Name Not Public
Exemptive relief is granted based on: the representation that the acquiring firm did not engage in the soliciation of business and the individual was not, at the time, considered to be an MFP as defined; the acquiring firm did not have knowledge of the contribution and the contribution has been returned; the municipal securities business relationships of the acquired firm were long standing and existed prior to the contribution; the firm has instituted extensive information barriers on certain municipal business communications; the individual involved will be prohibited from the solicitation of new municipal securtiies business for a period of time.
April 3, 2009
This is in response to your December 17, 2008, February 5, 2009 and March 9, 2009 letters1 requesting an exemption pursuant to FINRA Rule 9610(b) for your client Firm A (“Firm A”) from the prohibition of engaging in municipal securities business as defined in Municipal Securities Rulemaking Board ("MSRB") Rule G-37 ("Rule"). Your request for exemption is based on a contribution of $1,500 made on or about October 8, 2008, by Individual Officer of, Firm A, to Campaign. Firm A stipulates that the Contribution is a contribution that was made indirectly (“indirect contribution”) to Candidate A that triggers a ban on municipal securities business with State A issuers of which Candidate A is an official.2
In your letters requesting exemption, you represent the following facts: The Campaign was a committee engaged in “joint fundraising” (a “joint fundraising committee”), as described in the regulations of the Federal Election Commission. Persons that receive proceeds from joint fundraising activities are “participants.”3 The participants in the Campaign were the Party A National Committee; Candidates Compliance Fund; and the federal accounts of the state Party A committees in State B, State C, State D, and State E. You also reference MSRB, Q & A III.7. (September 22, 2005), wherein the MSRB opined that in analyzing if a contribution is an indirect contribution to an official of an issuer under MSRB Rule G-37(d), one must determine if a payment to a political party is being used to contribute indirectly to an official of an issuer and that one should consider, among other things, the “intent or motive” of the donor in making the payment to the party committee, i.e., whether it was intended to be used for a certain issuer official. You state that “it is clear that the motive for Individual’s contribution was to help the Candidates campaign given that the name of the committee to which he gave bears the name of those candidates.”4 You also state that when an individual’s contribution to a joint fundraising committee is allocated in whole or in part to particular participants, under FEC regulations the individual is deemed to be contributing that amount directly to that participant. Finally, as noted above, Firm A stipulates that the Contribution is an indirect contribution to an official of an issuer that triggers a ban under Rule G-37.
In support of your request, you represent that the necessity for the exemption arises from a set of unique and rapidly changing facts and circumstances that developed when Firm A, unexpectedly and rapidly acquired Firm B. You represent that prior to Firm A’s acquisition of Firm B, Firm A did not engage in municipal securities business as defined under the Rule. With the acquisition, Firm A suddenly became subject to the Rule, and has elected to consider certain of its employees and executives, including Individual, as municipal finance professionals (“MFP”) as of the date of the acquisition. You also represent that after acquiring Firm B, Firm A promptly sought counsel and implemented a Rule-37 compliance program similar to Firm B’s pre-existing program; and as part of this due diligence under the compliance program, Firm A discovered the Contribution.
According to your letter, Firm A determined that Individual is an MFP because he is an Officer of Firm A, but Individual’s duties do not, and will not include any involvement in Firm A’s municipal securities business, any role in soliciting such business, or any direct supervisory function over such business. You represent that the Contribution is asserted to have been made solely for personal political reasons and Individual was not solicited to do so by a colleague. Further, Individual received a full refund of the Contribution.5
You also represent that the Contribution is not related to obtaining or retaining municipal securities business as defined by the Rule. Prior to the acquisition of Firm B by Firm A, you assert that Firm B had a longstanding municipal securities business presence in State A. Further, you represent that all of Firm B’s municipal securities business was entered into prior to the Contribution and without knowledge that Firm A would acquire Firm B or that Individual would make the Contribution.
