June 11, 2002
This is in response to your April 8, 2002 letter and supplements dated April 23, 2002 and May 28, 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 $1,000 contribution made on October 2, 2001 and a $1,100 contribution made on February 22, 2002 by Individual ("Contributions").
The Contributions were made to the political campaign of Candidate, a candidate for Office of the Governor of State ("Candidate"). You represent that Candidate was not, at the time the contribution was made, an elected official or an issuer official. The Firm became aware of the Contributions when, as part of the Firm's new hire procedure, Individual filled-out a "Political Contribution Information Form" when he commenced work at the Firm and disclosed his two campaign contributions. Individual has subsequently received a refund of the Contributions.
Individual is a graduate student at Name University and was hired as an intern on March 5, 2002 in the Firm's Fixed Income Department based on a February 27, 2002 referral from the Dean of the Name Business School and after an interview occurring several days later. Part of his duties will be to prepare debt schedules, financial analysis, and other tasks in preparation of bond underwriting. The Firm represents that these duties will cause Individual to be designated as a municipal finance professional.
You represent that when the Contributions were made Individual was not involved in municipal securities business1, had not been offered a position with the Firm2, and was not aware of the Rule and its restrictions until after he was hired. Accordingly, you argue that Individual was not attempting to influence any municipal issuers when making the Contributions.
NASD has considered the Firm's request for exemptive relief in consideration of the standards applicable to the MSRB Rule. A paramount issue in rendering our determination is whether an exemption is consistent with the public interest and the protection of investors.3 In reaching a determination, NASD staff considered several key factors surrounding the Contributions, including: (1) the Contributions were made prior to Individual's employment by the Firm4; and (2) at the time of the Contributions Individual had no personal involvement in soliciting new, or participating in existing, municipal securities business.
Important to our decision is your representation that the Firm has developed and implemented detailed procedures to ensure full compliance with the Rule, including a procedure to make political contribution inquiries of new hires. By following these procedures, the Firm successfully identified Individuals' Contributions and has been able to avoid a violation of the Rule. We have considered that the Firm took prompt action once it became aware of the Contributions by: refraining from engaging in new municipal securities business with issuers that are subject to the appointment authority of the Governor of State5; directing Individual to seek a return of the Contributions; instituting measures to assure that, until an exemption is granted, Individual will have no contact with any municipal issuers; and if and when an exemption is granted, Individual will have no involvement, for a two-year period, with municipal securities business of the State or any issuer that is subject to the appointment authority of the Governor of State.
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. 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 important information emerges.
Your request for relief asks that the Firm's application for an exemption, the identity of the Firm, and the identity of the MFP 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 Individual worked for Firm X as an assistant to a financial consultant for the time period November 1998 through January 1999. The Firm represents that the Firm X financial consultant did not market or sell municipal securities, and was not involved in municipal security underwriting or financing. During this time period Individual's primary duty was recordkeeping and answering telephones.
2 Confirmed by a June 10, 2002 telephone call between Person and Malcolm Northam.
3 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 contributions(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.
4 See MSRB Notice of Interpretation, Q&A No. 3, Securities Exchange Act Release No. 40167, 63 FR 37434 (July 10, 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 Confirmed by a May 2, 2002 telephone call between Person and Malcolm Northam.