Name Not Public
August 8, 2001
This is in response to your letter dated August 1, 2001 requesting an exemption for Firm from the prohibition of engaging in municipal securities business as defined in Municipal Securities Rulemaking Board ("MSRB") Rule G-37 ("Rule").
Your request results from a May 9, 2001, $125.00 political contribution from Name, an employee of Firm, to Campaign of Candidate for City Comptroller. Name's contribution to the Candidate’s Campaign did not qualify for the $250 de minimis contribution exception to Rule G-37 because Name was not eligible to vote for the City Comptroller. Firm became aware of this contribution through internal procedures that require all municipal finance professionals ("MFP") to complete quarterly affirmations of compliance with Rule G-37 and to disclose political contributions. Name filed his/her report on July 5, 2001. Once Firm learned of the contribution, it directed Name to secure a refund, which was obtained on July 25, 2001. The Firm then immediately notified the NASD that their internal procedures had identified an MFP political contribution.
Firm represents that the contribution was made in response to a solicitation from Name's close friend from business school who was on the host committee for a Campaign fundraiser. Firm further represents that Name's attendance at the fundraiser, and the contribution, were for personal reasons and not related to his/her former or current business activities at Firm.
We understand from your letter that Name was an MFP at the time Name made the contribution by virtue of Rule G-37(g)(iv), which provides that a person designated an MFP "shall retain the designation for two years after the last activity or position which gave rise to the designation." In this regard, Name specifically was not engaged in activities or holding a position at the time of the contribution that would trigger an MFP designation. Firm represents that until May 1, 2000, Name worked in Firm's Municipal Finance Department. On May 1, 2000, more than a year before Name made the contribution, Name transferred to the Department X and ceased engaging in any activities or holding any position which give rise to the MFP designation. However, on May 9, 2001, the date Name made the political contribution, Name was still an MFP because of the referenced two-year "lookback."
Although Name continues to be designated an MFP, Name does not now and, as noted above, did not at the time of the contribution, engage in any activity or hold a position that would affirmatively trigger his/her designation as an MFP. In any case, even while working in the Municipal Finance Department, Name was not involved in municipal securities activities relating to City. You also represent that after transferring to Department X Name: (1) has not received any compensation that is related to the revenue derived from Firm's municipal securities business; (2) has an office that is located on a different floor than the Municipal Finance Department; and (3) has not participated in any efforts by the Municipal Finance Department to procure business in City.
Firm represents that it maintains and implements a comprehensive set of internal policies and procedures directed at compliance with MSRB Rule G-37. As part of those procedures, at the time of Name's transfer, Firm informed Name that even though his/her job responsibilities had changed, under MSRB Rule G-37(g)(iv), Firm would retain his/her designation as an MFP for two years and would continue to be subject to Firm's policy that required him/her to pre-clear all contributions. Nevertheless, Name did not pre-clear the contribution in question. Upon learning of the contribution, you represent that the Firm took remedial action with regard to Name including imposing a fine and citing him/her in an internal letter of censure.
In addition to the referenced representations, Firm's request for an exemption points out that City does not usually select underwriters on a deal-by-deal basis, but rather, periodically (every few years) invites a number of firms to compete for selection as one of several underwriters for subsequent bond issues. Pursuant to this arrangement, members of the selected pool are awarded the senior manager role for individual underwritings on a rotating basis with the remaining underwriters serving as co-managers. Firm was most recently selected as one of the members of the underwriting pool in 1997 and since that time has been a participant in underwriting City bonds in this manner.
As a condition of exemptive relief and, as an additional future safeguard, Firm represents that it will implement the following firewall procedures to segregate Name from the Firm’s Municipal Finance Department dealings with City issuers:
- Until May 8, 2003, Name is prohibited from any involvement in, and will be segregated from, all matters that pertain in any respect to offerings or potential offerings of municipal bonds, or advisory business, with City related issuers.
- Name, his/her spouse, and all members of his/her immediate family will be precluded from receiving any compensation derived from revenues received by the Firm in connection with municipal securities business with City for the period from May 9, 2001 through May 8, 2003.
- Name will not receive any indirect compensation such as shares of any firm-wide or other incentive compensation amounts directly attributable to municipal securities business with City for the period from May 9, 2001 through May 8, 2003.
- Until May 8, 2003, Name's office will be located on a different floor than the Municipal Finance Department investment banking professionals. Name will not be permitted access to any files, including electronic files, related to City-Related Issuers. In this regard, all such paper files for City-Related Issuers will be maintained on a separate floor or in secured areas or cabinets. In addition, Name will not be permitted electronic access to the data servers for the Firm’s Municipal Finance Department’s investment banking or Municipal Syndicate Desk.
- The Municipal Finance Department of Firm will adopt policies and procedures for Name and the Firm’s City based investment banking professionals and Municipal Syndicate Desk to inform them that they may not have any discussions or communications (including e-mail or voicemail) with Name regarding City-Related Issuers without prior approval of the Firm’s Office of General Counsel. All such employees shall certify that they have received notice of this and acknowledge that they may be subject to sanctions, including potential dismissal, in the event they fail to comply.
- Name's supervisors, as well as the Firm Office of General Counsel, shall undertake to conduct and document periodic inquiries to determine that the firewall procedures are being followed and such documentation shall be preserved for review by NASD Regulation upon request.
Based on Rule G-37, NASD Regulation has considered Firm's request for exemptive relief based on the enumerated standards. A paramount issue in rendering our determination is whether an exemption is consistent with the public interest and the protection of investors.1 In reaching a determination, NASD Regulation staff considered several key factors surrounding the contribution, including: (1) the contribution was made more than one year after Name transferred from the Firm Municipal Finance Department to another department; (2) from his/her transfer on May 1, 2000, to the present, Name continues to be designated an MFP only because of the two year "lookback" provision; (3) Name had no personal involvement in Firm's municipal securities activities with City, including the pre-existing and established selection of Firm as one of several underwriters; and (4) the contribution, which was returned, was made to the campaign of a candidate for public office who is not now an issuer official, and who had no apparent opportunity to influence the award of municipal securities business. Although a less weighty factor, the contribution was small and was made in response to a solicitation by a personal friend involved with the campaign. Based on these and other noted facts, NASD Regulation finds no apparent quid pro quo relative to the contribution.
Important to our consideration is Firm's representation that it maintains and implements a comprehensive set of internal policies and procedures directed at compliance with MSRB Rule G-37. Among other things, the policies and procedures are represented to include an established contribution pre-clearance process, a quarterly process for internal reporting of contributions, a mechanism to detect potentially problematic activities, and a program designed to sanction individuals who violate internal policies and procedures. Moreover, we have considered that Firm took prompt action once it became aware of the contribution by: contacting each MFP to confirm contribution disclosures and policies, withdrawing from an invitation to co-lead a City offering, and self-imposing a ban on future City municipal securities new business until the Rule G-37 prohibition has been resolved.
Based on the facts and circumstances as represented in your letter, and our application of the G-37 exemption standards to this matter, we conclude that it is appropriate to grant an exemption from the two-year prohibition from municipal securities business as defined by the Rule.
This exemption is based on our understanding of the material facts as Firm has represented them. Our decision in this matter could vary if the facts are not as represented, if material facts have not been disclosed, or if new important information emerges. Firm is required to continually comply with the firewall provisions set forth in its exemption request as outlined in this letter until May 8, 2003. Such compliance is a condition of the Firm’s exemption from the Rule. If you have any questions regarding the issues discussed herein, please contact me at (202) 728-8085.
Malcolm P. Northam
1 MSRB 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.