May 1, 2002
This is in response to your letter dated April 24, 2002, requesting an exemption pursuant to NASD Rule 9610(b) for your client, Firm, from the prohibition of engaging in municipal securities business as defined by Municipal Securities Rulemaking Board (“MSRB”) Rule G-37 (“Rule”). You have requested this exemption because of a $500 contribution (“Contribution”) made on February 2, 2002 by Name, who is currently a Title of Firm. You acknowledge that, by virtue of Name's former position as a member of the Board of Directors of Firm X, he was considered to be a Municipal Finance Professional (“MFP”) at the time of the Contribution. You indicate that Firm X is the predecessor to the Firm.
Name made the Contribution to the political campaign of Candidate, a member of the City Council (“Recipient”). The Firm became aware of the Contribution when Name disclosed it to the Firm as part of its quarterly survey of those on its MFP list. Once becoming aware of the Contribution, the firm instructed Name to obtain a refund and refrained from engaging in any municipal securities business or acting upon any contractual obligation to engage in municipal securities business with any City issuer. The Contribution was refunded on April 17, 2002.
You represent that Name made the Contribution to the campaign of the Recipient prior to her election in response to a solicitation from friends who are the principals in a private banking and commercial lending company that engages in business with the parent company of the Firm. You represent that these individuals and their company are not involved with the issuance or awarding of municipal securities business. Further, you represent that Name did not know the political office for which the Recipient was running. Instead, Name made the Contribution because of his long-standing relationship with the company’s principals and his belief that the Contribution had been pre-cleared by his assistant.
You represent that Name was designated as an MFP because he was a member of the Board of Directors of Firm X. On May 1, 2001, as part of the corporate merger between Company A and Company B, Name resigned as a member of the Board of Firm X and was appointed Title of the newly created bank holding company, Company C. As part of the merger, the broker-dealer business of Firm Y , including its municipal securities activities, was incorporated into Firm X, which was renamed as the Firm. Thus, Name made the Contribution nine months after he ceased to hold a position or exercise responsibilities that causes a person to be designated as an MFP. However, Name was an MFP at the time he made the Contribution by virtue of Rule G-37 (g)(iv), which provides that a person designated an MFP “shall retain the designation for two years after the last activity or position which gave rise to the designation.”
You represent that when Name served as a member of the Board of Directors of Firm X, he did not have any involvement in the municipal securities business activities of the broker-dealer. You represent that Name was not engaged in activities or holding a position at the time the Contribution was made, that would trigger an MFP designation. You also represent that since February 2002 and currently, Name has not been and is not involved in the municipal finance business. Accordingly, you argue that he did not have any motive or reason to attempt to obtain municipal securities business by making the Contribution.
Finally, you represent that the Firm instructed Name that he would retain his status as an MFP for the two-year “overhang” period and that during that period he would remain subject to the Firm’s MFP policies, including the policy that requires him to pre-clear all political contributions. Apparently, however, Name believed that his assistant, who prepared the check for the Contribution, had pre-cleared the Contribution. The assistant who usually prepared Name's Contribution checks was not in, and as a result, another assistant performed that function. The Contribution was not pre-cleared, in spite of standing instructions to do so.
Based on Rule G-37, NASD Regulation has considered your client’s request for exemptive relief in consideration of 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.1 In reaching a determination, NASD Regulation staff considered several key factors surrounding the Contribution, including: (1) the Contribution was made nine months after Name last held a position which would have resulted in his designation as an MFP; (2) since becoming a Title of Company C on May 1, 2001 to the present, Name continues to be designated an MFP only because of the Rule’s two-year “look back” provision; (3) at the time Name was a member of the Firm X Board and became an MFP as a result of holding this position, Name had no personal day-to-day involvement in Firm X's municipal securities activities, and, since resigning from the Firm X Board, Name has had no involvement in the Firm’s solicitation or execution of municipal securities business as defined by the Rule; and (4) although less weighty factors, the Contribution was an accommodation to a long-standing relationship with the business client of the Firm’s parent company, was returned, and was small.
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, a quarterly process for internal reporting of contributions, an MFP contribution recordkeeping requirement, and annual MFP certification of compliance. Moreover, we have considered that the Firm took prompt action once it became aware of the Contribution by: contacting each MFP to confirm contribution disclosures and policies; providing an e-mail reminder to each MFP about their contribution pre-clearance responsibilities; calling or e-mailing each MFP subject to the Rule’s two-year “look back” provisions to remind them of their continuing MFP responsibilities; and refraining from engaging in new municipal securities business until the Association has determined if exemptive relief is appropriate. Additionally, until February 2, 2004, the Firm will prohibit Name from: soliciting municipal securities business; selling municipal securities; occupying a position within the Firm where he would be within the chain of supervision above an MFP; and becoming a member of the Firm’s Executive Committee. Name will be required to: personally pre-clear his political contributions or obtain a written certification from his subordinates that a contribution has been pre-cleared; sign a compliance memorandum taking responsibility for violating the Firm’s policy in connection with the Contribution and acknowledging the jeopardy of the Firm as a result of the violation; and certify that he will take specified steps to ensure compliance with the policy in the future.
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.
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 Regulation Web site with other NASD decisions responding to the Rule exemptive requests. By publishing the decisions in redacted form, the NASD is able to provide confidentiality while informing and educating members, issuers, and investor communities of the factors that the 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 MSRB 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 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.