Name Not Public
July 17, 2001
This is in response to your letters dated May 14, 2001, and June 12, 2001, and telephone conversation of July, 11, 2001.1 On behalf of Firm you request that Firm be granted an exemption from the prohibition of engaging in municipal securities business contained in the Municipal Securities Rulemaking Board (“MSRB”) Rule G-37 (“Rule G-37” or “Rule”).
The request for an exemption arises due to a political contribution made to the Candidate by a managing director of the Firm on March 27, 2000. In support of your request for an exemption, you make a number of representations, including the following:
The municipal finance professional (“MFP”) in question, Name, joined the Firm in September 1994 in Department X and became a Managing Director in 1996. Name has served in a variety of positions at the Firm, including Title of Department Y and co-head of Department Z Debt Business. He had never been a member of the Firm’s Municipal Department or otherwise been involved in municipal business before November 22, 2000.
In March 2000, Name and his/her spouse were solicited by a neighbor to make a contribution to the Candidate's primary campaign fund (the “Campaign”). Name and his/her spouse wrote separate checks for $1,000, which checks were drawn from a joint bank account and dated March 27, 2000 (the “Contribution”). You represent that Name complied with the Firm’s Policies and Procedures Governing Political Contributions. As Name was not at that time an MFP, nor was Name in any way involved or expected to become involved in the Firm’s municipal securities business, the proposed contribution was approved by the Firm.
In July 2000, Name was promoted to the Chief of Staff for Division ZZ, which position Name continues to hold today. You state that Name reports to two co-heads of the Division. His/her duties include serving as Chairman of the Firm Committee, which oversees the Division’s use of capital for global debt underwriting and investing. At the time of Name's appointment as Chief of Staff, the responsibilities of the position did not include any supervisory authority over employees working in the Firm’s municipal securities business, or any involvement in specific municipal offerings. Consistent with these limitations, at the time of Name's promotion and immediately thereafter, Name was not expected to become involved, nor was Name involved, in soliciting municipal finance business from City issuers, nor had Name ever met with City officials in any business capacity.
On November 22, 2000, structural changes within the Division ZZ resulted in the redistribution of certain general supervisory responsibilities among the senior management of the Division. At that time, Name assumed general supervisory oversight of the Municipal Department and, thus, became an MFP.
In support of your request for an exemption, you have represented that the scope of Name's responsibilities with respect to the municipal securities business is strictly limited to supervision, including being posted from time to time on the progress of municipal underwriting projects. You represent that Name has not been personally involved in soliciting underwriting business from municipal issuers, nor has Name participated as part of any municipal underwriting project team. In particular, you state that Name has had no involvement in soliciting business from City issuers or in working on underwritings for projects for such issuers. You state, moreover, that Name has never met with a single City official in any business capacity.
You state that the Firm serves as one of three senior managers for the City’s General Obligation bond program, which position the firm has held since 1996. The Firm also serves as co-manager of the City’s other major bond programs, including the XXX Authority, the XYZ Authority and the XXX Corporation. Since 1980, the City has sold $76.3 billion of debt in negotiated sales. The Firm has also served as one of the senior managers for the City’s Issue since its inception in the early 1970s.
As you represent, the Firm recently recognized the implications of the Contribution during the course of periodically updating its current list of MFPs. Immediate steps were taken at that time to recoup the Contribution, and the Contribution has now been fully refunded. To avoid a recurrence of the current situation in the future, the Firm is taking steps to identify and designate as “Restricted Persons” senior managers who currently have no role in the Firm’s municipal securities business but may potentially be promoted in the coming years to positions that may carry some form of general supervisory responsibility over that business.
