A firm’s failure to adopt procedures to review a new employee’s political contributions made before his employment at the firm is not a reasonable justification or excuse for granting an exemption from Municipal Securities Rulemaking Board (MSRB) Rule G-37.
January 27, 1997
This is in response to your letter of December 18, 1996, requesting an exemption for Firm X, a wholly owned subsidiary of Corp Y, a bank holding company registered under the Bankholding Company Act of 1956, from the prohibition of engaging in municipal securities business contained in Municipal Securities Rulemaking Board (MSRB) Rule G-37 (Rule).
The request stems from the fact that an individual (unnamed in your letter) joined Firm X as a Senior Officer on May 7, 1996. That person is a "Municipal Finance Professional" (MFP) within the meaning of MSRB Rule G-37. Prior to joining Firm X, the individual made two contributions to the campaign fund of a long-time friend who served as a City Council member in City. The first contribution, in the amount of $100, was made on July 5, 1994, and the second, in the amount of $50, was made on June 5, 1995. At the time of the contributions, the individual was not a resident of City.
The individual was not aware that his/her contributions could trigger the prohibition of Rule G-37 after he/she became an MFP until he/she attended a firm-element continuing education seminar sponsored by Firm X on September 4, 1996. Upon learning of this individual's contributions, Firm X undertook to send a questionnaire to all newly hired MFPs to determine whether any additional employees had made political contributions prior to joining the firm. The responses indicated that no other employees had made similar contributions. Firm X has modified its compliance manual by adding a provision prohibiting its employees from soliciting or making contributions to any official of an issuer the firm is engaging or seeking to engage in municipal securities business.
After the individual joined the firm but before Firm X learned of the contributions, Firm X engaged in municipal securities business with City. However, after becoming aware of the contribution, Firm X withdrew from further participation in the City's Non-Tax Revenue Anticipation Notes Offering.
As you know, the Rule makes provision for a de minimis political contribution in instances where the contributor is entitled to vote for the recipient. However, there is no de minimis exemption when a political contribution is made to a person for whom the contributor is not entitled to vote.
The MSRB in filings with the SEC1 and in its interpretations2 has made clear that the granting of exemptions to the Rule should only be done in very limited circumstances. It identifies only two specific examples that are appropriate for an exemption: (i) a contribution by a disgruntled employee to an issuer official for the purpose of injuring the member; or (ii) a number of small contributions by an employee during an election cycle (e.g. four years) which, when consolidated slightly exceeds the $250 de minimis exemption, such as contributions totaling $255.
The SEC in approving the NASD rule change to establish internal procedures to review requests by members for exemptions from Rule G-37(b)3 stated, "the Commission finds that the rule change is consistent with the provisions of Section 15A(b)(2) of the Act because it establishes a procedure to enforce compliance with MSRB Rule G-37 that is intended to effectuate the intent of the MSRB that the NASD grant exemptions only under the limited circumstance contemplated by the MSRB. The Commission also finds that, for the reasons set forth above, the rule change is consistent with the provisions of Section 19(g)(1)(B) of the Act, which requires that the NASD, absent reasonable justification or excuse, enforce compliance with MSRB rules." (emphasis added)
It appears that the violation of the rule described in your letter related directly to the failure of Firm X to adopt procedures to review for political contributions prior to offering employment. Therefore, we cannot conclude that Firm X has demonstrated reasonable justification or excuse for granting the requested exemption. Accordingly, Firm X's request for an exemption is denied.
Be advised that Firm X has 15 days in which to appeal this determination to the Fixed Income Committee of the NASD Regulation, Inc. Any such determination is subject to review by the NASD Regulation Board of Directors. If you wish to do so, you should send the written appeal request to:
NASD Regulation, Inc.
Fixed Income Committee
c/o Mr. John Pilcher, Esq.
Office of General Counsel
1735 K Street, N.W.
Washington, D.C. 20006
Thomas R. Cassella
|cc:||NASD District Director
Christopher A. Taylor, MSRB
1 Securities Exchange Act Release No. 34160 (June 3, 1994), 59 FR 30376 (June 13, 1994) (Release 34-34160).
2 MSRB Manual, General Rules, Rule G-37 (CCH) ¶ 3681, Additional Rule G-37 Q & A June 15, 1995, Q4.
3 Securities Exchange Act Release No. 34-36403 (October 20, 1995), 60 FR 54898 (October 26, 1995).