November 15, 2002
This is in response to your August 13, 2002 request and supplemental letters, dated August 14, 2002 and September 6, 2002, requesting an exemption pursuant to NASD Rule 9610 (b) for 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 February 2001 $1,000 contribution ("Contribution") by Name who is currently the co-head of the Firm’s Division and a member of the Management Committee of the Parent. The Firm has identified members of the Parent Management Committee as municipal finance professionals.
The Contribution was made by Name to the successful City Mayoral campaign of Candidate. Candidate, at the time the Contribution was made, was the City Attorney1 of City and a candidate for Mayor. Name is a resident of City and was eligible to vote for the Candidate, was not a municipal finance professional ("MFP") at the time the Contribution was made, and was not involved in the Firm's municipal securities business. You also represent that, pursuant to the Firm's Rule procedures, she pre-cleared the Contribution.2
At the time the Contribution was made, Name was the head of the Firm’s Group, and was not involved in the Firm's municipal securities business, nor was she in a supervisory position involving either the Firm’s municipal department or MFP’s. On February 19, 2002, Name became a member of the Parent Management Committee. On April 24, 2002, the Firm recognized the potential implications of Name's Contribution as a result of her appointment to the Parent Management Committee.3 At that time, Name was notified of her MFP designation and the accompanying municipal securities business restrictions. Name was instructed to seek a refund4 of the Contribution and she was advised not to participate in Management Committee or other matters relating to the Firm's municipal securities business. Additionally, management of the municipal department was advised that the Firm could not proceed with underwriting any municipal securities business with City issuers until the matter was resolved.5
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 letters, and our application of the Rule 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.
A paramount issue in rendering our determination is whether an exemption is consistent with the public interest and the protection of investors.6 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 involved in the solicitation of new municipal securities business; (2) the Firm took action once it became aware of the Contribution by instituting a self-ban on new City municipal securities business; (3) the Firm notified Name of her designation as an MFP and the accompanying restrictions; (4) the Firm has agreed to establish information barriers to help ensure the segregation of information flow, minimizing the potential for quid pro quo resulting from the Contribution; (5) the Firm represents that it has corrected the technical political contributions database problems and has established new procedures for direct notification to legal and compliance personnel of additions to the Parent Management Committee; and (6) although the Contribution has not been returned, the Firm represents that reasonable efforts have been made to obtain the return of the Contribution.
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 was potentially available where the person making the contribution had not yet become an MFP when the contribution was made.7 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 for pre-clearing of political contributions. By following these procedures, the Firm successfully identified Name’s contribution and the potential for the business prohibition under the Rule. We have considered that the Firm has assigned and trained new staff, and has taken steps to amend the procedures to provide for direct notification to legal and compliance personnel of changes to the Parent Management Committee. You represent that this will afford Compliance with the timely opportunity to perform a two-year look-back review of the person’s political contributions. Also important to our decision, Compliance took action once it became aware of the Contribution by advising the management of the Firm's municipal department that it could not underwrite any municipal securities business with City issuers until the issue concerning Name’s Contribution was resolved.8 You represent that the Firm has not engaged in any new municipal securities business with issuers for whom the Mayor of the City could be considered to be an issuer official, and the Firm withdrew from its role an underwriter in an August 2002 new issuance by the City Department.
In addition, the Firm has agreed9 that it will institute the following procedures to further assure the segregation of Name from municipal securities business with the Issuers:
Based on the facts and circumstances as represented in your letters, 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 You represent that in his position as City Attorney of City, Candidate did not meet the MSRB Rule definition of "issuer official."
2 You represent that the Firm requires pre-clearance of all political contributions to state or local candidates or officials, including those made by non-MFP’s.
3 You represent that during the time period March to May 2002, the Firm's legal and compliance personnel conducted a review of persons subject to the Rule. As part of that quarterly process, Firm Compliance makes a two-year look-back query in the Firm's political contributions database for all persons proposed to be added to the Firm’sG-37 Persons List (defined by the Firm as persons who may be deemed an MFP under the technical definitions of the Rule), including Name. Initially, the results of that query came back negative as to Name. However, due to technical problems experienced with the Firm's political contributions database, which resulted in omissions of data about contributions and anomalies in certain reports generated during this time period, Compliance re-ran the query. In re-running the query, Compliance generated a report, on April 24, 2002, which showed that Name had pre-cleared and made a Candidate contribution fourteen months before, in February 2001. You represent that the database technical problems have been corrected (confirmed in a September 19, 2002 telephone call between Malcolm Northam and Individual), and that additional Firm procedures have been adopted to assure that appropriate legal and compliance personnel are contacted immediately prior to the addition of any persons to the Parent Management Committee. Additionally, in an October 28, 2002 telephone call between Malcolm Northam and Individual, the Firm reported that, in July, 2002, a new staff person was trained and assigned to input and retrieve information into the Firm political contribution database, and the Firm confirmed that, for both June 30, 2002 and September 30, 2002, the quarterly political contributions reports by Compliance were accurate and the process functioned properly.
4 You represent that you have been advised that the Candidate's election account has been closed with a $00.00 balance and that there are no remaining funds attributable to either the primary or general election campaign, and that no remaining campaign funds were transferred to other related accounts that would be available to use to refund the Contribution. You represent that there are no other steps reasonably available to the Firm to obtain a Contribution refund.
5 You represent that, on February 8, 2002, the City Department sent out an RFP for an underwriting of a City Department Project. The Firm responded to the request on March 1, 2002 and was notified that it had been selected as the underwriter in late July 2002. Although selected as the underwriter, you represent that the Firm subsequently resigned to allow City Department to proceed with its financings, pending resolution of the exemption relief request.
6 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.
7 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)."
8 You represent that on May 6, 2002, the Firm did complete a long-standing mandate to act as commercial paper dealer on an issuance for the City Airport. You represent that this activity was to fulfill a mandate that the Firm had received in 1999.
9 Confirmed by a September 19, 2002 telephone conversation between Malcolm Northam and Individual.