Morgan Stanley 2015 Annual Report Download - page 24

In response to the financial crisis, legislators and regulators, both in the U.S. and worldwide, have adopted, continue to
propose and are in the process of adopting, finalizing and implementing a wide range of financial market reforms that are
resulting in major changes to the way our global operations are regulated and conducted. In particular, as a result of these
reforms, we are, or will become, subject to (among other things) significantly revised and expanded regulation and
supervision, more intensive scrutiny of our businesses and any plans for expansion of those businesses, new activities
limitations, a systemic risk regime that imposes heightened capital and liquidity requirements and other enhanced prudential
standards, new resolution regimes and resolution planning requirements, new requirements for maintaining minimum
amounts of external total loss-absorbing capacity and external long-term debt, new restrictions on activities and investments
imposed by the Volcker Rule, and comprehensive new derivatives regulation. While certain portions of these reforms are
effective, others are still subject to final rulemaking or transition periods. Many of the changes required by these reforms
could materially impact the profitability of our businesses and the value of assets we hold, expose us to additional costs,
require changes to business practices or force us to discontinue businesses, adversely affect our ability to pay dividends and
repurchase our stock, or require us to raise capital, including in ways that may adversely impact our shareholders or creditors.
In addition, regulatory requirements that are being proposed by foreign policymakers and regulators may be inconsistent or
conflict with regulations that we are subject to in the U.S. and, if adopted, may adversely affect us. While there continues to
be uncertainty about the full impact of these changes, we do know that the Company is and will continue to be subject to a
more complex regulatory framework, and will incur costs to comply with new requirements as well as to monitor for
compliance in the future.
The application of regulatory requirements and strategies in the United States to facilitate the orderly resolution of large
financial institutions may pose a greater risk of loss for the security holders of the Company.
Pursuant to the Dodd-Frank Act, the Company is required to submit to the Federal Reserve and the FDIC an annual
resolution plan that describes its strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of
material financial distress or failure of the Company. In addition, provided that certain procedures are met, the Company can
be subject to a resolution proceeding under the orderly liquidation authority under Title II of the Dodd-Frank Act with the
FDIC being appointed as receiver. The FDIC’s power under the orderly liquidation authority to disregard the priority of
creditor claims and treat similarly situated creditors differently in certain circumstances, subject to certain limitations, could
adversely impact holders of the Company’s unsecured debt. See “Business—Supervision and Regulation” in Part I, Item 1.
Further, because both our resolution plan contemplates a single-point-of-entry (“SPOE”) strategy under the U.S. Bankruptcy
Code and the FDIC has proposed an SPOE strategy through which it may apply its orderly liquidation authority powers, we
believe that the application of an SPOE strategy is the reasonably likely outcome if either our resolution plan were
implemented or a resolution proceeding were commenced under the orderly liquidation authority. An SPOE strategy
generally contemplates the provision of additional capital and liquidity by the Company to certain subsidiaries in an effort to
ensure that such subsidiaries have the resources necessary to implement the resolution strategy. Although this strategy,
whether applied pursuant to the Company’s resolution plan or in a resolution proceeding under the orderly liquidation
authority, is intended to result in better outcomes for creditors overall, there is no guarantee that the application of an SPOE
strategy will not result in greater losses for holders of the Company’s securities compared to a different resolution strategy
for the firm.
Regulators have taken and proposed various actions to facilitate an SPOE strategy under the U.S. Bankruptcy Code, the
orderly liquidation authority or other resolution regimes. For example, the Federal Reserve has issued a proposed rule that
would require top-tier bank holding companies of U.S. G-SIBs, including the Company, to maintain minimum amounts of
equity and eligible long-term debt (“total loss-absorbing capacity” or “TLAC”) in order to ensure that such institutions have
enough loss-absorbing resources at the point of failure to be recapitalized through the conversion of debt to equity or
otherwise by imposing losses on eligible TLAC where the SPOE strategy is used.
The financial services industry faces substantial litigation and is subject to extensive regulatory investigations, and we
may face damage to our reputation and legal liability.
As a global financial services firm, we face the risk of investigations and proceedings by governmental and self-regulatory
organizations in all countries in which we conduct our business. Interventions by authorities may result in adverse judgments,
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