DESCRIPTION OF THE SECURITIES
Terms not defined herein have the meanings given to such terms in the accompanying prospectus supplement. The term “Security” refers to each $10 Stated Principal Amount of our Participation Securities Based on the Value of the Morgan Stanley SmartInvest Equity Index (Price Return) due November 20, 2018. In this pricing supplement, the terms “we,” “us” and “our” refer to Morgan Stanley.
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Aggregate Principal Amount
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$
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Pricing Date
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May 15, 2015
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Original Issue Date (Settlement Date)
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May 20, 2015 (3 Business Days after the Pricing Date)
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Maturity Date
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November 20, 2018, subject to extension as described in the following paragraph.
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If the Valuation Date is postponed in accordance with the definition thereof so that it falls less than two Business Days prior to the scheduled Maturity Date, the Maturity Date will be postponed to the second Business Day following the Valuation Date as postponed. See “––Valuation Date” below.
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Issue Price
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100% ($10 per Security)
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Stated Principal Amount
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$10 per Security
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Denominations
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$10 and integral multiples thereof
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Specified Currency
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U.S. dollars
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Payment at Maturity
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At maturity, upon delivery of the Securities to the Trustee, we will pay with respect to the $10 Stated Principal Amount of each Security an amount in cash, as determined by the Calculation Agent, equal to:
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(i) if the Final Index Value is greater than the Initial Index Value, $10 plus the product of $10 and the Index Percent Increase, or
(ii) if the Final Index Value is less than or equal to the Initial Index Value,
$10 x Index Performance Factor
We shall, or shall cause the Calculation Agent to, (i) provide written notice to the Trustee and to The Depository Trust Company, which we refer to as DTC, of the amount of cash to be delivered with respect to the $10 Stated Principal Amount of each Security, on or prior to 10:30 a.m. (New York City time) on the Business Day preceding the Maturity Date, and (ii) deliver the aggregate cash amount due with respect to the Securities to the Trustee for delivery to DTC, as holder of the Securities, on or prior to the Maturity Date. We expect such amount of cash will
be distributed to investors on the Maturity Date in accordance with the standard rules and procedures of DTC and its direct and indirect participants. See “—Book Entry Security or Certificated Security” below, and see “Forms of Securities—The Depositary” in the accompanying prospectus.
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Index Percent Increase
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A fraction, as determined by the Calculation Agent, the numerator of which is the Final Index Value minus the Initial Index Value and the denominator of which is the Initial Index Value, as described by the following formula:
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Index Percent Increase
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=
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Final Index Value – Initial Index Value
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Initial Index Value
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Index Performance Factor
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A fraction, as determined by the Calculation Agent, the numerator of which is the Final Index Value and the denominator of which is the Initial Index Value, as described by the following formula:
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Index Performance Factor
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=
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Initial Index Value
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Initial Index Value
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, which is the Index Closing Value on the Pricing Date.
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Final Index Value
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The Index Closing Value on the Valuation Date, as determined by the Calculation Agent.
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Index Closing Value
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The Index Closing Value on any Index Business Day will be determined by the Calculation Agent and will equal the official closing value of the Index, or any Successor Index (as defined under “—Discontinuance of the Index” below), published at the regular official weekday close of trading on that Index Business Day by the Index Publisher. In certain circumstances, the Index Closing Value will be based on the alternate calculation of the Index described under “—Discontinuance of the Index.”
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Index Publisher
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Standard & Poor’s Financial Services LLC or any successor thereto
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Index Sponsor
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Morgan Stanley & Co. International plc
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Valuation Date
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November 15, 2018, subject to postponement for non-Index Business Days as described in the following paragraph.
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If the scheduled Valuation Date is not an Index Business Day, the Valuation Date shall be the next succeeding Index Business Day; provided that the Index Closing Value for the Valuation Date will not be determined on a date later than the fifth scheduled Index Business Day after the scheduled Valuation Date, and if such date is not an Index Business Day, the Calculation Agent will determine the Index Closing Value on such date in accordance with the formula for and method of calculating the Index last in effect prior to the non-Index Business Day, without rebalancing or substitution, using the closing price (or, if trading in the relevant
securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension, limitation or non-Index Business Day) on such date of each security most recently constituting the Index.
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Business Day
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Any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in The City of New York.
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Index Business Day
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A day, as determined by the Calculation Agent, on which (i) trading is generally conducted on each of the Relevant Exchange(s) for the Index, other than a day on which trading on such exchange(s) is scheduled to close prior to the time of the posting of its regular final weekday closing price and (ii) the Index Closing Value is published by the Index Publisher.
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Relevant Exchange
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The primary exchange(s) or market(s) of trading for (i) any security then included in the Index, or any Successor Index, and (ii) any futures or options contracts related to the Index or to any security then included in the Index.
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Certificated Security
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Book Entry. The Securities will be issued in the form of one or more fully registered global securities which will be deposited with, or on behalf of, DTC and will be registered in the name of a nominee of DTC. DTC’s nominee will be the only registered holder of the Securities. Your beneficial interest in the Securities will be evidenced solely by entries on the books of the Securities intermediary acting on your behalf as a direct or indirect participant in DTC. In this pricing supplement, all references to actions taken by “you” or to be taken by “you” refer to actions taken or to be taken by DTC and its participants acting on your behalf, and all references to payments or notices to you will mean payments or notices to DTC, as the registered holder of the Securities, for distribution to participants in accordance with DTC’s procedures. For more information regarding DTC and book-entry securities, please read “Forms of Securities—The Depositary” and “Forms of Securities—Global Securities—Registered Global Securities” in the accompanying prospectus.
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Senior Security or Subordinated Security
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Senior
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Trustee
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The Bank of New York Mellon, a New York banking corporation
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Agent
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Morgan Stanley & Co. LLC (“MS & Co.”)
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Calculation Agent
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MS & Co. and its successors
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All determinations made by the Calculation Agent will be at the sole discretion of the Calculation Agent and will, in the absence of manifest error, be conclusive for all purposes and binding on you, the Trustee and us.
All calculations with respect to the Payment at Maturity will be made by the Calculation Agent and will be rounded to the nearest one hundred-thousandth, with five one-millionths rounded upward
(e.g., .876545 would be rounded to .87655); all dollar amounts related to determination of the amount of cash payable per security will be rounded to the nearest ten-thousandth, with five one hundred-thousandths rounded upward (e.g., .76545 would be rounded up to .7655); and all dollar amounts paid on the aggregate number of securities will be rounded to the nearest cent, with one-half cent rounded upward.
