RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

IM Ref. No. 20136181110 Morgan Stanley Mortgage Securities Trust

Your letter dated June 20, 2013 requests our assurance that we would not recommend enforcement action to the Commission under Section 8(b)(1) of the Investment Company Act of 1940 ("1940 Act") if the Morgan Stanley Mortgage Securities Trust (the "Fund") implements a concentration policy pursuant to which it would invest more than 25% of its assets in the securities of issuers of mortgage-backed securities ("MBS") issued by non-agency entities ("Non-Agency MBS") and MBS issued or guaranteed by the U.S. government or its agencies or instrumentalities ("Government MBS"), as described below.¹

Facts
You state the following: the Fund is an open-end management investment company. To pursue its investment objective, the Fund normally invests at least 80% of its assets in mortgage-related securities. The Fund's investment adviser believes it is in the best interests of the Fund and its shareholders to afford the Fund the ability to invest more than 25% of its total assets in Non-Agency MBS ("New Concentration Policy") to take advantage of current investment opportunities and facilitate its ability to respond to changes in market conditions. Accordingly, at meetings held on August 30, 2012 and February 27-28, 2013, the Fund's investment adviser recommended to the Fund's Board of Trustees (the "Board"), and the Board approved, the New Concentration Policy. On April 24, 2013, the Fund's shareholders approved the New Concentration Policy.

Analysis
Section 8(b)(1) of the 1940 Act requires an investment company ("fund") to recite in its registration statement, among other things, whether it reserves the freedom to concentrate investments in a particular industry or group of industries. If such freedom is reserved, Section 8(b)(1) requires the fund to include a statement briefly indicating, insofar as is practicable, the extent to which the fund intends to concentrate its investments. A fund is concentrated if it invests more than 25% of the value of its assets in any one industry. Section 13(a)(3) of the 1940 Act requires a fund to obtain shareholder approval to change its concentration policy.² Section 13(a)(3) of the 1940 Act requires a fund to obtain shareholder approval to change its concentration policy.

Section 8(b)(1) permits a fund to implement a concentration policy that allows for some degree of discretion, provided that the circumstances under which the manager may exercise its discretion to change the fund's concentration status are described, to the extent practicable, in the fund's registration statement. To satisfy this standard, we believe that a fund must clearly and precisely describe, with as much specificity as is practicable, the circumstances under which the fund intends to concentrate its investments.³ You state that the Fund's New Concentration Policy describes, insofar as practicable, the extent to which the Fund intends to concentrate in an industry by setting clear, objective limitations on the manager's ability to freely concentrate in an industry or group of industries.

You state that Government MBS and Non-Agency MBS have common economic characteristics. For example, you state that both MBS are structured in the same way. The issuer is a trust or other vehicle which holds pools of mortgage loans. Cash flows collected and payable to MBS holders consist of the principal and interest payments of the mortgage loans where such payments are typically made over the lifetime of the underlying loans. You believe that Government MBS and Non-Agency MBS are subject to similar risks, including prepayment, extension, and interest rate risks. You state that with respect to these risks, issuers of Government MBS and Non-Agency MBS may be similarly impacted by business or political developments affecting real estate and other factors impacting the housing market. Therefore, you contend that it is reasonable to treat issuers of Government MBS and Non-Agency MBS as being in a particular industry or group of industries, and that the Fund's New Concentration Policy describes, insofar as practicable, the extent to which the Fund intends to concentrate its investments.

Based on the facts and circumstances set forth in your letter, we would not recommend enforcement action to the Commission under Section 8(b)(1) of the 1940 Act if the Fund implements the concentration policy described above.⁴ Any different facts and circumstances may require different conclusions.