the [ ] percent collateral requirement, 

additional collateral must be pledged promptly to return Morgan Stanley 

to compliance with this requirement.16

• MS Bank must maintain a tier 1 leverage capital ratio of at least 

[ ] percent, a tier 1 risk-based capital ratio of at least [ ] percent, 

and a total risk-based capital ratio of at least [ ] percent until the 

OCC approves a capital plan for the bank.

• The Assets must be transferred to MS Bank by October 8, 2009. 

B. Financing Transactions Exemption Request

MS Bank also proposes to engage in certain financing transactions

with affiliates (secured by the Assets) in connection with the reorganization. These 

 

14 Some of the Assets may be transferred with credit default swap (“CDS”) 

protection from Morgan Stanley or another affiliate of the bank, or the bank may 

decide to obtain CDS protection for an Asset from an affiliate after it is transferred. 

Although the bank may obtain CDS protection from Morgan Stanley or another 

affiliate with respect to the transferred Asset, the bank may not pay for this 

protection because the bank would already receive credit protection for the 

transferred Asset from Morgan Stanley under the guarantee described above. 

Morgan Stanley may, however, net payments to the bank under the CDS against 

any payment obligations to the bank under the guarantee.

15 The aggregate covered-transaction amount generally is equal to the bank’s 

purchase price for transferred Assets plus the face amount of committed but 

unfunded credit lines transferred to the bank.

16 Morgan Stanley may release collateral to the extent that transferred Assets are 

sold or mature.
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transactions would include loan participations, assignments from affiliates,

repurchase agreements, securities-borrowing transactions, and other qualified 

financial contracts (collectively, “Financing Transactions”). Consistent with 

previous exemptions from section 23A that the Board has granted to permit a bank 

to engage in similar financing transactions with its affiliates,17

• The Financing Transactions must be overnight financing transactions that 

are fully secured, marked-to-market daily, and subject to daily marginmaintenance requirements.

MS Bank may only 

engage in Financing Transactions with affiliates that meet the following 

conditions:

• Collateral for the Financing Transactions must be obligations that are 

externally rated B- or higher by an NSRO or, for unrated assets, of 

equivalent credit quality and must not include any “low-quality asset” 

(as defined in Regulation W).

• Morgan Stanley must fully guarantee the prompt and full payment of all 

obligations of the affiliate counterparty to each Financing Transaction. 

• In support of the guarantee, Morgan Stanley must provide collateral 

equal to [ ] percent of the amount of the affiliate’s obligation for each 

Financing Transaction.

• MS Bank must be able to promptly liquidate transactions, even in the 

event of bankruptcy of the borrowing affiliate.

C. Certain Loans with CDS Protection Exemption Request

MS Bank would acquire certain loans that have existing CDS 

protection provided by an affiliate. Under its credit policy, the bank would not 

have been allowed to purchase some of these loans without the CDS protection. 

Because the CDS protection would be necessary to justify the bank’s extension of 

 

17 See, e.g., Board letters dated October 23, 2007, to Carl Howard, Esq. 

(Citigroup Inc.); October 12, 2007, to Jay Levine (The Royal Bank of 

Scotland plc); October 11, 2007, to Alan B. Kaplan, Esq. (Barclays Bank PLC); 

September 12, 2007, to Michael L. Kadish, Esq. (Deutsche Bank AG); 

August 20, 2007, to Kathleen A. Juhase, Esq. (JPMorgan Chase & Co.); 

August 20, 2007, to Patrick S. Antrim, Esq. (Bank of America Corporation); and 

August 20, 2007, to Carl Howard, Esq. (Citigroup Inc.). 
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credit, the bank’s acquisition of such a loan would be considered an extension of 

credit by the bank to the affiliate selling the CDS for purposes of section 23A and 

Regulation W. 

