Name Not Public
October 10, 2000
This is in response to your letters dated July 25, 2000, August 23, 2000, and September 22, 2000. On behalf of Firm X, you request that Firm X 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 to an issuer official within the past two years by Name, the Director of Firm X's Investment Advisory Department. In support of your request for an exemption, you make a number of representations in the referenced letters and two telephone conversations,1 including the following:
Firm X maintains its headquarters in County A and has been doing significant business with County A for many years. On March 13, 2000, Firm X hired Name to serve as Director of Firm X's Investment Advisory Department. Name has never been employed in the municipal securities business, nor has he/she been employed as a municipal finance professional. Prior to his/her employment at Firm X, Name worked for Company A. Company A is a registered investment advisor associated with Company B. Although Name has never been employed by a broker/dealer, you represent that Name has extensive experience as an investment advisor. Based on Name's past experience, you represent that Name was not familiar with MSRB Rule G-37 until Name began his/her employment at Firm X.
While employed at Company A, on February 21, 2000, Name made a political contribution of $300 to the County Executive Club (the "Contribution"). The re-election campaign of the County Executive of County, was the beneficiary of the Contribution. At the time of the Contribution, Name was eligible to vote for the County Executive. You further represent that on June 22, 2000, $50 of the Contribution was returned in response to Name's request. Enclosed with your July 25, 2000, letter are copies of the contribution check and the subsequent reimbursement check.
You state that Firm X would like to make Name a member of its Board of Directors, and it is possible that under MSRB Rule G-37(g)(iv)(E), members of Firm X's Board of Directors may be considered municipal finance professionals. You represent that Firm X seeks to appoint Name to the Board of Directors to take advantage of Name's considerable business skills. It is a customary practice of the firm to appoint its department heads to its Board of Directors, and, accordingly, the firm is not appointing Name to serve on its Board of Directors because of Name's municipal finance expertise or Name's ability to solicit municipal finance business on behalf of Firm X. Firm X would like to continue doing business with County if Name is named a member of the Board of Directors.
If an exemption is granted, you represent that Firm X will promptly establish a firewall around Name for the period ending February 21, 2002, that would include the following conditions:
- Name's compensation package will preclude Name from receiving any compensation derived from negotiated municipal securities business with County until February 21, 2002.
- Firm X will deduct from Name's share of any firm-wide or other incentive compensation any amounts attributable to such business with County until February 21, 2002.
- Name's spouse and all members of Name's immediate family will be precluded from receiving any compensation derived from revenues received by Firm X in connection with municipal securities business with County.
- Until February 21, 2002, Name will be barred from deliberations of the Board of Directors concerning municipal securities business with County, as well as deliberations regarding the business or operation of the entire Public Finance Department of the firm.
- Until February 21, 2002, Name will be precluded from any involvement in municipal finance business with County, including the solicitation of municipal finance business and arranging meetings for the purpose of soliciting municipal securities business.
- Until February 21, 2002, Name's office will be located on a floor different than that of the Public Finance Department. All files concerning business with County will be placed in secure, confidential files, to which Name will not have access, including electronic files.
- Firm X will provide written notice to all employees in the Public Finance Department of the prohibition on Name communicating with those employees regarding municipal finance business with County.
- Each employee in the Public Finance Department will be required to certify in writing that he or she has read the firewall notice, understands the prohibition, intends to comply with it, and acknowledges that he or she may be sanctioned by the firm in the form of actions up to and including dismissal for any failure to comply fully with the prohibition.
- 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 supervisor and the firm’s supervisory principal in charge of the Public Finance Department will conduct periodic reviews to ensure compliance with and the continued integrity and effectiveness of the firewall procedures and that of the Public Finance Department.
You assert that the requested exemption should be granted based upon several considerations, including that at the time of the Contribution Name had never worked in the municipal securities business, Name has not been employed as a municipal finance professional, Name was eligible to vote for the County Executive, and the contribution was only $50 more than permitted under the Rule. You maintain that a contribution of this size would be highly unlikely to influence the award of municipal securities business.
You also assert that the exemptive relief requested, subject to the foregoing procedures, would be consistent with the public interest, the protection of investors, and the purposes of MSRB Rule G-37. The requested exemption, you maintain, is consistent with existing MSRB guidance. Specifically, you cite the guidance issued in June 1998, whereby the MSRB emphasized that exemptive relief under MSRB Rule G-37(i), although not available in situations in which a municipal finance professional made a non-de minimis contribution, was potentially available where the person making the contribution had not yet become an MFP.2
For purposes of this response, we have assumed, without deciding, that Name would be considered a municipal finance professional under Rule G-37.3 Rule G-37 permits NASD Regulation to grant an exemption based on several factors, including among others, whether the exemption is consistent with the public interest, the protection of investors, and the purposes of the Rule.4 The staff has considered Firm X's request for 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 staff believes the de minimis nature of the Contribution substantially mitigates the probability that the payment will improperly influence issuer officials or function in a manner that is otherwise inconsistent with the public interest, the protection of investors, or the purposes of the Rule. Because the Contribution was made by an individual who has never been employed in the municipal securities business, we believe the possibility that the payment was intended to influence issuer officials is also significantly minimized. 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 represented or if other materials facts have not been disclosed. Although our decision is based entirely on the analysis in the preceding paragraph, we understand that Firm X will promptly establish the above-described firewall around Name. This undertaking is an express condition of the exemption.
Jeffrey S. Holik
1 Specifically, we reference the telephone discussions of August 15, 2000, and September 15, 2000, between Compliance Principal of Firm X, and Malcolm Northam, Director of Fixed Income Regulation and Sarrita Cypress, Senior Attorney, Office of Regulation Policy, NASD Regulation, Inc.
2 MSRB Manual ¶ 3681 (CCH) (Question and Answer No. 3, June 29, 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)."
3 It is not certain that the Director is an MFP. Rules governing municipal securities are promulgated and interpreted by the MSRB. Rule G-37g(iv) defines MFP to include associated persons of a firm on the "executive or management committee or similarly situated officials." The MSRB has not stated in its Rule G-37 interpretations whether and under what circumstances this definition includes a member of a firm’s board of directors. NASD staff does not have authority to interpret MSRB Rules.
4 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.