December 18, 2000
This is in response to your letter dated November 21, 2000, which on behalf of Firm A requests an exemption from the prohibition of engaging in municipal securities business contained in the Municipal Securities Rulemaking Board ("MSRB") Rule G-37 ("Rule G-37" or "Rule").
The request for an exemption stems from a recent merger which was completed on November 3, 2000. As a result of the merger, Firm A, a registered broker/dealer, became an indirectly wholly owned subsidiary of Parent X. Parent X has a global Business Group named Firm B. Firm A requests an exemption from the Rule because a senior Firm B executive made a political contribution to an issuer official prior to the merger but within the past two years.
In support of your request for an exemption, you make a number of representations in your letter including the following:
Firm B has two Divisions, Division One and Division Two. Division One contains various corporate subsidiaries, including Firm A, which are involved in U.S. private client, e-commerce/intermediary, or asset management business. Aside from Firm A, none of Division One’s subsidiaries is engaged in municipal securities business.1 Division Two includes several corporate subsidiaries which engage in, among other things, corporate finance, equity, fixed income, or treasury product business.
Division Two does not contain any subsidiary or business which engages in municipal securities business.
Division One and Division Two each has its own executive committee which oversees the businesses contained within that Division. The Division One Executive Committee oversees Firm A. You represent that the Division One Executive Committee may be acting as the functional equivalent of Firm A's executive committee, which existed prior to the merger but no longer exists today. Thus, members of the Division One Executive Committee may qualify as Municipal Finance Professionals ("MFPs") under Rule G-37(g)(iv)(E).
You state that, as a part of the post-merger reorganization, Parent X wants to place Individual, a senior Firm B executive with global responsibilities, on Division One’s Executive Committee. Individual is the Chief Operating Officer and head of Fixed Income of Firm B, the umbrella Business Group in which both Division One and Division Two are located. Individual is also on Division Two’s Executive Committee. On September 24, 1999, Individual made a $1,000 contribution to Governor George W. Bush’s presidential campaign ("the Contribution").
You maintain that it is important to have Individual serve on the Division One Executive Committee so Division One’s activities can be coordinated with the rest of Firm B. To undertake this coordination function, you represent that it is not necessary for Individual to participate in the oversight of Firm A's municipal securities business. As you recognize, placing Individual on the Division One Executive Committee may trigger Rule G-37’s two year ban for Firm A.
You argue that an exemption from the Rule should be granted. In particular, you state that 1) the Contribution was not made with the intent of obtaining municipal securities business, as defined in Rule G-37; 2) prior to the merger, Parent X and its subsidiaries did not engage in municipal securities business and Individual was not an MFP; and 3) the Contribution could not have been made with the merger in mind because Parent X was not engaged in merger discussions with Firm A at the time of the Contribution. You also state that Individual has sought a refund of the Contribution.
If an exemption is granted, you represent that Individual will not be involved in helping obtain municipal securities business on behalf of Firm A or engaged in municipal securities representative activities before September 24, 2001, when the two-year ban under Rule G-37 would otherwise expire. If Individual is appointed to the Division One Executive Committee, you represent that Individual will be treated as an MFP, and his/her future contributions will be subject to comprehensive Firm A Rule G-37 compliance procedures.
Rule G-37 permits NASD Regulation to grant an exemption based on several factors, including among others, whether the exemption is consistent with the public interest, the protection of investors, and the purposes of the Rule.2 Based on the facts as you have represented them, we have considered Firm A's exemption request in light of these factors.
We consent to an exemption of the two-year prohibition from municipal securities business as defined by the Rule. Our decision is based on consideration of the MSRB’s published interpretation of Rule G-37 regarding mergers of corporations in the municipal securities industry3 and on your representation that Individual will not be engaged in helping Firm A obtain municipal securities business or engaged in municipal securities representative activities before September 24, 2001, when the two-year ban under Rule G-37 would otherwise expire.
Please be aware that our decision is based strictly on our understanding of the materials facts as you have represented them and that our decision in this matter could be different if the facts are not as represented or if other materials facts have not been disclosed to us.
Emily P. Gordy
1 This particular representation was made by the, Associate General Counsel and Corporate Vice President of Firm A in a telephone conversation of November 29, 2000 with Sarrita Cypress, Senior Attorney, Office of Regulation Policy, NASD Regulation, Inc.
2 Rule G-37(i) permits the 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 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.
3 In interpretive guidance concerning the applicability of Rule G-37 in connection with mergers in the municipal securities business, the MSRB stated that the rule, "was not intended to prevent mergers in the municipal securities industry or, once a merger is consummated, to seriously hinder the surviving dealer’s municipal securities business if the merger was not an attempt to circumvent the [Rule’s] letter or spirit." See MSRB Notice of Interpretation, Q&A No. 1, (June 29, 1998); Securities Exchange Act Release No. 34-40167 (July 2, 1998), 63 FR 37434.