January 7, 2003
This is in response to your November 11, 2002 letter and supplemental letter dated December 20, 2002, requesting an exemption pursuant to NASD Rule 9610 (b) for your client, Firm, from the prohibition of engaging in municipal securities business as defined in Municipal Securities Rulemaking Board ("MSRB") Rule G-37 ("Rule"). You have requested this exemption because of a December 4, 2001 $1,000 contribution ("Contribution") by Name, the business unit head of the Firm’s Business Unit. On October 30, 2002, the Firm’s Parent reorganized. Name was appointed as Chairman and Chief Executive Officer of new Business Unit of the Firm and became a member of the Parent’s Management/Executive Committee. You represent that on Month Day, 2003, the Parent desires to incorporate the municipal securities activities of certain of its retail sales brokers, including certain employees who qualify as Municipal Finance Professionals ("MFPs"), into the newly created Business Unit. When this is done, you represent that Name would become an MFP in that she would be an indirect supervisor of MFPs.
Name made the Contribution to the re-election campaign of Candidate, the Governor of State. You represent that Name made the Contribution for personal reasons, in connection with her attendance at a political fund raiser while Name was the Chairman and Chief Executive Officer of Company X, and that the Contribution was not made in relation to any municipal securities business. The Firm became aware of the Contribution when it reviewed Name's prior contributions in anticipation of moving the Firm's municipal retail sales brokers and others who qualify as MFP’s into the Business Unit. You represent that the Contribution has been returned.1
You represent that the Firm's reorganization was not related to the municipal securities business of the Firm, that Name has never been involved in municipal securities business, and that she did not supervise such activity during her employment at Company X. Additionally, you represent that the Firm has a significant and long-standing presence in underwriting municipal securities in State, the Firm has been ranked first in underwriting State bonds for the past four years, and, in 2002, the Firm underwrote $7.2 billion worth of State bonds. You further represent that, in State, a pool of broker-dealers is selected in advance, members of the pre-selected pool underwrite State bonds on a rotation basis, and the Firm is a member of the pool and has been for a number of years. Accordingly, you argue, the Firm has no reason to use Name's political contribution to obtain municipal securities business in State.
NASD has considered the Firm's request for exemptive relief in consideration of the standards applicable to the MSRB Rule. Based on the facts and circumstances as represented in your letter and NASD’s application of the standards regarding exemptive relief under the Rule, we conclude that it is appropriate to grant an exemption from the two-year prohibition from municipal securities business as defined by the Rule.
A paramount issue in rendering our determination is whether an exemption is consistent with the public interest and the protection of investors.2 In reaching a determination, NASD staff considered several key factors surrounding the Contribution, including: (1) Name was not an MFP at the time the Contribution was made and was not engaged in, and did not supervise, municipal securities business; (2) the Firm took action once it became aware of the Contribution by retaining outside counsel to review the proposed reorganization and the possibility of municipal securities business restrictions as a result of the Contribution; (3) the Firm notified Name that when the municipal activities of certain retail sales brokers and MFP’s become part of the Business Unit on Month Day, 2003, the Firm will consider her to be an MFP and her municipal securities business activities will be restricted as a result of her Contribution and of her responsibilities3; (4) the Firm has agreed to restrict Name’s municipal securities activities, minimizing the potential for a quid pro quo resulting from the Contribution; and (5) although a less weighty factor, the Contribution has been returned.
The Firm's exemption request was considered in light of the interpretive guidance issued in June 1998, whereby the MSRB emphasized that exemptive relief under the Rule may be available where the person making the contribution had not yet become an MFP when the contribution was made.4 Important to our decision is your representation that the Firm has developed and implemented detailed procedures to ensure full compliance with the Rule, including procedures both for pre-clearing of political contributions, and for identifying contributions during the Rule’s two-year look-back provisions. By following these procedures, the Firm successfully identified Name's Contribution and the business prohibition that would occur under the Rule if the Firm's municipal retail sales brokers and others who qualify as MFPs were consolidated in the Business Unit on January 16, 2003. Additionally, in order to help assure separation of the Firm's municipal securities business from the Contribution, you represent that your client has agreed that Name, until December 4, 2003 (the expiration of the two-year look-back established under the Rule), will not: 1) solicit municipal securities business; 2) sell municipal securities; or 3) directly supervise5 such solicitation or sales activity.
Based on the facts and circumstances as represented in your letter, and our application of the Rule’s exemption standards to this matter, we conclude that it is appropriate to grant an exemption from the two-year prohibition from municipal securities business as defined by the Rule. This exemption is based on our understanding of the material facts as you have represented them. Our decision in this matter could be different if the facts are not as represented, if material facts have not been disclosed, or if new information emerges.
Your request for relief asks that the Firm’s application for an exemption, and the identity of the firm, remain confidential. NASD grants that request. However, this exemption decision will be available, with identifying information redacted, on NASD’s Web site with other NASD decisions responding to the Rule exemptive requests. By publishing the decisions in redacted form, NASD is able to provide confidentiality while informing and educating members, issuers, and investor communities of the factors that NASD may consider in granting or denying exemptive relief under the Rule. If you have any questions regarding the issues discussed, please contact me at 202-728-8085.
Malcolm P. Northam
1 Confirmed by a November 19, 2002 telephone conversation between Malcolm Northam and Attorney, Law Firm.
2 MSRB Rule G-37(i) permits NASD to grant an exemption based on consideration of the following factors: (1) the exemption is consistent with the public interest, the protection of investors and the purposes of the rule; and (2) the broker, dealer, or municipal securities dealer: (A) prior to the time of the contribution(s) which resulted in such prohibition was made, had developed and instituted procedures reasonably designed to ensure compliance with Rule G-37; (B) prior to or at the time the contribution(s) which resulted in the prohibition was made, had no knowledge of the contribution(s); (C) has taken all available steps to cause the person or persons involved in making the contribution(s) which resulted in such prohibition to obtain a return of the contribution(s); and (D) has taken such other remedial or preventive measures as may be appropriate under the circumstances.
3 Confirmed by a December 3, 2002 telephone conversation between Malcolm Northam and Attorney, Law Firm.
4 See MSRB Notice of Interpretation, Q & A number 3, dated June 29, 1998. The MSRB stated that, "where a non-de minimis contribution was made by a person who later becomes a municipal finance professional (whether by reason of a merger, as a newly hired associated person, as an existing associated person becoming involved in municipal securities activities, or otherwise), neither the NASD nor any appropriate regulatory agency is constrained from granting a conditional or unconditional exemption if, in its judgment, such exemption is consistent with rule G-37(i)."
5 You represent that Name will be, by virtue of her position as head of the Business Unit, deemed to be an indirect supervisor of municipal sales activity.