Name Not Public
June 27, 2002
This is in response to your May 21, 2002 and June 26, 2002 letters requesting an exemption pursuant to NASD Rule 9610 (b) for 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 $5,000 contribution ("Contribution") by Company, an equity specialist firm that Firm Parent has purchased.
The April 26, 2002 Contribution was made by Company to the re-election campaign of Candidate. You represent that the Contribution was made to express Company's support for the Candidate and his efforts on behalf of the business community following the September 11, 2001 attacks on the World Trade Center. The Firm became aware of the Contribution as part of its pre-merger review of Company, and prior to signing an acquisition agreement. Immediately after the Firm became aware of the Contribution, Company requested and received the return of the Contribution.
You represent that Company is a registered broker-dealer, is a member of the New York Stock Exchange ("NYSE"), acts solely as a specialist firm on the NYSE, and has no municipal finance operations. Additionally, you represent that on June 26, 2002, Company ceased to exist as a result of it’s acquisition by Firm Y, an affiliate of the Firm that functions as part of the Firm’s equities division. None of Company's principals1 will have any management or executive authority, nor will they be part of any management or executive committee having authority, over the municipal securities business of the Firm.2 You represent that neither Firm Y nor its direct parent company, Firm Y Parent, has any municipal finance business. Accordingly, you argue that the Contribution should not be construed as being made to influence the award of municipal securities business since Company did not engage in such business, and its employees will have no involvement in such business with the Firm.
Finally, you represent that Company has not been merged into, and is not a subsidiary of the Firm. Instead, Company has been acquired by the Firm’s Parent and merged into Firm Y. The result is that Company's business operations, although merged into Firm Y and thus part of the Firms’ equities division, will continue to be limited to acting as an equity specialist as part of Firm Y’s existing business operations, and will be subject to the Firm’s information barrier procedures pursuant to NYSE Rule 98. You represent that information flow between the acquired Company business operations and other areas of the Firm, including the Firm’s municipal finance business, is strictly controlled. In addition to these controls, you have agreed3 that the Firm will institute the following procedures to further ensure the segregation of Company's principals from the Firm’s municipal securities business with the State or any issuer that is subject to the appointment authority of the Candidate:
- The Firm’s State-based municipal finance professionals and the Firm’s municipal syndicate desk (and others involved directly or indirectly with the solicitation of State) will be informed in writing that they may not have any discussion or communications (including e-mail or voice mail) with Company's principals regarding State business without prior approval of the Firm’s legal department;
- The Firm will provide written notice to all State-based municipal finance professionals and the municipal syndicate desk (and others involved directly or indirectly with the solicitation of State Business) that Company’s principals have been segregated with respect to State business. All such employees shall certify that they have received notice of this, understand and will comply with the notice, and acknowledge that they may be subject to sanctions, including potential dismissal, in the event they fail to comply;
- Company’s principals will receive similar notice of the information restrictions and will be subject to the same obligation to provide written certification of compliance; and
- Designated supervisors for Company’s principals and acquired business operations will undertake periodic inquiry to determine that these procedures are being followed.
NASD has considered the Firm’s request for exemptive relief in consideration of the standards applicable to the MSRB Rule.4 A paramount issue in rendering our determination is whether an exemption is consistent with the public interest and the protection of investors.5 In reaching a determination, NASD staff considered several key factors surrounding the Contribution, including that: (1) the Contribution was made by Company prior to signing an acquisition agreement with the Firm Parent;6 (2) at the time of the contribution Company had no involvement in soliciting new, or participating in existing, municipal securities business; (3) Company has been acquired by the Firm Parent and merged into Firm Y, an existing subsidiary of the Firm Parent that reports to and is controlled by the equities business unit of the Firm; (4) Firm Y securities information flow is controlled by NYSE approved information barriers designed to prevent the use of confidential information and conflicts of interest, minimizing the potential for quid pro quo resulting from the Contribution; (5) the Firm has put in place additional processes to ensure the segregation of the acquired Company business operations and its principals from State Business; and (6) although a less weighty factor, the Contribution was returned.
Based on the facts and circumstances as represented in your letters, and our application of the Rule’s 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 you have represented them. Our decision 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, and the identity of the firm, remain confidential. NASD grants that request. However, this exemption decision will be available, with identifying information redacted, on NASD’s Web site with other NASD decisions responding to the Rule exemptive requests. By publishing the decisions 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.
Sincerely,Malcolm P. Northam
1Company principals means the persons who were principals immediately prior to the merger.
2 Confirmed by June 7, 2002 and June 18, 2002 telephone calls between Name, Name, and Malcolm Northam.
3 Confirmed by June 7, 2002 and June 18, 2002 telephone calls between Name, Name, and Malcolm Northam.
4 Your letter requests an exemption, or in the alternative an interpretation that the prohibitions of Rule G-37 do not apply to the facts as you describe them. NASD does not have the authority to interpret MSRB rules and this letter represents a decision on the firm’s request for an exemption only.
5 MSRB Rule G-37 (i) permits 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 of the contributions(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 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.
6 See MSRB Notice of Interpretation, Q&A No. 1, June 29, 1998. The MSRB stated that, "rule G-37 was not intended to prevent mergers in the municipal securities industry or, once a merger is consummated, to seriously hinder the surviving dealer’s municipal securities business if the merger is not an attempt to circumvent the letter or spirit of rule G-37. Thus, the Board believes that it would be appropriate for the NASD or the appropriate regulatory agency (i.e. federal bank regulatory authorities) to grant conditional or unconditional exemptions from bans on municipal securities business arising from such mergers if the NASD or the appropriate regulatory agency determines that, pursuant to rule G-37(i), the exemption is consistent with the public interest, the protection of investors and the purposes of the rule, as well as any other factors set forth in the rule or any other factors deemed relevant by the NASD or the appropriate regulatory agency."