In support of your request for an exemption, you represent that the Firm has implemented firewall procedures to segregate Name from the Firm’s Municipal Department Dealings with City Issuers. You state that an initial firewall was instituted on May 3, 2001, and the conditions of that firewall were amended and further clarified in procedures instituted on June 8, 2001. You represent that the Firm’s firewall procedures, as amended, include the following conditions:
- Until March 27, 2002, Name is prohibited from any involvement and must be segregated from all matters that pertain in any respect to offerings or potential offerings of municipal bonds by or advisory business with City-Related Issuers. No request for supervisory input or consultation on such matters may be directed to Name.
- Name's compensation package will preclude him/her from receiving any compensation derived from negotiated municipal securities business with the City for the period from November 22, 2000, through March 27, 2002.
- Name will not receive indirect compensation such as shares of any firm-wide or other incentive compensation amounts attributable to such business with the City for the period from November 22, 2000, through March 27, 2002.
- Name's spouse and all members of his/her immediate family will be precluded from receiving any compensation derived from revenues received by Firm in connection with municipal securities business with the City.
- Until March 27, 2002, Name's office will be located on a floor different than the Municipal 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 related to 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 Department’s investment banking or Municipal Syndicate Desk.
- The Municipal Department’s New York-based investment banking professionals and Municipal Syndicate Desk will be informed in writing that they may not have any discussions or communications (including e-mail or voice mail) with Name regarding City-Related Issuers without prior approval of the legal department.
- Firm will provide written notice to all City-based municipal investment banking professionals and the Municipal Syndicate Desk shall be advised in writing that Name has been segregated with respect to City-Related Issuers. All such employees shall certify that they have received notice of these policies and procedures, understand and will comply with the policies and procedures, and acknowledge that that they may be subject to sanctions, including potential dismissal, in the event they fail to comply.
- Name will receive similar notice of the firewall conditions and will be subject to the same obligation to provide written certification of his/her compliance.
- Name's supervisors, as well as Division ZZ Compliance Department, shall undertake periodic inquiry to determine that the firewall procedures are being followed.
Rule G-37 permits NASD Regulation to grant an exemption based on several factors, including among other things, a determination that the exemption is consistent with the public interest and the protection of investors.2 The staff has considered Firm's request for an exemption based on the facts and arguments set forth in your letter. We consent to an exemption of the two-year prohibition from municipal securities business as defined by the Rule.
The Firm’s exemption request was considered in light of the interpretive guidance issued in June 1998, whereby the MSRB emphasized that exemptive relief under MSRB Rule G-37(i) was potentially available where the person making the contribution had not yet become an MFP when the contribution was made.3
In this instance, the Contribution was made by an individual who, as of the time of the Contribution, had never been an MFP nor was Name involved in the Firm’s municipal securities business. We believe the possibility that the payment was intended to influence issuer officials is significantly minimized. To the extent that any potential investor protection concerns exist, the staff believes these concerns will be appropriately addressed by the Firm’s existing firewall procedures for Name. Accordingly, we believe that granting the exemption is consistent with the public interest, the protection of investors, and the purposes of the Rule.
Please be advised that this exemption is based strictly on our understanding of the material facts as you have represented them, and that our decision in this matter could be different if the facts are not as represented or if other material facts have not been disclosed. The Firm is required to continually comply with the firewall provisions set forth in its exemption request until March 27, 2002. 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) 728-8070.
Emily P. Gordy
1 Telephone conversation held by Name #2 with Malcolm Northam, Director of Fixed Income Regulation and Sarrita Cypress, Senior Attorney, NASD Regulation Inc.
2 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.
3See MSRB Notice of Interpretation, Q&A No. 3, Securities Exchange Act Release No. 40167, 63 FR 37434 (July 10, 1998). The MSRB stated that, “where a non-de minimis contribution was made by a person who later becomes a municipal finance professional (whether by reason of a merger, as a newly hired associated person, as an existing associated person becoming involved in municipal securities activities, or otherwise), neither the NASD nor any appropriate regulatory agency is constrained from granting a conditional or unconditional exemption if, in its judgment, such exemption is consistent with rule G-37(i).”