This request for exemptive relief is granted based on the Firm's representation that the Contributions were made prior to the individual's employment with the Firm, and he was not, while he was employed by the Firm, primarily engaged in municipal securities business, and he did not attend meetings with clients or participate in any Firm solicitations.  The Firm represents that the individual is no longer employed by the Firm, the Firm has amended its new hire procedures, and the Firm has agreed to institute an educational effort to communicate clearly it's revised policies and procedures for new MFPs.




May 25, 2005


This is in response to your March 29, 2005 and May 9, 2005 letters 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 the contributions listed on the attached document totaling $1,985 by Name.1

 

You represent that the contributions appear to have been made because of Name's personal political interests, particularly those related to his employment as a county official at the time of the contributions.  You acknowledge that Name, as an Associate in the Firm's Municipal Securities Group, an entry-level position, was a municipal finance professional ("MFP") as defined by the Rule.

 

You represent that the Firm hired Name on January 24, 2005 because he has a graduate degree in public administration and nearly ten years' finance and administration experience in the areas of municipal and state finance, and as a state and local public official.  Additionally, you represent that his education and experience provided him with a foundation in county and state budgeting and administration and specific knowledge regarding State bond and finance processes.  To support this representation, you indicate that Name's experience included several years as a principal legislative budget analyst for the State Ways and Means Committee, two years as Director of Finance for County #1 legislature, and at the time the Firm hired Name, he was the Deputy Commissioner of the County #2 Department of Health Services.  You represent that during his employment with the Firm, Name was not primarily engaged in municipal securities representative activities, did not solicit any municipal securities business, and did not attend meetings with clients or participate in any Firm solicitations.  Instead, you represent that while employed by the Firm, Name spent a majority of his time in orientation and training and in other non-municipal securities representative activities.

 

You represent that the Firm first became aware of the contributions when Name disclosed them in his response to the Firm's contribution disclosure form that is part of the Firm's due diligence inquiry regarding the Rule.  The Firm contribution disclosure form is prescribed by the Firm's policies and procedures designed to comply with the Rule, and is used to screen job candidates and new hires.  You represent that the Firm's policies and procedures require that the contribution disclosure form be completed and reviewed prior to a new hire's first day of work.  However, in this instance, Name requested an early employment date and, due to a flaw in the Firm's Municipal Securities Group clerical procedures, Name was permitted to start his employment as an MFP with the Firm six months before his originally scheduled start date, and prior to completing the Firm's contribution disclosure form, and prior to a review of the political contributions subsequently disclosed on his contribution disclosure form.  On February 1, 2005 when the Firm determined, based upon Name's disclosure on the Firm's contribution disclosure form, that he had made political contributions that might result in a ban on municipal securities business as prescribed by the Rule, Name was sent home and placed on "inactive status" and was directed not to come to the Firm's office or engage in any work for the Firm.  You represent that the Firm formally terminated Name's employment on February 18, 2005.  The Firm has requested that Name contact each of the candidates disclosed to the Firm as receiving a contribution and request a refund of the contributions.2

 

NASD has considered your Firm's request for exemptive relief pursuant to the applicable standards.  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.  First, you represent that the Firm took prompt remedial action by placing Name in an "inactive status" and directing him to not engage in any work for the Firm, and also instituting a self-ban on engaging in municipal securities business with the issuers of which any recipient of Name's contributions is an issuer official.4  Second, you have represented that Name, prior to being hired by the Firm, was not engaged in the solicitation of municipal securities business, as defined in the Rule, and during his Firm employment as an MFP Name did not engage in municipal securities representative activities and did not solicit municipal business.  Third, you have represented that the Firm has a long relationship as an underwriter of municipal securities for County #1 and County #2, and the State and neither the hiring of Name nor his Contributions were necessary to obtain municipal securities business from such issuers.5  Fourth, the Firm has agreed to undertake an education initiative, as described below, for all employees of the Firm's Municipal Securities Group.  Fifth, although a less weighty factor, the Firm represents that it has made a reasonable effort, in consideration of the circumstances, to effect the return of the contributions.

