Name Not Public
Exemptive relief is granted based on: the representation that at the time of the contribution the individual had no connection to the firm’s municipal securities business, and it was not contemplated that, at the time of the contribution, he would be promoted and, thus, become a municipal finance professional (as defined); the firm has significant and long standing business relationships with the government entity of which the contribution recipient was an issuer official; the firm has established additional compliance processes about political contributions; the individual will not be involved in any way in municipal securities business with the state or any other governmental issuer business for which the contribution recipient is an issuer official.
This is in response to your April 16, 2010, and May 18, 2010, letters requesting an exemption under Rule G-37(i) of the Municipal Securities Rulemaking Board (“MSRB”) and FINRA Rule 9610 from the prohibition from engaging in municipal securities business in MSRB Rule G-37(b) for your client, Firm. You request this exemption because an employee of Firm, Individual, made a $1,000 contribution (“Contribution”) on September 30, 2009, to Name for Governor of State.
In support of your request that Firm be granted an exemption you made the following representations:
On February 1, 2010, as part of a reorganization of management at Firm, Individual was given the responsibility of supervising the Firm Muni Trading Desk. In this position, Individual supervises as a Series 53 municipal securities principal associated persons engaged in municipal securities business. As a result of this promotion, Individual became a municipal finance professional (“MFP”).
Prior to his promotion, Individual was the Head of Firm’s Hybrid Capital Trading Desk, a position he continues to hold. Individual did not engage in municipal securities business, including the supervision of any municipal securities business, and did not have any functional role or any involvement in Firm’s municipal securities business activities. Individual was not involved in marketing municipal securities, nor did he have supervisory authority over anyone who was involved in marketing municipal securities. Other than his position noted above, Individual did not have any additional positions, authority or responsibilities at Firm or perform any other functions. Individual did not sit on any governing committee or board of Firm, its parent company, or any affiliate, nor did he have any authority within the broker-dealer, such as the power to hire or fire throughout Firm or to set the Firm’s compensation pool, that would permit him to control or affect the municipal securities business of the broker-dealer. Thus, you represent, Individual was not an MFP prior to his promotion on February 1, 2010.
Individual’s Contribution to Name was made solely for personal reasons and was in no way related to municipal securities business. At the time of the Contribution, Individual had no connection to Firm’s municipal securities business, nor was it contemplated that Individual would be promoted to his current position and become an MFP. Prior to making the Contribution, Individual submitted the Contribution to Firms’ compliance department for pre-clearance and received approval.
Firm subjected Individual to its Rule G-37 due diligence procedures under which Firm checked his past political contributions due to the six month look-back provision in Rule G-37(b)(iii). Ordinarily, an employee in Firm’s compliance group records contributions into a database for tracking. However, due to a clerical error, the Contribution was not entered into Firm’s database. Because of this clerical error, the pre-promotion review of the database did not disclose Individual’s Contribution, and he was approved for the promotion. If firm had been aware of the Contribution, it could have delayed Individual’s promotion two months and avoided being subject to the two year ban on business under the Rule. Firm subsequently found the Contribution while searching for contributions by Firm MFPs in publicly available campaign finance disclosure records. This search was done as an informal part of Firm’s compliance program to locate the contributions of any Individual who listed Firm as his or her employer, and not because of any considerations specific to Individual.
Firm relied heavily on its internal database for compliance with Rule G-37. Yet, Firm’s supervisory procedures did not require Individual, or a supervisor or subordinate of Individual , to conFirm that the Contribution had been entered into the Firm database at any time after notifying Firm’s compliance group of the Contribution. In addition, the procedures in place for compliance with Rule G-37 did not require any person within compliance or audit to review/audit to determine that all contributions sent to Compliance had been properly entered into the Compliance database. In addition, the procedures did not require Individual to review and certify the completeness and accuracy of the information in the database and provide any information that was missing before the employment decision - the promotion - was made.