Because the Calculation Agent is our affiliate, the economic interests of the Calculation Agent and its affiliates may be adverse to your interests as an investor in the Securities, including with respect to certain determinations and judgments that the Calculation Agent must make in determining the Initial Index Value or the Final Index Value. See “—Discontinuance of the Index; Alteration of Method of Calculation” below. MS & Co. is obligated to carry out its duties and functions as Calculation Agent in good faith and using its reasonable judgment.
Alternate Exchange Calculation
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in Case of an Event of Default
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If an Event of Default with respect to the Securities shall have occurred and be continuing, the amount declared due and payable upon any acceleration of the Securities (the “Acceleration Amount”) will be an amount, determined by the Calculation Agent in its sole discretion, that is equal to the cost of having a Qualified Financial Institution, of the kind and selected as described below, expressly assume all our payment and other obligations with respect to the Securities as of that day and as if no default or acceleration had occurred, or to undertake other obligations providing substantially equivalent economic value to you with respect to the Securities. That cost will equal:
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•
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the lowest amount that a Qualified Financial Institution would charge to effect this assumption or undertaking, plus
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the reasonable expenses, including reasonable attorneys’ fees, incurred by the holders of the Securities in preparing any documentation necessary for this assumption or undertaking.
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During the Default Quotation Period for the Securities, which we describe below, the holders of the Securities and/or we may request a Qualified Financial Institution to provide a quotation of the amount it would charge to effect this assumption or undertaking. If either party obtains a quotation, it must notify the other party in writing of the quotation. The amount referred to in the first bullet point above will equal the lowest—or, if there is only one, the only—quotation obtained, and as to which notice is so given, during the Default Quotation Period. With respect to any quotation, however, the party not obtaining the quotation may object, on reasonable and significant grounds, to the assumption or undertaking by the Qualified Financial Institution providing the quotation and notify the other party in writing of those grounds within two Business Days after the last day of the Default Quotation Period, in which case that quotation will be disregarded in determining the Acceleration Amount.
Notwithstanding the foregoing, if a voluntary or involuntary liquidation, bankruptcy or insolvency of, or any analogous proceeding is filed with respect to Morgan Stanley, then depending on applicable bankruptcy law, your claim may be limited to an amount that could be less than the Acceleration Amount.
If the maturity of the Securities is accelerated because of an Event of Default as described above, we shall, or shall cause the Calculation Agent to, provide written notice to the Trustee at its New York office, on which notice the Trustee may conclusively rely, and to DTC of the Acceleration Amount and the aggregate cash amount due, if any, with respect to the Securities as promptly as possible and in no event later than two Business Days after the date of such acceleration.
Default Quotation Period
The Default Quotation Period is the period beginning on the day the Acceleration Amount first becomes due and ending on the third Business Day after that day, unless:
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•
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no quotation of the kind referred to above is obtained, or
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•
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every quotation of that kind obtained is objected to within five Business Days after the due date as described above.
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If either of these two events occurs, the Default Quotation Period will continue until the third Business Day after the first Business Day on which prompt notice of a quotation is given as described above. If that quotation is objected to as described above within five Business Days after that first Business Day, however, the Default Quotation Period will continue as described in the prior sentence and this sentence.
In any event, if the Default Quotation Period and the subsequent two Business Day objection period have not ended before the Valuation Date, then the Acceleration Amount will equal the principal amount of the Securities.
Qualified Financial Institutions
For the purpose of determining the Acceleration Amount at any time, a Qualified Financial Institution must be a financial institution organized under the laws of any jurisdiction in the United States or Europe, which at that time has outstanding debt obligations with a stated maturity of one year or less from the date of issue and rated either:
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A-2 or higher by Standard & Poor’s Ratings Services or any successor, or any other comparable rating then used by that rating agency, or
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P-2 or higher by Moody’s Investors Service or any successor, or any other comparable rating then used by that rating agency.
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Discontinuance of the Index
If the Index Sponsor instructs the Index Publisher to discontinue publication of the Index, or if publication of the Index is otherwise discontinued, and the Index Publisher or another entity publishes a successor or substitute index that MS & Co., as the Calculation Agent, determines, in its sole discretion, to be comparable to the discontinued Index (such index being referred to herein as a “Successor Index”), then any subsequent Index Closing Value will be determined by reference to the published value of such Successor Index at the regular weekday close of trading on any Index Business Day that the Index Closing Value is to be determined.
Upon any selection by the Calculation Agent of a Successor Index, the Calculation Agent will cause written notice thereof to be furnished to the Trustee, to Morgan Stanley and to DTC, as holder of the Securities, within three Business Days of such selection. We expect that such notice will be made available to you, as a beneficial owner of the Securities, in accordance with the standard rules and procedures of DTC and its direct and indirect participants.
If the Index Sponsor instructs the Index Publisher to discontinue publication of the Index, or if publication of the Index is otherwise discontinued, and the Calculation Agent determines, in its sole discretion, that no Successor Index is available, then the Securities will be accelerated on the third Business Day after the date of such determination. The amount due upon such acceleration (the “Index Discontinuance Acceleration Amount”) will be determined by the Calculation Agent on the date of such acceleration, in good faith and in a commercially reasonable manner, and will equal its estimate of the value of the Securities, determined by reference to the Calculation Agent’s pricing models, inputs, assumptions about future market conditions including, without limitation, the volatility of the Index and its components and current and expected interest rates.
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The Index
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The Morgan Stanley SmartInvest Equity Index (Price Return) (the “Index”) is a quantitative, rules-based, long-only equity index developed by Morgan Stanley. The Index aims to invest, at any one time, in 40 stocks included in the S&P 500® Index that are among the more concentrated reported positions held by hedge funds, based on analyzing their publicly available stock selections, as disclosed by the hedge funds on their filed Forms 13F. The Index is calculated, published and rebalanced by Standard & Poor’s Financial Services LLC as index publisher and index calculation agent. The inception date for the Index was March 5, 2007. The Index is not a replication of, nor an alternative to, hedge funds. The Index is not a hedge fund and not linked to any hedge fund or group of hedge funds.
