Name Not Public
This request for exemptive relief is granted based on the Firm's representation that the individual did not engage in the solicitation of municipal securities business, as defined by MSRB Rule G-37, the imposition by the Firm of extensive Firm-wide information barriers on certain municipal securities business communications, prohibition of, for a specified period of time, the individual's solicitation of new municipal securities business, a Firm commitment to conduct training or re-training for all Firm MFPs and new hire MFPs, including an on-going annual educational effort, a review of existing Firm procedures and the development of necessary enhancements.
February 23, 2006
This is in response to your January 13, February 3, and February 15, 2006 letters requesting an exemption pursuant to NASD Rule 9610(b) for your client, 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 a contribution of $1,000 made on or about November 21, 2005 by Name( "Contribution") in support of Candidate's campaign for the governor of State. Candidate is currently the State1 Attorney General.
You represent that the Contribution was made based on a solicitation from a personal acquaintance and was not made in response to either a direct request from Candidate or from his campaign.2 You acknowledge that Name was a municipal finance professional ("MFP") as defined by the Rule on the date of the Contribution.
You also represent that the Firm first became aware of the Contribution as a result of the Firm's due diligence procedures relating to the Rule in response to a quarterly survey of MFPs. Under the Firm's compliance program with respect to the Rule, you represent that Name had an obligation to seek advance approval prior to making any political contribution. Had Name sought approval for the Contribution, it would not have been granted under the Firm's procedures because it was in an amount in excess of $250. You represent that the Contribution, which was made by credit card, has been returned.
You represent that Name has never solicited municipal finance business (as defined in the Rule) or primarily engaged in municipal securities representative activities.
Name served as head of the Firm's Institutional Investor Sales for the Fixed Income Division from June 2000 until February 11, 2005. In that capacity, Name coordinated with approximately eight (8) sales forces, including the municipal securities institutional investor sales force, to ensure that their activities, as they relate to a private institutional investor, complemented each other and did not conflict. Name did not supervise the municipal securities global institutional investor sales force or determine compensation for any employee of the sales force. You represent that Name performed the limited function of supervising the sales communications between the head of the sales force and private investors. On January 8, 2004, you represent that even this limited function was assigned to another individual. On February 11, 2005, Name took a sabbatical from the Firm for personal reasons related to his family situation. While on sabbatical, Name had no active role with the Firm, with municipal securities business (as defined by the Rule), or with issuer officials (as defined by the Rule).3Name returned to the Firm in September 2005 as a relationship manager for a few large private institutional investors. Name made the Contribution while serving in this role, which is unrelated to municipal securities business.
You represent that Name disclosed the Contribution in response to the Firm's quarterly survey of MFPs. Upon discovery of the Contribution, the Firm attempted to implement a ban on engaging in municipal securities business (as defined in the Rule) and began a due diligence investigation to determine if the Firm had engaged in municipal securities business (as defined by the Rule) after the date of the Contribution. As a result of the Firm's due diligence, it discovered, and disclosed to NASD, that the Firm had engaged in prohibited municipal securities business after the Contribution was made ("prohibited post-Contribution business"),4 including, after the Firm's discovery of the Contribution, municipal securities business under one or more remarketing agreements that were in place prior to the date the Contribution was made. The Firm represents that the prohibited post- Contribution business was done in the normal course of the Firm's municipal securities business and was not awarded or otherwise directed to the Firm because Name made the Contribution. The Firm represents that there was no nexus between the Contribution and the Firm's performance of the prohibited post-Contribution business because: (1) in each instance, the Firm had been selected as an underwriter/agent for the prohibited post-Contribution business prior to the date of the Contribution; (2) a portion of the prohibited post-Contribution business resulted from issuer initiated5 program size increases to municipal commercial paper remarketing services agreements entered into in 19976 which resulted in these being considered under the Rule as new municipal securities business; and (3) the amount of the prohibited post-Contribution business did not represent an increase in the total municipal securities business when compared with similar time periods for the prior three years.
