November 14, 2001
This is in response to your letters dated August 24, 2001 and September 10, 2001 requesting an exemption for Firm from the prohibition of engaging in municipal securities business as defined in Municipal Securities Rulemaking Board (“MSRB”) Rule G-37 (“Rule”).
Your request, on behalf of the Firm , results from a June 15, 2001, political contribution of $250.00 from Name, employed by the Firm as an Associate Managing Director, to the Candidate’s Campaign. Candidate was an attorney in private practice and a candidate1 for the City Council. The Firm represents that Candidate died on August 5, 2001.2 At the time Name made the contribution, she was a municipal finance professional (“MFP”).
The Firm represents that when the contribution was made, Name mistakenly believed she was eligible to vote for Candidate but learned in early July 2001 that she, in fact, did not reside in Candidate's district. Name contacted the Firm's compliance department the next day to report that she had mistakenly exceeded the campaign contribution limit imposed by the Rule. Subsequently, Name requested and received the return of the $250.00 contribution.
Once the Firm became aware of the contribution and the resulting prohibition on municipal securities business, it issued a memorandum to employees reminding them of the MSRB’s Rule on political contributions. The Firm also voluntarily suspended its solicitation of municipal securities business from the issuer involved.
The Firm also represents that it maintains and implements a comprehensive set of internal procedures directed at compliance with MSRB Rule G-37. These procedures require all Firm MFPs wanting to make a contribution to submit a “political contribution request form” to the Firm's compliance department for approval prior to the contribution being made. Name did not follow this procedure. It was Name’s mistaken belief that she did not need to pre-clear the contribution because she believed she was eligible to vote for Candidate.
NASD Regulation has considered the Firm's request for exemptive relief based on the established standards of Rule G-373 and has determined to grant the request consistent with the public interest and the protection of investors. In reaching a determination, NASD Regulation staff considered several key factors surrounding the contribution, including the fact that: 1) the contribution was inadvertent, de minimis, and was returned; and (2) the contribution was made to a candidate for public office who never had the opportunity to influence the award of municipal securities business (Candidate was not an elected official, was never elected to the office for which he was a candidate, and he died during the election campaign). Based on these facts, NASD Regulation finds no apparent quid pro quo relative to the contribution.
Important to our determination is the Firm's representation that it maintains and implements a comprehensive set of internal policies and procedures directed at compliance with MSRB Rule G-37. Among other things, the policies and procedures are represented to include an established contribution pre-clearance process, a process for internal reporting of contributions, and a mechanism to detect potentially problematic activities. While Name did not follow the established contribution pre-clearance procedures designed to prevent this type of inadvertent contribution, we have considered that the Firm took prompt action once it became aware of the contribution. The Firm verbally reprimanded Name, contacted each MFP to confirm contribution disclosures and policies, reported the contribution on its Form G-37 filing, and since July 12, 2001, suspended solicitation of municipal securities business from the issuer involved. The Firm represents that it plans to place a “disciplinary action” memorandum in Name's official personnel file that will indicate, in part, that future Rule G-37 contribution violations by Name may result in her dismissal.4
Based on the facts and circumstances as represented in your letter, and our application of the G-37 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 the Firm has represented them. Our decision in this matter could vary if the facts are not as represented, if material facts have not been disclosed, or if new material information emerges.
In your request for relief, filed pursuant to NASD Rule 9610(b), you requested that the Firm's application for exemptive relief and the identity of the Firm and the MFP remain confidential. The NASD grants that request. However, this exemption decision will be available, with identifying information redacted, on the NASD Regulation Web Site with other NASD decisions responding to MSRB Rule G-37 exemptive requests. By publishing the decisions in redacted form, the NASD is able to provide confidentiality while informing and educating members, issuers, and investor communities of the factors that the NASD may consider in granting or denying exemptive relief under the rule.
If you have any questions regarding the issues discussed herein, please contact me at 202-728-8085.
Malcolm P. Northam
1 The exemption request is necessitated due to the MSRB Rule G-37(g)(vi) definition of “official of an issuer” which includes, in part, candidates for elective office.
2 Letter dated September 10, 2001 from Firm Attorney to Malcolm Northam.
3 MSRB Rule G-37(i) permits the NASD to grant an exemption based on consideration of the following factors: (1) whether the exemption is consistent with the public interest, the protection of investors and the purposes of the Rule; and (2) whether the broker, dealer, or municipal securities dealer: (A) prior to the time 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 actual 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 October 24, 2001 telephone communication between Firm Attorney and Malcolm Northam.