Name Not Public
January 12, 2000
This is in response to your letter dated November 8, 1999 and subsequent telephone conversations of December 1, 1999 and December 9, 1999 requesting an exemption for Firm from the prohibition of engaging in municipal securities business contained in Municipal Securities Rulemaking Board ("MSRB") Rule G-37 ("Rule").
You represent that the exemption request arises because the Chief Executive Officer ("CEO"), who is a municipal finance professional ("MFP") within the meaning of the Rule, donated $200.00 on October 13, 1998 to support the reelection campaign of Candidate (the "Contribution"). Because the CEO is not entitled to vote in State, Firm has been subject to a number of business restrictions in the State since the date of the Contribution.
In the telephone conversation of December 1, 1999, you confirmed that the CEO failed to follow Firm's procedures that require the pre-clearance of political contributions. You characterize the Contribution as "inadvertent" and represent that it was given based on the mistaken belief that the donation would be used to support the beneficiary’s presidential election campaign despite the fact that the payment was directed to the candidate’s gubernatorial committee. Upon realizing that the Contribution was inadvertently given to a gubernatorial committee and not to a presidential committee, you state that the CEO obtained a full refund of the Contribution. You also state that, upon discovery of the Contribution, Firm promptly retained local counsel to determine the full extent of any business restriction that would be applicable as a result of the Contribution. In addition, all managers in Firm's Public Finance Department were promptly notified of the business restriction in order to prevent Firm from inadvertently seeking to obtain municipal securities business from a restricted entity.
There are several factors which we consider when determining whether to grant an exemption.1 One of these factors is the development of procedures reasonably designed to ensure compliance with the Rule. You represent that Firm had established comprehensive and detailed procedures which included the requirement to pre-clear political contributions. Indeed, the firm’s procedures were attached to your exemption request as "Attachment No. 2," and they require that "all public finance employees" of the firm obtain prior approval of political contributions. The CEO did not follow the firm’s established procedures. This lapse by a senior official is significant and leads us to conclude that the request for an exemption should be denied.
Our conclusion is not affected by the fact that the CEO obtained a refund of the Contribution. On balance, we do not believe that the return of the Contribution outweighs the overriding regulatory interest in having a municipal finance professional prudently adhere to procedures established by his or her firm to pre-clear political contributions and thereby ensure compliance with MSRB Rule G-37.
Further, although you state that Firm has been subject to the restrictions for over one year, under the MSRB rules and interpretations, the length of time that the firm has been restricted from municipal securities business as a result of its non-compliance with the requirements of MSRB Rule G-37 is not one of the enumerated factors to be considered in determining whether to grant exemptions from the Rule. On the contrary, the two year prohibition of the Rule serves fundamental investor protection and market integrity purposes by attempting to ameliorate actual and perceived conflicts of interest that may arise when MFPs make political contributions to persons in the position to direct the MFPs municipal finance business.
Please be advised that the firm has 15 days in which to appeal this determination to NASD Regulation’s National Adjudicatory Council. If you do not want the appeal decision to be publicly available in whole or in part, please include in your appeal a detailed statement, including supporting facts, showing good cause for treating the decision as confidential. If you wish to do so, you should send the written appeal request to:
NASD Regulation, Inc.
1735 K Street, NW
Washington, DC 20006-1500
Jeffrey S. Holik
1 Rule G-37(i) permits the NASD to grant an exemption based on consideration of several factors as follows: (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.