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Section 13(f) of the Securities Exchange Act of 1934 requires certain institutional investment managers to report their holdings of certain exchange-traded securities to the Securities and Exchange Commission on Form 13F. Form 13F requires disclosure of, among other things, issuer names; description of the class of security (e.g. common stock, put/call option, class A shares, debt); number of securities owned; and fair market value of securities managed. Filers do not disclose any short positions or the rationale for the investment on Form 13F.
Determination of the “Selection Universe”
In order to qualify for inclusion in the Index, a security must meet the following selection universe requirements on the quarterly selection date. The selection dates are the first business day of each March, June, September and December.
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The security must be a constituent of the S&P 500® Index.
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Ownership information for the security must be available through Form 13F filings.
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The issuer of the security must have a market capitalization that exceeds $2 billion times (the closing level of the S&P 500® Index on the prior Trading Day divided by its closing level on December 29, 2006). This adjusts $2 billion for then-current market size as compared to 2006.
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Selection Procedure
The components of the Index are selected based on the following steps:
Determination of the “Eligible Universe”
A third-party service provider collects all Form 13F filings and selects only those Forms 13F filed by hedge fund managers.
The securities constituting the selection universe are ranked according to the proportion of shares owned by hedge funds as a percentage of total shares outstanding. A higher percentage of hedge fund ownership is ranked higher than a lower percentage of hedge fund ownership.
Of the securities constituting the selection universe, a predetermined number of the highest ranked securities are selected to be part of the eligible universe. If two or more securities are equally ranked, the tied securities are ranked by market capitalization, with a higher market capitalization ranked higher than a lower market capitalization.
The Index uses information reported quarterly on a 45 day trailing basis and may acquire or track a stock that hedge fund managers are no longer holding.
Determination of the “Pre-filter Universe”
The securities constituting the eligible universe are then ranked according to the following two criteria:
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the number of hedge funds that own the security. Ownership by a smaller number of hedge funds is ranked higher than ownership by a larger number of hedge funds; and
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the number of filers of Form 13F that have entirely sold down their position in the security between such filers’ prior Form 13F filings and the latest available Form 13F filings for such filers.
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Of the securities constituting the eligible universe, the 40 highest ranked securities are selected to be part of the pre-filter universe. If two or more securities are equally ranked, the tied securities are ranked by the proportion of shares owned by all hedge funds to the total shares outstanding, with a higher proportion of shares owned by hedge funds ranked higher than a lower proportion of shares owned by hedge funds.
The Liquidity Filter
A liquidity filter is then applied to the securities constituting the pre-filter universe. The liquidity filter analyzes the trading volume of each security to determine if it is sufficiently liquid to be included in the Index.
A security passes the liquidity filter if its historic average daily turnover is higher than its target average daily turnover. Historic average daily turnover is calculated on each selection date by comparing the weekly average daily volume of the security and the weekly average daily closing price of such security for the thirteen weeks preceding the selection date. Securities in the pre-filter universe that do not pass the liquidity filter are ranked based on a measure of liquidity. The lowest-ranked security is removed from the pre-filter universe and replaced with the highest-ranked security from the eligible universe not already selected. This process is repeated until all 40 securities constituting the pre-filter universe pass the liquidity filter.
The securities that constitute the pre-filter universe and satisfy the liquidity filter are index components. The component weights of the index components are determined on the basis of their relative free-float market capitalization, subject to a maximum weight of 10%.
Rebalancing
The selection procedure described above is carried out by the index calculation agent on each selection date to determine changes to the composition of the Index to be implemented on the next rebalancing date. The rebalancing dates are the third business day of each March, June, September and December,
subject to postponement for non-Trading Days or certain Index Market Disruption Events (as defined below).
The number of index shares of each index component to be included in the Index is calculated on each quarterly rebalancing date on the basis of its component weight. The rebalancing will be effective on the next rebalancing effective date. The rebalancing effective dates are the first scheduled Trading Day succeeding the rebalancing date.
Quarterly Periodic Review
Form 13F has to be filed quarterly, no later than 45 calendar days after the end of March, June, September and December. Each quarterly periodic review uses Forms 13F filed for the most recent period. For example, positions disclosed in a Form 13F for the period ending December will be filed around mid-February, and these data will be used to determine the eligible universe for the next March selection date. No data from filings for an earlier filing period are used in determining the selection universe.
Index Calculation
There are two versions of the Index, a Total Return Index (where dividends are reinvested) and a Price Return Index (where dividends are not reinvested). The Securities are linked to the level of the Price Return version of the Index. The level of the Price Return version of the Index was set at 1,000 on the index base date, March 5, 2002. The live date for the Index was March 5, 2007. The Index is calculated on an end-of-day basis, except in the event of certain Index Market Disruption Events (as defined below), and is based on the component weights and related index shares and the closing prices of the index components, and is expressed in U.S. dollars.
Adjustments
From time to time, there may be situations requiring adjustments to the Index outside of a scheduled quarterly periodic review to ensure that the Index continues to reflect, as closely as possible, the value of the index components.
It is possible that the requirements related to the filing of Forms 13F (such as the required content or timing for filing) may change in the future, or the requirement to make such filings could be abolished completely. In this case, the Index Sponsor will cease publication of the Index.
Index Market Disruption Events
“Index Market Disruption Event” means (a) (i) the occurrence or existence, as determined by the index calculation agent in respect of any index component, of (A) a material suspension of or limitation imposed on trading by the primary exchange on which such index component is listed or traded (the “relevant exchange”), (B) any event that materially disrupts or impairs the
ability of market participants in general to effect transactions in, or obtain market values for such index component on the relevant exchange during the one hour period preceding the scheduled weekday closing time of such exchange, or (C) the closure of the relevant exchange prior to its scheduled weekday closing time unless it is announced at least one hour prior to the earlier of (x) the actual closing time for the regular trading session on such exchange and (y) the submission deadline for orders to be entered into such exchange system for execution at the scheduled weekday closing time of such exchange and (ii) the aggregate of any and all such disrupted index components comprises 20% or more of the Index; or
(b) the occurrence or existence, as determined by the index calculation agent, in respect of futures or options contracts relating to the Index, of (i) a material suspension or limitation imposed on trading by an exchange or quotation system where trading has a material effect on the overall market for futures or options contracts relating to the Index (the “related exchange”) during the one hour period preceding the scheduled weekday closing time of such exchange, (ii) any event that materially disrupts or impairs the ability of market participants in general to effect transactions in, or obtain market values for such futures or contracts related to the Index on any related exchange during the one hour period preceding the scheduled weekday closing time of such exchange, or (iii) the closure of the related exchange prior to its scheduled weekday closing time unless it is announced at least one hour prior to the earlier of (x) the actual closing time for the regular trading session on such exchange and (y) the submission deadline for orders to be entered into such exchange system for execution at the scheduled weekday closing time of such exchange.