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.7 In reaching a determination, NASD staff considered several key factors surrounding the Contribution. First, you have represented that Name has never engaged in the solicitation of municipal securities business (as defined by the Rule) and never primarily engaged in municipal securities representative activities. Second, you have represented that the Firm had no knowledge of the Contribution prior to the date it was made, promptly discovered the Contribution through the application of its policies and procedures, and commenced a due diligence investigation to determine if the Firm had engaged in prohibited post-Contribution business. Third, you have represented that the Firm is improving its written procedures to prevent the Firm from engaging in any prohibited municipal securities business in the future in the event the Firm is subject to a ban pursuant to the Rule, and will undertake special training of all relevant departments and individuals regarding the procedures, as discussed below. Fourth, you have represented that due to the Firm's established relationship with the State as a provider of municipal securities business services and the volume of business performed by the Firm for the issuer on an ongoing basis, it does not appear that the Contribution was necessary to obtain such municipal securities business.8 Fifth, you have represented that the Firm is undertaking a special educational initiative as described in more detail below of all of the Firm's MFPs regarding the requirement to pre-clear all political contributions as well as requiring Name to attend special compliance training with the head of compliance for the Firm's North and South America Region. Sixth, although a less weighty factor, the Contribution has been returned.
Important to our consideration is your representation that the Firm maintains and implements a detailed and comprehensive program to comply with the Rule and that the Contribution and the prohibited post-Contribution business were discovered as a result of this program. Among other things, the compliance program is represented to include an established Contribution pre-clearance process, and a quarterly process for MFPs to report contributions and provide certifications as to their contributions or lack thereof. In addition, the Firm's compliance program requires that all pre-approved contributions be reported to the Firm's Compliance Department and, on a quarterly basis, to the Head of the Public Finance Department.
Additional preventive steps taken by the Firm include:
- For at least the period from November 20, 2005 to November 20, 2007, Name will be prohibited from soliciting municipal securities business (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 by the Rule) that Name has, until November 20, 2007, been segregated with respect to any issuer of which Candidate is considered to be an issuer official, and instruct each such employee that he or she may not have any discussions or communications (including e-mail or voice mail) with Name 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.
- Name 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 Name's certifications.
- The head of the Firm's Fixed Income Division and the head of compliance for the Firm's North and South America Region, no later than 60 days from the date of this letter, will lead an educational effort sufficient to communicate to all of the Firm's MFPs, including those Firm MFP's presently on extended leave, a clear understanding of the Firm's policies and procedures regarding political contributions. Attendees will certify that they have received, understand the substance of this educational effort, and also will certify that they may be subject to sanctions, including potential dismissal, in the event they fail to comply. This educational effort will also be incorporated, not less frequently than annually, into the Firm's periodic compliance training and will also be made part of compliance training for new hire MFP's. The Firm's legal or compliance department will retain a list of those MFP's or other professionals who attend this educational effort, along with a copy of the certifications.
- The Firm will review existing procedures and develop any necessary enhancements and review processes reasonably designed to prevent the Firm from engaging in any prohibited municipal securities business (as defined by the Rule) in the event the Firm is subject to a prohibition pursuant to the Rule in the future, and will undertake specific training of all applicable departments and individuals regarding these enhanced procedures and processes, no later than 60 days from the date of this letter.
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.
Malcolm P. Northam
1 In a January 30, 2006 telephone conversation among Courtney Dinsmore, Firm Vice President and Assistant General Counsel, and Firm Counsel, Firm Vice President confirmed that Name is eligible to vote for issuer officials in the State.
2 Confirmed in a January 25, 2006 telephone conversation between Courtney Dinsmore and Firm Counsel.
3 Confirmed in a February 22, 2006 telephone conversation between Malcolm Northam and Firm Counsel.
4 This letter expresses no opinion as to the overall adequacy and appropriate breadth of the Firm's procedures, and the Firm's implementation thereof and should not be construed as an assurance that the Firm will not be subject to sanctions for the conduct described in the application or in connection with the facts and circumstances related thereto.
5 Confirmed in a February 23, 2006 telephone conversation between Malcolm Northam and Firm Counsel.
6 Certain provisions in existing contracts that allow for changes in the services provided or compensation received, such as an increase the size of a program, are considered new municipal securities business. MSRB Interpretation of Prohibition on Municipal Securities Business pursuant to Rule G-37 (February 21, 1997).
7 MSRB Rule G-37 permits NASD 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.
8 You represent that during the period from 2002 to 2005, the Firm underwrote over $58.2 billion of negotiated bond issues for State issuers which placed the Firm as the number two underwriting Firm for such State issuances for that period.