 Only a limited number of loans that depend on the CDS protection 

would be transferred to MS Bank, and the CDS are governed by a derivatives 

contract that limits MS Bank’s unsecured credit exposure to any affiliate to no 

more than [ ]. As a result, the Board has determined that it is appropriate to 

grant an exemption that permits MS Bank to acquire the loans included in the 

transferred Assets that depend on CDS protection provided by an affiliate without 

requiring the bank to subject such loans to the quantitative limits and qualitative 

requirements of section 23A and Regulation W. Going forward, however, if 

MS Bank makes a loan where CDS protection provided by an affiliate is necessary 

to justify the bank’s making the loan, the loan must be treated as an extension of 

credit to the affiliate seller of the CDS. 

D. Other Statutory Standards for the Section 23A Exemption Requests

As noted, section 23A and Regulation W specifically authorize the 

Board to exempt transactions or relationships from the statute and rule if the Board 

finds the exemption to be in the public interest and consistent with the purposes of 

section 23A. According to MS Bank, these exemptions are in the public interest 

because the reorganization would allow it to operate more profitably and 

efficiently, thereby allowing the bank to extend additional credit in a more 

cost-effective manner and to serve its customers better. As with previous 

exemption requests, and consistent with the requirements for certain internal 

corporate reorganizations in Regulation W,18

The proposed asset purchase and securities financing transactions by 

MS Bank would be subject to the market-terms requirement of section 23B of the 

Federal Reserve Act. Section 23B generally requires that transactions between a 

bank and its affiliates be on terms that are at least as favorable to the bank as the 

terms of comparable transactions between the bank and a third party.

the board of directors of MS Bank 

has reviewed and approved the transactions described above. 

19

 

18 12 CFR 223.41(d).

19 12 U.S.C. § 371c-1(a). 
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In light of these considerations and all the facts and circumstances of 

this case, the proposed transactions appear to be consistent with safe and sound 

banking practices and on terms that will ensure the quality of the transferred 

Assets. Accordingly, the proposed transactions appear to be in the public interest 

and consistent with the purposes of section 23A. The Board, after consultation 

with staffs of the OCC and the Federal Deposit Insurance Corporation, hereby 

grants the requested exemptions.

Anti-Tying Exception Request

Section 106 of the Bank Holding Company Act Amendments of 1970 

generally prohibits a bank from conditioning the availability or price of a product 

on a requirement that the customer obtain another separate product from, or 

provide another separate product to, the bank or an affiliate of the bank. This 

statutory prohibition did not apply to products and services provided by the 

nonbank subsidiaries of Morgan Stanley that were offered or provided without 

reference to the products or services of MS Bank. A small number of loans 

included in the Assets to be transferred to MS Bank might contain conditions that 

would have violated the anti-tying restrictions of section 106 if the loans had been 

extended by a bank. As a general matter, it is a violation of section 106 for a bank 

to acquire such loans from an affiliate. Section 106 authorizes the Board to grant 

exceptions to the prohibition if the exception is not contrary to the purposes of this 

section.20

The Board’s determinations are specifically conditioned on 

compliance by MS Bank and Morgan Stanley with all the commitments and 

representations made in connection with the requests and with the conditions 

discussed above. These commitments, representations, and conditions are deemed 

to be conditions imposed in writing in connection with granting the requests and, 

as such, may be enforced in proceedings under applicable law. The determinations 

are also based on the specific facts and circumstances surrounding the proposed 

transactions and may be revoked in the event of any material change in those facts 

 In light of all the facts and circumstances of this case, the Board grants 

an exemption from section 106 to permit MS Bank to acquire the Assets. Going 

forward, however, the bank would not be permitted to extend or renew any loans 

on terms that would violate the anti-tying restrictions in section 106. 

Conclusion

 

20 12 U.S.C. § 1972(1).
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and circumstances or any failure by MS Bank or Morgan Stanley to observe any of 

these commitments, representations, or conditions. Granting the requests does not

represent a determination concerning the permissibility of any other transactions 

engaged in by MS Bank or Morgan Stanley that are subject to section 23A, 

Regulation W, or section 106. 

Sincerely, 

(signed)

Robert deV. Frierson

Deputy Secretary of the Board

cc: Ivan J. Hurwitz, Vice President

 Federal Reserve Bank of New York

Federal Deposit Insurance Corporation

Office of the Comptroller of the Currency