Name Not Public
November 11, 2003
This is in response to your letter dated August 6, 2003, 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 Name, a municipal finance professional ("MFP") of the Firm and an officer of the Firm’s affiliate, Bank, made the following three political contributions: (1) $131.21 in March 2003; (2) $50.00 on February 8, 2003; and (3) $250.00 on June 8, 2002 ("Contributions").1 You acknowledge that Name was designated as a Firm MFP on December 23, 2002, because Name's responsibilities include offering banking products and services to commercial Bank customers, including certain public entities, and in the course of performing these responsibilities, he solicits certain public entities to bring their municipal securities business to the Firm.
You represent that, as part of the Firm’s process for designating Name as an MFP, Name was required, among other things, to: (a) read the Firm’s Political Contributions Policy and Procedures ("Policy"); (b) sign a statement agreeing to comply fully with the Policy, including pre-clearing contribution requests and providing contribution information to the Firm’s Public Finance Compliance team quarterly; and (c) disclose all political contributions made during the previous two years. You represent that in Name’s disclosure to the Firm of political contributions for the prior two years, he did not disclose any contributions to any issuer officials.
You represent that, on or about April 29, 2003, the Firm first became aware of the March 2003 Contribution of $131.212 and the June 8, 2002 Contribution of $250.00, when Name disclosed them in his response to the Firm’s regularly scheduled, firm-wide, quarterly request for information from all MFPs regarding political contributions made in the first quarter of 2003. At the Firm’s request, Name then promptly sought and obtained a refund of $131.21.3 You also represent that on or about May 23, 2003, Name advised the Firm of the February 8, 2003 Contribution of $50.00 to Candidate B. This was the first knowledge that the Firm had of the Contribution because Name had not followed the Firm’s procedures to pre-clear the Contribution and also did not disclose this Contribution when he responded to the Firm’s first quarter 2003 request for political contribution information. Again, at the Firm’s request, Name sought a refund of the $50.00 Contribution.4 You represent that Name did not solicit Firm municipal securities business from Candidate A, Candidate B, or any other issuer of which these individuals might be considered to be issuer officials or issuer official candidates ("Issuers").
Finally, the Firm disclosed to NASD on August 22, 2003, that Name also failed to report a May 2002 political contribution of $50.00 to a candidate for whom Name was entitled to vote. Although this contribution to a candidate for the governor of State does not trigger the prohibitions in Rule G-37(b), Name’s failure to report the contribution is an additional violation of the Firm’s Policy.
Based on Rule G-37, NASD has considered your client’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.5 In reaching a determination, NASD staff considered several key factors surrounding the Contributions. First, the Contributions were small in amount. Second, in the instance of Candidate A, the contributions were in support of Name’s stepmother’s candidacy. Further, as you also represent, Name’s Contribution to Candidate B was in support of a personal relationship. Third, as you have represented, the Firm has a long relationship as an underwriter of State municipal issuers and the Contributions were not necessary to obtain municipal securities business in these markets.6 Fourth, upon learning of the Contributions, the Firm has ceased engaging in municipal securities business with any Issuer of which Candidate A or Candidate B were considered to be issuer officials. Additionally, the Firm withdrew from a City bond deal for which the Firm had already been selected as senior manager. Fifth, Name has been verbally counseled by his immediate municipal securities principal supervisor and the Firm’s Senior Compliance Manager, and has received a "letter of censure" from the Firm. A copy of the letter has been placed in his personnel file. Finally, although a less weighty factor, one Contribution has been returned and the Firm has demonstrated a reasonable effort to obtain a refund of another Contribution.
Important to our consideration is your representation that the Firm maintains and implements a detailed and comprehensive program to comply with the Rule. Among other things, the compliance program is represented to include an established contribution pre-clearance process, and a quarterly process for MFP "political contribution certification" and internal reporting of contributions.7 Moreover, we have considered that the Firm took prompt action once it became aware of the Contributions by: contacting each MFP to remind them of their obligation to comply with Firm policies, including the contribution pre-clearance requirement; and, informing Firm MFPs about Name’s "inactive" status and the internal prohibition on communicating with him concerning any potential or actual municipal securities business engagements or opportunities.