For the purposes of determining whether an Index Market Disruption Event exists in respect of an index component at any time, if an Index Market Disruption Event occurs in respect of such index component at that time, then the component weight of that index component to the Index shall be based on a comparison of the portion of the Index attributable to that index component to the overall Index, in each case using the weighting of the index component as published by the index calculation agent as part of the market opening data.
In the event of an Index Market Disruption Event, the closing value of the Index shall not be calculated on such day, provided that if an Index Market Disruption Event continues for a period of eight scheduled trading days then the closing value of the Index will be calculated by the index calculation agent based on prevailing market conditions, the last reported closing price of the relevant index components and other conditions that the index calculation agent determines relevant.
If an Index Market Disruption Event occurs on a rebalancing date, the index calculation agent shall make determinations and/or adjustments it considers appropriate to calculate the closing value
of the Index by reference to prevailing market conditions and the last available price of the relevant index components, or may instead select an alternate date for such rebalancing date.
Hypothetical Retrospective
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and Historical Information
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The following table sets forth the published high and low Index Closing Values, as well as end-of-quarter Index Closing Values, of the Index for each quarter in the period from January 1, 2010 through May 4, 2015. The Index Closing Value on May 4, 2015 was 5,283.92. The graph following the table sets forth the historical performance of the Index for the period from January 1, 2010 through May 4, 2015. We obtained the information in the table below from Bloomberg Financial Markets, without independent verification.
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The historical values of the Index should not be taken as an indication of future performance, and no assurance can be given as to the Index Closing Value on the Valuation Date. The Final Index Value may decline below the Initial Index Value so that the Payment at Maturity will be less than the Stated Principal Amount of $10. You could lose your entire investment.
We cannot give you any assurance that the value of the Index on the Valuation Date will increase from the Initial Index Value so that you will receive a Payment at Maturity that exceeds the Stated Principal Amount of the Securities.
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Morgan Stanley SmartInvest Equity Index (Price Return)
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2010
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First Quarter
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2,318.83
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2,023.85
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2,303.38
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Second Quarter
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2,443.64
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2,056.17
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2,056.17
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Third Quarter
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2,369.79
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2,034.07
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2,359.77
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Fourth Quarter
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2,698.18
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2,349.28
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2,685.67
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2011
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First Quarter
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2,896.18
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2,658.44
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2,878.94
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Second Quarter
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2,971.17
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2,732.64
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2,902.07
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Third Quarter
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2,962.60
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2,358.16
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2,466.04
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Fourth Quarter
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2,917.63
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2,384.19
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2,861.58
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2012
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First Quarter
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3,321.73
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2,897.54
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3,278.87
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Second Quarter
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3,306.75
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2,957.70
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3,137.07
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Third Quarter
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3,327.09
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2,992.98
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3,277.11
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Fourth Quarter
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3,504.00
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3,234.95
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3,464.99
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2013
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First Quarter
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3,884.97
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3,542.50
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3,884.97
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Second Quarter
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4,134.73
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3,769.20
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4,030.21
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Third Quarter
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4,409.26
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4,037.05
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4,313.88
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Fourth Quarter
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4,666.21
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4,247.76
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4,666.21
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2014
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First Quarter
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5,020.22
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4,487.45
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4,971.18
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Second Quarter
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5,184.43
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4,758.03
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5,184.43
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Third Quarter
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5,225.34
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4,905.22
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5,056.82
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Fourth Quarter
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5,274.34
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4,639.08
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5,132.58
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2015
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First Quarter
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5,350.66
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4,909.61
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5,308.67
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Second Quarter (through May 4, 2015)
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5,314.72
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5,196.94
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5,283.92
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Historical Performance of the Morgan Stanley SmartInvest Equity Index (Price Return)
Daily Closing Values
January 1, 2010 through May 4, 2015
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Hypothetical Index Return
The following table shows the hypothetical return on the Index from March 5, 2002 to May 4, 2015. Because the publication of the index began on March 5, 2007, the return on the Index shown below is, in part, retrospectively simulated. No actual investment which allowed a tracking of the performance of the Index was possible at any time prior to March 5, 2007.
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Index Returns1
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Annualized 3/5/2002–5/4/2015
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2002
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2003
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2004
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2005
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2006
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2007
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2008
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2009
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2010
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2011
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2012
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2013
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2014
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2015
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Returns
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13.5%
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-11.1%
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49.3%
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28.5%
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20.4%
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16.5%
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-1.3%
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-38.3%
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46.9%
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25.4%
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6.5%
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21.1%
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34.7%
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10.0%
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2.9%
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1 Data range from March 5, 2002 to May 4, 2015. SmartInvest Index simulated return data from March 5, 2002 to March 5, 2007, actual returns thereafter.
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Back-testing and other statistical analyses provided herein use simulated analysis and hypothetical circumstances to estimate how the Index may have performed between March 5, 2002 and March 5, 2007, prior to its actual existence. Past performance (actual or simulated) is not an indicator of future performance. The results obtained from such back-testing should not be considered indicative of the actual results that might be obtained from an investment in the Index. The actual performance of the Index may vary significantly from the results obtained from back-testing. Unlike an actual performance record, simulated results are achieved by means of the retroactive application of a back-tested model itself designed with the benefit of hindsight and knowledge of factors that may have possibly affected its performance. The hypothetical historical performance presented herein has not been verified by an independent third party, and such hypothetical historical performance has inherent limitations. In addition, results obtained from back-testing include hypothetical results that do not reflect the reinvestment of dividends and other earnings or the deduction of any expenses that an investor in any product, the return of which is linked to the
performance of the Index, would have paid or actually paid and do not account for all financial risks that may affect the actual performance of any such investment. Alternative simulations, techniques, modeling or assumptions might produce significantly different results and prove to be more appropriate. Actual results will vary, perhaps materially, from the simulated returns presented herein. Investors should be aware that no actual investment which allowed a tracking of the performance of the Index was possible at any time prior to March 5, 2007. Such data must be considered illustrative only.
