September 30, 2002
This is in response to your letter dated September 16, 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 12, 2000 $1,000 contribution ("Contribution") by Name, the Title A (Parent) of the Firm’s Parent. On September 8, 2002, as part of the Parent’s reorganization, Name was named as Title B (Parent) of the Parent’s Division. As such, Name will also become the Firm’s Title C and, you represent, a municipal finance professional.
Name made the Contribution to the re-election campaign of Candidate, the Attorney General of State. You represent that Candidate is a former co-worker of Name and that the Contribution was made for personal reasons and was not related to municipal securities business. The Firm became aware of the Contribution as part of its due diligence process to comply with the two-year look-back provisions of the Rule as a result of the Parent reorganization. You represent that the Contribution has been returned.1
You represent that the Parent reorganization was not related to the municipal securities business of the Firm, that Name has never been involved in municipal securities business either directly or in a supervisory capacity, and that Name was not an employee of the Firm at the time of the Contribution. Moreover, you represent, there were no plans or expectations at the time the Contribution was made that Name would become Firm Title C. Additionally, you represent that in the past ten years, the Firm has acted as sole manager, senior manager or co-manager in 115 transactions involving the issuance of municipal bonds in State, and has underwritten more municipal securities than any other dealer in State since Date. Accordingly, you argue that Name did not have any reason to make the Contribution to attempt to influence the Firm’s State municipal securities business.
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 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.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 involved in the solicitation of new municipal securities business; (2) the Firm took action once it became aware of the Contribution by voluntarily refraining from new State or its issuing authorities municipal securities business pending the outcome of the exemption request; (3) the Firm notified Name of his designation as an MFP and the accompanying restrictions; (4) the Firm has agreed to restrict Name's municipal securities activities, minimizing the potential for 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 was potentially available where the person making the contribution had not yet become an MFP when the contribution was made.3 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 potential for the business prohibition under the Rule. 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 will not: 1) solicit municipal securities business; 2) sell municipal securities; or 3) directly supervise 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 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 September 23, 2002 telephone conversation between Malcolm Northam and Individual.
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 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)."