In addition, the Firm has agreed that it has or will institute the following:
- Until at least February 8, 2005 (although still subject to the Firm’s contribution reporting and pre-clearance requirements), Name will not be permitted to solicit any municipal securities business for the Firm;
- Name has been designated as a Firm "inactive" MFP and his compensation (salary and incentive compensation) will not be based in whole or in-part on any municipal securities business revenues from any municipal issuer, including, but not limited to, the Issuers and Name’s public entity customers;
- Quarterly, Name’s Firm supervisor (a qualified municipal securities principal) will review, in consultation with Name, Name’s Firm designated "political contributions certification" and will make specific inquiry of Name as to whether the contributions disclosure is accurate, complete, and in compliance with Firm policy. The supervising municipal securities principal will provide the Firm’s compliance department with a signed and dated statement as to Name’s response to such inquiry.
- The Firm’s State-based MFPs and the Firm’s municipal syndicate desk (and others involved directly or indirectly with solicitation of the Issuers) will be informed in writing that Name has been segregated with respect to Issuer business and instructed that they may not have any discussions or communications (including e-mail or voicemail) with Name regarding Issuer business without the prior written approval of the Firm’s compliance department. All such employees shall certify that they have received this notice, 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;
- Name will receive similar notification of the information restrictions and will be subject to the same obligation to provide certification of compliance; and
- While Name remains an MFP as defined by the Rule, the Firm’s compliance or legal department will undertake, at least quarterly: (a) an inquiry to determine that the above information barriers have been implemented and maintained; and (b) a review of publicly available campaign finance and contribution information8 for those individuals identified by the Rule as an "official of an issuer" in a State state-wide elected office, or for candidates and incumbents of the City Council. Such review will be conducted in a manner to provide the Firm a reasonable basis for reliance on Name’s disclosure of direct and indirect contributions. The Firm’s compliance department will retain this information to demonstrate the Firm’s compliance with this condition.
Based on the facts and circumstances as represented in your letter, and our application of the Rule 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, subject to the Firm’s compliance with the undertakings identified above.
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 important 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. The NASD grants that request. However, this exemption decision will be available, with identifying information redacted, on the NASD Web site with other NASD decisions responding to Rule G-37 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.
Malcolm P. Northam
1 The $131.21 Contribution made in March 2003 was "in-kind," i.e., food and a campaign luncheon for the campaign of Candidate A. The $250.00 Contribution made on June 8, 2002 was also made to Candidate A’s campaign. Candidate A is Name’s stepmother and was an unsuccessful candidate for the City Council. You represent that Candidate A, prior to her candidacy, and, subsequently, is not an issuer official and that Name was eligible to vote for her. The $50.00 Contribution made on February 8, 2003 was given to the campaign of Candidate B, an unsuccessful candidate for the City Council. Name was not eligible to vote for Candidate B. As confirmed in an August 21, 2003 telephone conversation between Firm Compliance Officer, and Malcolm Northam, Name is not now an issuer official.
2Name did not follow the Firm’s procedures to pre-clear the March 2003 in-kind Contribution.
3 We note that Name has assigned and disclosed a value of the "in-kind" contribution as $90.00, but the campaign refunded $131.21.
4 You represent that a Contribution refund is not possible because the campaign is over and the campaign bank account has been "zeroed out." You have included a letter, dated June 3, 2003, from Candidate B, in support of your representation.
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; (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, 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 and 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.
6 You represent that since 1968, the Firm or predecessor firms has participated in over $21 billion in securities issued by State issuers. Of that amount, $3.8 billion were of issuers located in the greater City, State area.
7 The Firm represents that Name had several opportunities to make accurate and timely disclosure of his political contributions but did not do so.
8 The review will include, but not be limited to, national, state or local political campaign contribution Web sites, and required state or local campaign financing or contribution information filings.