You should not take the historical or hypothetical retrospective values of the Index as an indication of its future performance.
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Use of Proceeds and Hedging
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The proceeds we receive from the sale of the Securities will be used for general corporate purposes. We will receive, in aggregate, $10 per Security issued, because, when we enter into hedging transactions in order to meet our obligations under the Securities, our hedging counterparty will reimburse the cost of the Agent’s commissions. The costs of the Securities borne by you and described beginning on PS-3 above comprise the Agent’s commissions and the cost of issuing, structuring and hedging the Securities. See also “Use of Proceeds” in the accompanying prospectus.
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On or prior to the Pricing Date, we will hedge our anticipated exposure in connection with the Securities by entering into hedging transactions with our subsidiaries and/or third party dealers. We expect our hedging counterparties to take positions in the stocks constituting the Index, in futures and/or options contracts on the Index or its component stocks listed on major securities markets, or positions in any other available securities or instruments that they may wish to use in connection with such hedging. Such purchase activity could potentially increase the Initial Index Value, and therefore could increase the value at or above which the Index must close on the Valuation Date so that you do not suffer a loss on your initial investment in the Securities. In addition, through our subsidiaries, we are likely to modify our hedge position throughout the life of the Securities by purchasing and selling the stocks underlying the Index, futures and/or options contracts on the Index or its component stocks listed on major securities markets or positions in any other available securities or instruments that we may wish to use in connection with such hedging activities, including by selling any such securities or instruments on the Valuation Date. We cannot give any assurance that our hedging activities will not affect the value of the Index, and, therefore, adversely affect the value of the Securities or the payment you will receive at maturity, if any.
Supplemental Information Concerning
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Plan of Distribution; Conflicts of Interest
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Under the terms and subject to the conditions contained in the U.S. distribution agreement referred to in the prospectus supplement under “Plan of Distribution (Conflicts of Interest),” the Agent, acting as principal for its own account, has agreed to
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purchase, and we have agreed to sell, the aggregate principal amount of Securities set forth on the cover of this pricing supplement. The Agent proposes initially to offer the Securities directly to the public at the public offering price set forth on the cover page of this pricing supplement. The Agent may distribute the Securities through Morgan Stanley Smith Barney LLC (“Morgan Stanley Wealth Management”), as selected dealers, or other dealers, which may include Morgan Stanley & Co. International plc (“MSIP”) and Bank Morgan Stanley AG. Morgan Stanley Wealth Management, MSIP and Bank Morgan Stanley AG are affiliates of Morgan Stanley. Selected dealers, including Morgan Stanley Wealth Management, and their financial advisors will collectively receive from the Agent a fixed sales commission of $0.25 for each Security they sell. In addition, Morgan Stanley Wealth Management will receive a structuring fee of $0.05 for each Security. After the initial offering of the Securities, the Agent may vary the offering price and other selling terms from time to time.
MS & Co. is our wholly-owned subsidiary and it and other subsidiaries of ours expect to make a profit by selling, structuring and, when applicable, hedging the Securities. When MS & Co. prices this offering of Securities, it will determine the economic terms of the Securities such that for each Security the estimated value on the Pricing Date will be no lower than the minimum level described in “Summary of Pricing Supplement” beginning on PS-3.
MS & Co. will conduct this offering in compliance with the requirements of FINRA Rule 5121 of the Financial Industry Regulatory Authority, Inc., which is commonly referred to as FINRA, regarding a FINRA member firm’s distribution of the Securities of an affiliate and related conflicts of interest. MS & Co. or any of our other affiliates may not make sales in this offering to any discretionary account.
In order to facilitate the offering of the Securities, the Agent may engage in transactions that stabilize, maintain or otherwise affect the price of the Securities or the level of the Index. Specifically, the Agent may sell more securities than it is obligated to purchase in connection with the offering, creating a naked short position in the Securities for its own account. The Agent must close out any naked short position by purchasing the Securities in the open market after the offering. A naked short position in the Securities is more likely to be created if the Agent is concerned that there may be downward pressure on the price of the Securities in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the Agent may bid for, and purchase, the Securities in the open market to stabilize the price of the Securities. Any of these activities may raise or maintain the market price of the Securities above independent market prices or prevent or retard a decline in the market price of the Securities. The Agent is not required to engage in these activities, and may end any of these activities at any time. An affiliate of the Agent
has entered into a hedging transaction in connection with this offering of the Securities. See “—Use of Proceeds and Hedging” above.
General
No action has been or will be taken by us, the Agent or any dealer that would permit a public offering of the Securities or possession or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus in any jurisdiction, other than the United States, where action for that purpose is required. No offers, sales or deliveries of the Securities, or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus or any other offering material relating to the Securities, may be made in or from any jurisdiction except in circumstances which will result in compliance with any applicable laws and regulations and will not impose any obligations on us, the Agent or any dealer.
The Agent has represented and agreed, and each dealer through which we may offer the Securities has represented and agreed, that it (i) will comply with all applicable laws and regulations in force in each non-U.S. jurisdiction in which it purchases, offers, sells or delivers the Securities or possesses or distributes this pricing supplement and the accompanying prospectus supplement and prospectus and (ii) will obtain any consent, approval or permission required by it for the purchase, offer or sale by it of the Securities under the laws and regulations in force in each non-U.S. jurisdiction to which it is subject or in which it makes purchases, offers or sales of the Securities. We shall not have responsibility for the Agent’s or any dealer’s compliance with the applicable laws and regulations or obtaining any required consent, approval or permission.
In addition to the selling restrictions set forth in “Plan of Distribution (Conflicts of Interest)” in the accompanying prospectus supplement, the following selling restrictions also apply to the Securities:
Brazil
The Securities have not been and will not be registered with the Comissão de Valores Mobiliários (The Brazilian Securities Commission). The Securities may not be offered or sold in the Federative Republic of Brazil except in circumstances which do not constitute a public offering or distribution under Brazilian laws and regulations.
