A firm’s failure to follow its written procedures and policies regarding new employees and Rule G-37 when a person’s employment with the firm was a result of a reorganization of various corporate affiliates and the political contribution was made before the person was an employee of the firm does not constitute a reasonable justification for granting exemptive relief under Municipal Securities Rulemaking Board (MSRB) Rule G-37.


January 7, 1997

 

A
Firm X
Address

 

Dear A:

 

This is in response to your letter of July 31, 1996, requesting an exemption for Firm X, a wholly owned subsidiary of Firm Y, from the prohibition on engaging in municipal securities business contained in Municipal Securities Rulemaking Board (MSRB) Rule G-37 (the Rule).

 

The request stems from the fact that C, a registered representative, made a $50 contribution to a candidate in the City mayoral election for whom C was not eligible to vote. At the time of the contribution, C was not a municipal finance professional (MFP) as defined in the Rule because C was employed by an affiliated entity that is not a registered broker-dealer. However, several months after the contribution, C became an MFP by virtue of C's transfer to Firm X as part of an internal reorganization and C's activities as a registered representative.

 

Your letter also attached a copy of Firm X’s Firm-Wide Policies and Procedures on Political Contributions. The procedures contain a section on new employees, which requires that they be, " . . . pre-cleared for their political contributions history before a formal offer is extended for employment in Firm X." The Procedures further state, "should any of the information result in a violation, or impending violation, of G-37, the Supervisory Principal should immediately notify the Director of Compliance, who must report that fact to the President of Firm X." Your letter goes on to note that the contribution was discovered, "at the time that C joined Firm X . . . ."

 

As you know, the Rule makes provision for a de minimis political contribution of an amount not to exceed $250 in instances where the contributor is entitled to vote for the person who was given the contribution. However, there is no de minimis amount 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)

 

Although C's employment with Firm X was the result of an "internal reorganization", it did result in C being a new employee with Firm X. Had Firm X's procedures as to new hires been followed, the disclosure of the contribution would have been known before C's transfer from an affiliated entity had been effected, rather than after.

 

Therefore, we cannot conclude that Firm X's failure to follow its written policies and procedures as to political contributions constitutes 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. 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

Sincerely,

 

 

  Thomas R. Cassella

 

cc: NASD District Director
Christopher 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).