 

Important to our consideration is your representation that the Firm maintains and implements a detailed and comprehensive program to comply with the Rule.  Among other things, the compliance program is represented to require new MFPs to complete a political contribution certification form listing all their political contributions over the last two years prior to being hired.  However, in this instance, the Firm's Municipal Securities Group did not require Name to complete his political contribution certification form until after he had started his employment.  As a result, the Firm became aware of the contributions only after the employee had been hired, and thus placed the Firm's potential for certain negotiated municipal securities business in jeopardy.  The Firm's Municipal Securities Group actions are serious because the person required to be pre-screened had been part of the local and state political process for more than ten years as a state and local public official, and it should have been prudently recognized that this may be an environment where political contributions are sought and given regularly.  The Firm represents that it has made an addition to its new MFP hire procedures to require, without exception, that all Firm MFP hires must be pre-approved by the Firm's legal department.  In addition, the Firm has agreed that it has adopted or will institute the following:

  • Executive Name, EVP and Director of the Firm's Municipal Securities Group will, no later than 60 days from the date of this letter, lead an educational effort sufficient to communicate a clear understanding of the Firm's newly revised policies and procedures for new MFPs.  All Municipal Securities Group employees shall certify that they received, understand and will comply with the Firm's policies for reviewing the political contributions of persons prior to their employment at the Firm and those of newly hired MFPs, and will acknowledge that they may be subject to sanctions, including potential dismissal, in the event they fail to comply.

Based on the facts and circumstances as represented in your letter, and our application of the standards for exemptive relief in the Rule, we conclude that it is appropriate to grant an exemption from the prohibition from municipal securities business as defined by the Rule, subject to the Firm's compliance with the undertaking identified above.

 

This exemption is based on our understanding of the material facts as you have represented them.  Our determination in this matter could be different if the facts are not as represented, if material facts have not been disclosed, or if new 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, our determination to provide exemptive relief will be available, with identifying information redacted, on the NASD Web site with other NASD responses to requests for exemptive relief under Rule G-37.  By publishing the NASD responses 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.

 

Sincerely,

 

Malcolm P. Northam

 

ATTACHMENT

List of Contributions to Issuer Officials by Name

 

Date Amount Name of Candidate Office Sought
5/14/2003 $75 Candidate #1

County Legislator

County #1

6/8/2003 $100 Candidate #2

County Legislator

County #1

7/4/2003 $250 Candidate #3

County Legislator

County #1

9/22/2003 $100 Candidate #4

County Legislator

County #1

9/22/2003 $100 Candidate #5

County Legislator

County #1

9/22/2003 $100 Candidate #6

County Legislator

County #1

9/22/2003 $100 Candidate #7

County Legislator

County #1

9/22/2003 $100 Candidate #8

County Legislator

County #1

9/22/2003 $100 Candidate #9

County Legislator

County #1

9/22/2003 $100 Candidate #10

County Legislator

County #1

9/22/2003 $100 Candidate #11

County Legislator

County #1

9/22/2003 $100 Candidate #12

County Legislator

County #1

9/22/2003 $100 Candidate #13

County Legislator

County #1

10/21/2003 $60 Candidate #2

County Legislator

County #1

6/4/2004 $300 Candidate #14

County Executive

County #2

12/6/2004 $200 Candidate #14

County Executive

County #2




 

 

1 In an April 12, 2005 telephone conversation between Malcolm Northam and Firm Associate General Counsel, you confirm that Name is eligible to vote for issuer officials in County #2, and is not eligible to vote for issuer officials in County #1.

 

2 You have enclosed a copy of a March 24, 2005 letter to Name memorializing this request, and have prepared letters to each of the identified issuer officials for Name to send in order to facilitate the refund request.

 

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; (2) the broker, dealer, or municipal securities dealer: (A) prior to the time 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, and the nature of such remedial or preventive measures directed specifically toward the contributor who made the relevant contributions and all employees of the broker, dealer, or municipal securities dealer; (3) whether, at the time of the contribution, the contributor was a municipal finance professional or otherwise and employee of the broker, dealer, or municipal securities dealer, or was seeking such employment; (4) the timing and amount of the contribution which resulted in the prohibition; (5) the nature of the election; and (6) the contributor's apparent intent or motive in making the contribution, as evidenced by the facts and circumstances surrounding such contribution.

 

4 You represent that the Firm has not accepted certain municipal securities business as a result of this "self-ban" resulting in an estimated revenue loss of approximately $100,000.

 

5 You represent that before the Firm even considered hiring Name, the Firm was already the leading underwriting service provider to both County #1 and County #2, and you represent that the Firm did not need Name's contributions to gain business in County #1 or County #2.  Further, you represent that for the time period January 2003 to December 2004, in County #1 and County #2, the Firm was the top-ranked underwriter, managing issuances with a combined par amount of nearly $863 million.  At the State level, you represent for the time period January 2003 through December 2004 the Firm managed issuances with a par amount over $11.2 billion.