Chile
The Securities have not been registered with the Superintendencia de Valores y Seguros in Chile and may not be offered or sold publicly in Chile. No offer, sales or deliveries of the Securities or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus, may be made in or from
Chile except in circumstances which will result in compliance with any applicable Chilean laws and regulations.
Mexico
The Securities have not been registered with the National Registry of Securities maintained by the Mexican National Banking and Securities Commission and may not be offered or sold publicly in Mexico. This pricing supplement, the accompanying prospectus supplement and the accompanying prospectus may not be publicly distributed in Mexico.
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Benefit Plan Investor Considerations
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Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), which we refer to as a “plan,” should consider the fiduciary standards of ERISA in the context of the plan’s particular circumstances before authorizing an investment in these securities. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the plan.
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In addition, we and certain of our subsidiaries and affiliates, including MS & Co., may each be considered “parties in interest” within the meaning of ERISA or “disqualified persons” within the meaning of the Code with respect to many plans, as well as many individual retirement accounts and Keogh plans (also “plans”). ERISA Section 406 and Code Section 4975 generally prohibit transactions between plans and parties in interest or disqualified persons. Prohibited transactions within the meaning of ERISA or the Code would likely arise, for example, if these securities are acquired by or with the assets of a plan with respect to which MS & Co. or any of its affiliates is a service provider or other party in interest, unless the Securities are acquired pursuant to an exemption from the “prohibited transaction” rules. A violation of these “prohibited transaction” rules could result in an excise tax or other liabilities under ERISA and/or Section 4975 of the Code for those persons, unless exemptive relief is available under an applicable statutory or administrative exemption.
The U.S. Department of Labor has issued five prohibited transaction class exemptions (“PTCEs”) that may provide exemptive relief for direct or indirect prohibited transactions resulting from the purchase or holding of these securities. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house asset managers), PTCE 95-60 (for certain transactions involving insurance company general accounts), PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts) and PTCE 84-14 (for certain transactions determined by independent qualified asset managers). In addition, ERISA Section 408(b)(17) and Section 4975(d)(20) of the Code provide an exemption for the purchase and sale of securities and the related lending transactions, provided that neither the issuer of the Securities nor any of its
affiliates has or exercises any discretionary authority or control or renders any investment advice with respect to the assets of any plan involved in the transaction and provided further that the plan pays no more than adequate consideration in connection with the transaction (the so-called “service provider” exemption). There can be no assurance that any of these class or statutory exemptions will be available with respect to transactions involving these securities.
Because we may be considered a party in interest with respect to many plans, unless otherwise specified in the applicable prospectus supplement, these securities may not be purchased, held or disposed of by any plan, any entity whose underlying assets include “plan assets” by reason of any plan’s investment in the entity (a “plan asset entity”) or any person investing “plan assets” of any plan, unless such purchase, holding or disposition is eligible for exemptive relief, including relief available under PTCEs 96-23, 95-60, 91-38, 90-1, 84-14 or the service provider exemption or such purchase, holding or disposition is otherwise not prohibited. Unless otherwise specified in the applicable prospectus supplement, any purchaser, including any fiduciary purchasing on behalf of a plan, transferee or holder of these securities will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding thereof that either (a) it is not a plan or a plan asset entity, is not purchasing such securities on behalf of or with “plan assets” of any plan, or with any assets of a governmental or church plan that is subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code (“Similar Law”) or (b) its purchase, holding and disposition are eligible for exemptive relief or such purchase, holding or disposition are not prohibited by ERISA or Section 4975 of the Code or any Similar Law.
Due to the complexity of these rules and the penalties that may be imposed upon persons involved in nonexempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing these securities on behalf of or with “plan assets” of any plan consult with their counsel regarding the availability of exemptive relief.
The Securities are contractual financial instruments. The financial exposure provided by the Securities is not a substitute or proxy for, and is not intended as a substitute or proxy for, individualized investment management or advice for the benefit of any purchaser or holder of the Securities. The Securities have not been designed and will not be administered in a manner intended to reflect the individualized needs and objectives of any purchaser or holder of the Securities.
Each purchaser or holder of any securities acknowledges and agrees that:
(i) the purchaser or holder or its fiduciary has made and shall make all investment decisions for the purchaser or holder and the purchaser or holder has not relied and shall not rely in any way
upon us or our affiliates to act as a fiduciary or adviser of the purchaser or holder with respect to (A) the design and terms of the Securities, (B) the purchaser or holder’s investment in the Securities, or (C) the exercise of or failure to exercise any rights we have under or with respect to the Securities;
(ii) we and our affiliates have acted and will act solely for our own account in connection with (A) all transactions relating to the Securities and (B) all hedging transactions in connection with our obligations under the Securities;
(iii) any and all assets and positions relating to hedging transactions by us or our affiliates are assets and positions of those entities and are not assets and positions held for the benefit of the purchaser or holder;
(iv) our interests are adverse to the interests of the purchaser or holder; and
(v) neither we nor any of our affiliates is a fiduciary or adviser of the purchaser or holder in connection with any such assets, positions or transactions, and any information that we or any of our affiliates may provide is not intended to be impartial investment advice.
Each purchaser and holder of these securities has exclusive responsibility for ensuring that its purchase, holding and disposition of the Securities do not violate the prohibited transaction rules of ERISA or the Code or any Similar Law. The sale of any of these securities to any plan or plan subject to Similar Law is in no respect a representation by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular plan.
However, individual retirement accounts, individual retirement annuities and Keogh plans, as well as employee benefit plans that permit participants to direct the investment of their accounts, will not be permitted to purchase or hold the Securities if the account, plan or annuity is for the benefit of an employee of Morgan Stanley Wealth Management or a family member and the employee receives any compensation (such as, for example, an addition to bonus) based on the purchase of the Securities by the account, plan or annuity.
Client accounts over which Morgan Stanley, Morgan Stanley Wealth Management or any of their respective subsidiaries have investment discretion are not permitted to purchase the Securities, either directly or indirectly.
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United States Federal Taxation
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Prospective investors should note that the discussion under the section called “United States Federal Taxation” in the accompanying prospectus supplement does not apply to the Securities issued under this pricing supplement and is superseded by the following discussion.
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The following is a general discussion of the material U.S. federal income tax consequences and certain estate tax consequences of the ownership and disposition of the Securities. This discussion applies only to initial investors in the Securities who:
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purchase the Securities at their “issue price,” which will equal the first price at which a substantial amount of the Securities is sold to the public (not including bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers); and
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hold the Securities as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”).