FINRA has considered your Firm A’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.6 In reaching a determination, FINRA staff considered several key factors surrounding the Contribution. First, you represent that prior to the acquisition of Firm B, Firm A never engaged in the solicitation of municipal securities business and Individual was not a MFP. Second, you represent that upon its acquisition of Firm B, Firm A promptly developed a Rule G-37 compliance program, and as part of its due diligence under such program, it discovered the Contribution. Third, you represent that Firm A did not have knowledge of the Contribution and has received a refund. Fourth, you represent that all of Firm B’s prior municipal securities business with entities of which Candidate would be considered an issuer official was entered into prior to the Contribution and with no knowledge that Firm A would acquire Firm B and Individual, as an Officer of Firm A, would make the Contribution shortly after such acquisition. Fifth, you represent that, if granted an exemption, Firm A will take adequate remedial measures, including ensuring that Individual will not be involved in any way in municipal securities business with an issuer of which Candidate is an official for at least two years from the date of the Contribution. Sixth, you have represented that Individual’s Contribution was not motivated by an intent or desire to obtain or retain municipal securities business and that Firm A neither sought nor received any benefit related to the Contribution, in that Firm B already had a longstanding presence in State before the acquisition and it was made only two weeks after Firm A became subject to Rule G-37 due to its unexpected acquisition of Firm B.
You represent that Firm A will institute the following preventive steps:
- For at least the period from October 8, 2008 until October 8, 2010, Individual will be prohibited from soliciting municipal securities business from any issuer of which Candidate A is an official (as defined in the Rule).
- Within 15 days of the date of this letter, the Firm will inform in writing its MFPs and municipal syndicate desk (and others directly or indirectly involved with solicitation of municipal securities business) (as defined in the Rule) that Individual has, until October 8, 2010, been segregated with respect to any issuer of which Candidate A is considered to be an issuer official, and shall instruct each such employee that he or she may not have any discussions or communications (including e-mail or voice mail) with Individual regarding such business ("Information Restrictions"). All such employees shall certify that they received, understand and will comply with the notice, and will acknowledge that they may be subject to sanctions, including potential dismissal, in the event they fail to comply. The Firm's legal or compliance department will retain a copy of the certifications.
- Individual will receive written notification of the Information Restrictions and will be subject to an obligation to provide a quarterly certification of compliance. The Firm's legal or compliance department will retain a copy of Individual's certifications.
Based on the uniqueness of the facts and circumstances as represented in your letter and our application of the standards for exemptive relief in the Rule, FINRA finds 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. FINRA grants that request. However, our determination to provide exemptive relief will be available, with identifying information redacted, on the FINRA Website with other FINRA responses to requests for exemptive relief under Rule G-37. By publishing the FINRA responses in redacted form, FINRA is able to provide confidentiality while informing and educating members, issuers, and investor communities of the factors that FINRA 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.
Malcolm P. Northam
1 Letters to Malcolm P. Northam, FINRA, from Firm counsel, dated December 17, 2008 (“December 17, 2008 Letter”), February 5, 2009 (“February 5 Letter”), and March 9, 2009 (“March 9 Letter”).
2 Confirmed in a telephone conversation on March 30, 2009 between Malcolm Northam and Firm counsel.
3 Joint fundraising committees are described and certain regulations regarding their activities are set forth in 11 C.F.R. 102.17. Under the FEC’s regulations, a joint fundraising committee’s participants must enter into a written agreement. The written agreement must state a formula for the allocation of fundraising proceeds to each participant, which may be subject to certain exceptions permitting the funds to be allocated otherwise than according to the formula. The written agreement may be amended. The agreement must be retained for three years and made available to the FEC upon request. When asking for contributions, a joint fundraising committee must include a description of its participants and the formula upon which the proceeds being raised will be allocated to such participants in all solicitations.
4 Letter dated March 9, 2009. In the February 5, 2009 Letter and the March 9, 2009 Letter, you also represent that contributions to Campaign would have been distributed to the participants as follows: the first $28,500 of any individual’s contribution would be sent to the Party A and any portion that exceeded that amount was allocated among the remaining participants.
5 A copy of the returned check was provided to FINRA staff on March 9, 2009.
6 MSRB Rule G-37 permits FINRA to grant an exemption based on consideration of the following factors, among others: (1) whether the exemption is consistent with the public interest, the protection of investors and the purposes of the rule; (2) whether 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 the rule; (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 an 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.