Firm represents that it is establishing additional compliance procedures to ensure that this situation does not occur again. On its own initiative, Firm has made the review of publicly available campaign finance disclosure records for contributions by Firm MFPs a formal part of its compliance program and will conduct these searches of public databases on a regular, periodic basis. In addition, prior to hiring or promoting an Individual into a position covered by Rule G-37, Firm will search these databases for any contributions made by that Individual as well as make the Individual certify that he or she has not made any such contributions.
Additionally, to ensure compliance with its obligations under MSRB Rule G-27(f), Firm will make the following changes to its supervisory control system: (1) Firm will have the senior compliance member who determines whether a preclearance request can be approved check to ensure that all contributions of which the compliance department is notified are entered into its database; and (2) prior to hiring an MFP or promoting a person to a position that will convert him or her to an MFP, Firm will also require that the candidates for such positions review the contribution information on file in Firm’s database and certify in writing as to their prior contributions during the relevant period.
You further represent that prior to the Contribution; Firm had a longstanding and significant presence in the State. Firm has underwritten over $7.5 billion of bonds issued by State agencies since 2006. These business relationships were pursued and entered into without knowledge that Individual would make the Contribution or become an MFP. Any future State business will be separate from, and unrelated to, Individual’s Contribution.
Firm has not engaged in any municipal securities business with a Governmental Issuer for whom Name is an Issuer Official since Individual’s promotion, and will refrain from entering into such business until an exemption to the Rule G-37 prohibition on business is granted. Individual will not be allowed to have any involvement in State municipal securities business for at least two years from the date of the Contribution. Individual has requested and received a refund of the Contribution.1
FINRA has considered your request for exemptive relief pursuant to the applicable standards.2 A paramount issue in rendering our determination is whether an exemption is consistent with the public interest, the protection of investors, and the purposes of the Rule. In reaching a determination, FINRA staff considered your representations in light of several key factors. First, you represent that Firm had, and continues to have, a detailed and comprehensive program to comply with Rule G-37, and that Firm is establishing additional compliance procedures to prevent this situation from re-occurring. Second, you represent that at the time of the Contribution, Individual was not an MFP and it was not contemplated that Individual would become an MFP. Third, you represent that prior to the Contribution, Firm already had a significant presence in the State and that its municipal securities business with State was entered into without knowledge of the Contribution or that Firm might make Individual an MFP in the future. Fourth, you represent that Individual has requested and received a refund of the Contribution. Fifth, you represent that Individual’s Contribution was motivated by personal, political reasons, and was not in any way motivated by municipal securities business. Sixth, you represent that, if granted an exemption, firm would ensure that Individual will not be involved in any way in municipal securities business with State or any other governmental issuer as specified in Section 3(a)(29)3 of the Securities Exchange Act of 19344 (“Governmental Issuer”) for which name is an “official of such issuer” as defined in MSRB Rule G-37(g)(vi) (“Issuer Official”) for at least two years from the date of the Contribution.
To ensure that Individual will not be involved in the municipal securities business described above, you represent that firm will institute the following preventive steps:
- At least until September 30, 2011, Individual will not be allowed to have any involvement with municipal securities business regarding the State and any other Governmental Issuer for which name is an Issuer Official.
- Within 15 days of the date of this letter, the Firm will inform its MFPs and municipal syndicate desk in writing (and others directly or indirectly involved with solicitation of municipal securities business) (as defined in the Rule) that Individual has, until September 30, 2011, been segregated with respect to municipal securities business with the State and any other Governmental Issuer for which Name is 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.
- The Firm will make the above stated changes to its G-37 compliance procedures within 30 days of the date of this letter and will carry out the procedures before any future promotion or hiring decision is made. The Firm will also change its supervisory system to require that within five business days of a contribution or the approval of a contribution, compliance will provide conFirmation to a contributor as to whether it received notice of the contribution and entered it into the database.
Based on the facts and circumstances as represented in your letter and our application of the standards for exemptive relief in the Rule, FINRA concludes 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 Name For Governor, Inc.” refunded the Contribution on May 4, 2010. See e-mail communication from Firm counsel to Malcolm Northam, FINRA, dated May 5, 2010.
2 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.
3 15 U.S.C. 78c3(a)(29).
4 15 U.S.C. 78a et seq.