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This discussion does not describe all of the tax consequences that may be relevant to a holder in light of the holder’s particular circumstances or to holders subject to special rules, such as:
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certain financial institutions;
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certain dealers and traders in securities or commodities;
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investors holding the Securities as part of a “straddle,” wash sale, conversion transaction, integrated transaction or constructive sale transaction;
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U.S. Holders (as defined below) whose functional currency is not the U.S. dollar;
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partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
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regulated investment companies;
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real estate investment trusts;
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tax-exempt entities, including “individual retirement accounts” or “Roth IRAs” as defined in Section 408 or 408A of the Code, respectively; or
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persons subject to the alternative minimum tax.
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In addition, we will not attempt to ascertain whether any issuer of any shares to which a Security relates (such shares hereafter referred to as “Underlying Shares”) is treated as a “passive foreign investment company” (“PFIC”) within the meaning of Section 1297 of the Code or as a “United States real property holding corporation” (“USRPHC”) within the meaning of Section 897 of the Code. If any issuer of Underlying Shares were so treated, certain adverse U.S. federal income tax consequences might apply, to a U.S. Holder in the case of a PFIC and to a Non-U.S. Holder (as defined below) in the case of a USRPHC, upon the sale, exchange or settlement of the Securities. You should refer to information filed with the Securities and Exchange Commission or another governmental authority by the issuers of the Underlying Shares and consult your tax adviser regarding the possible consequences to you if any issuer is or becomes a PFIC or USRPHC.
As the law applicable to the U.S. federal income taxation of instruments such as the Securities is technical and complex, the discussion below necessarily represents only a general summary.
Moreover, the effect of any applicable state, local or non-U.S. tax laws is not discussed, nor are any consequences resulting from the Medicare tax on investment income.
This discussion is based on the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof, changes to any of which subsequent to the date hereof may affect the tax consequences described herein. Persons considering the purchase of the Securities should consult their tax advisers with regard to the application of the U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
General
Although there is uncertainty regarding the U.S. federal income tax consequences of an investment in the Securities due to the lack of governing authority, in the opinion of our counsel, under current law, and based on current market conditions, each Security should be treated as a single financial contract that is an “open transaction” for U.S. federal income tax purposes.
Due to the absence of statutory, judicial or administrative authorities that directly address the treatment of the Securities or instruments that are similar to the Securities for U.S. federal income tax purposes, no assurance can be given that the Internal Revenue Service (the “IRS”) or a court will agree with the tax treatment described herein. Accordingly, you should consult your tax adviser regarding all aspects of the U.S. federal tax consequences of an investment in the Securities (including possible alternative treatments of the Securities). Unless otherwise stated, the following discussion is based on the treatment of the Securities as described above.
Tax Consequences to U.S. Holders
This section applies to you only if you are a U.S. Holder. As used herein, the term “U.S. Holder” means a beneficial owner of a Security that is, for U.S. federal income tax purposes:
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a citizen or individual resident of the United States;
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a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or
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an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
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Tax Treatment of the Securities
Assuming the treatment of the Securities as set forth above is respected and subject to the discussion below regarding a potential “deemed” taxable exchange, the following U.S. federal income tax consequences should result.
Tax Treatment Prior to Settlement. A U.S. Holder should not be required to recognize taxable income over the term of the Securities prior to settlement, other than pursuant to a sale or exchange as described below.
Tax Basis. A U.S. Holder’s tax basis in the Securities should equal the amount paid by the U.S. Holder to acquire the Securities.
Sale, Exchange or Settlement of the Securities. Upon a sale, exchange or settlement of the Securities, a U.S. Holder should recognize gain or loss equal to the difference between the amount realized on the sale, exchange or settlement and the U.S. Holder’s tax basis in the Securities sold, exchanged or settled. Subject to the discussion below under “—Possible ‘Deemed’ Taxable Exchange Under Section 1001 of the Code,” any such gain or loss should be long-term capital gain or loss if the U.S. Holder has held the Securities for more than one year at the time of the sale, exchange or settlement, and should be short-term capital gain or loss otherwise.
Possible “Deemed” Taxable Exchange Under Section 1001 of the Code
Even if the tax treatment of the Securities described above were respected, it is possible that the IRS could assert that a “deemed” taxable exchange has occurred in the event of a change in the methodology by which the Index is calculated, a change in the components of the Index or any other circumstance resulting in a material change to the Index. If the IRS were successful in asserting that a taxable exchange has occurred, a U.S. Holder could be required to recognize gain or loss (subject to the possible application of the wash sale rules) with respect to the Securities.
Possible Alternative Tax Treatments of an Investment in the Securities
Due to the absence of authorities that directly address the proper tax treatment of the Securities, no assurance can be given that the IRS will accept, or that a court will uphold, the treatment described above. In particular, the IRS could seek to treat a Security as a debt instrument. If a Security were treated as a debt instrument for U.S. federal income tax purposes, it would be subject to Treasury regulations governing contingent payment debt instruments (the “Contingent Debt Regulations”). If the Contingent Debt Regulations applied to the Securities, the timing and character of income thereon would be significantly affected. Among other things, a U.S. Holder would be required to accrue into income original issue discount (“OID”) on the Securities every year at a “comparable yield” determined at the time of their issuance. Furthermore, any gain realized by a U.S. Holder at maturity or upon a sale, exchange or other disposition of the Securities would generally be treated as ordinary income, and any loss realized would be treated as ordinary loss to the extent of the U.S. Holder’s prior accruals of OID and as capital loss thereafter.
Other alternative federal income tax treatments of the Securities are possible, which, if applied, could significantly affect the timing and character of the income or loss with respect to the Securities. In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. The notice focuses in particular on whether to require holders of these instruments to accrue income over the term of their investment. It also asks for comments on a number of related topics, including the character of income or loss with respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the instruments are linked; and whether these instruments are or should be subject to the “constructive ownership” rule, which very generally can operate to recharacterize certain long-term capital gain as ordinary income and impose an interest charge. While the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in the Securities, possibly with retroactive effect. Accordingly, prospective investors should consult their tax advisers regarding all aspects of the U.S. federal income tax consequences of an investment in the Securities, including the possible implications of this notice.
Backup Withholding and Information Reporting
Backup withholding may apply in respect of payments on the Securities and the payment of proceeds from a sale, exchange or other disposition of the Securities, unless a U.S. Holder provides proof of an applicable exemption or a correct taxpayer identification number and otherwise complies with the applicable requirements of the backup withholding rules. The amounts withheld under the backup withholding rules are not an additional tax and may be refunded, or credited against the U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS. In addition, information returns may be filed with the IRS in connection with payments on the Securities and the payment of proceeds from a sale, exchange or other disposition of the Securities, unless the U.S. Holder provides proof of an applicable exemption from the information reporting rules.
Tax Consequences to Non-U.S. Holders
This section applies to you only if you are a Non-U.S. Holder. As used herein, the term “Non-U.S. Holder” means a beneficial owner of a Security that is, for U.S. federal income tax purposes:
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an individual who is classified as a nonresident alien;
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a foreign corporation; or
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a foreign estate or trust.
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The term “Non-U.S. Holder” does not include any of the following holders:
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a holder who is an individual present in the United States for 183 days or more in the taxable year of disposition and who is not otherwise a resident of the United States for U.S. federal income tax purposes;
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certain former citizens or residents of the United States; or
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a holder for whom income or gain in respect of the Securities is effectively connected with the conduct of a trade or business in the United States.
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Such holders should consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the Securities.
Tax Treatment upon Sale, Exchange or Settlement of the Securities
In general. Assuming the treatment of the Securities as set forth above is respected, and subject to the discussion below concerning backup withholding and the discussion above concerning the possible application of Section 897 of the Code, a Non-U.S. Holder of the Securities generally will not be subject to U.S. federal income or withholding tax in respect of amounts paid to the Non-U.S. Holder.
Subject to the discussions regarding the possible application of Section 897 of the Code and FATCA, if all or any portion of a Security were recharacterized as a debt instrument, any payment made to a Non-U.S. Holder with respect to the Securities would not be subject to U.S. federal withholding tax, provided that:
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the Non-U.S. Holder does not own, directly or by attribution, ten percent or more of the total combined voting power of all classes of our stock entitled to vote;
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the Non-U.S. Holder is not a controlled foreign corporation related, directly or indirectly, to us through stock ownership;
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the Non-U.S. Holder is not a bank receiving interest under Section 881(c)(3)(A) of the Code, and
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the certification requirement described below has been satisfied with respect to the beneficial owner.
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Certification Requirement. The certification requirement referred to in the preceding paragraph will be satisfied if the beneficial owner of a Security (or a financial institution holding a Security on behalf of the beneficial owner) furnishes to the applicable withholding agent an IRS Form W-8BEN (or other appropriate form) on which the beneficial owner certifies under penalties of perjury that it is not a U.S. person.
In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. Among the issues addressed in the notice is the degree, if any, to which any income with respect to instruments such as the
Securities should be subject to U.S. withholding tax. It is possible that any Treasury regulations or other guidance issued after consideration of this issue could materially and adversely affect the withholding tax consequences of ownership and disposition of the Securities, possibly on a retroactive basis. Non-U.S. Holders should note that we currently do not intend to withhold on any payment made with respect to the Securities to Non-U.S. Holders (subject to compliance by such holders with the certification requirement described above and the discussion below regarding FATCA). However, in the event of a change of law or any formal or informal guidance by the IRS, the U.S. Treasury Department or Congress, we may decide to withhold on payments made with respect to the Securities to Non-U.S. Holders and we will not be required to pay any additional amounts with respect to amounts withheld. Accordingly, Non-U.S. Holders should consult their tax advisers regarding all aspects of the U.S. federal income tax consequences of an investment in the Securities, including the possible implications of the notice referred to above.
U.S. Federal Estate Tax
Individual Non-U.S. Holders and entities the property of which is potentially includible in such an individual’s gross estate for U.S. federal estate tax purposes (for example, a trust funded by such an individual and with respect to which the individual has retained certain interests or powers) should note that, absent an applicable treaty exemption, the Securities may be treated as U.S. situs property subject to U.S. federal estate tax. Prospective investors that are non-U.S. individuals, or are entities of the type described above, should consult their tax advisers regarding the U.S. federal estate tax consequences of an investment in the Securities.
Backup Withholding and Information Reporting
Information returns may be filed with the IRS in connection with payments on the Securities as well as in connection with the payment of proceeds from a sale, exchange or other disposition of the Securities. A Non-U.S. Holder may be subject to backup withholding in respect of amounts paid to the Non-U.S. Holder, unless such Non-U.S. Holder complies with certification procedures to establish that it is not a U.S. person for U.S. federal income tax purposes or otherwise establishes an exemption. Compliance with the certification procedures described above under “―Tax Treatment upon Sale, Exchange or Settlement of the Securities – Certification Requirement” will satisfy the certification requirements necessary to avoid backup withholding as well. The amount of any backup withholding from a payment to a Non-U.S. Holder will be allowed as a credit against the Non-U.S. Holder’s U.S. federal income tax liability and may entitle the Non-U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
FATCA Legislation
Legislation commonly referred to as “FATCA” generally imposes a withholding tax of 30% on payments to certain non-U.S. entities (including financial intermediaries) with respect to certain financial instruments, unless various U.S. information reporting and due diligence requirements have been satisfied. An intergovernmental agreement between the United States and the non-U.S. entity’s jurisdiction may modify these requirements. This legislation generally applies to certain financial instruments that are treated as paying U.S.-source interest or other U.S.-source “fixed or determinable annual or periodical” income. If the Securities were recharacterized as debt instruments, this legislation would apply to any payment of amounts treated as interest and, for dispositions after December 31, 2016, to payments of gross proceeds of the disposition (including upon retirement) of the Securities. If withholding applies to the Securities, we will not be required to pay any additional amounts with respect to amounts withheld. Both U.S. and Non-U.S. Holders should consult their tax advisers regarding the potential application of FATCA to the Securities.
The discussion in the preceding paragraphs and the discussion under “Additional provisions—Tax considerations” in the accompanying free writing prospectus, insofar as they purport to describe provisions of U.S. federal income tax laws or legal conclusions with respect thereto, constitute the full opinion of Davis Polk & Wardwell LLP regarding the material U.S. federal tax consequences of an investment in the Securities.