Name Not Public
August 15, 2002
This is in response to your June 3, 2002 letter requesting an exemption pursuant to NASD Rule 9610(b) for Firm A 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 $500 contribution made on February 11, 2002 ("Contribution") by Name, the Senior Executive Officer of Firm B, a wholly owned subsidiary of Parent and an affiliate of Firm A.1 You have designated Name as a municipal finance professional because of his role as a supervisor of municipal finance professionals as defined in Rule G-37 (g)(iv), and because of the common-control relationship between both firms in question.2 You represent that Name is not personally involved in soliciting municipal securities business from municipal issuers. In particular, you state that Name has had no involvement in soliciting business from the issuer in this matter.3
The Contribution was made to the political campaign of Candidate, a long-time friend of Name and a first-time candidate in the September, 2002 primary election for the Issuer. You represent that Candidate was not, at the time the contribution was made, an elected official or an issuer official, nor was he involved in the issuance or awarding of municipal securities business.4Firm A became aware of the Contribution when, as part of the routine quarterly survey of Firm A's executive officers and municipal finance professionals, Name reported the Contribution. Once the Contribution was identified, Firm A directed Name to seek its return. The Contribution was returned on March 29, 2002. Firm A represents that it has not engaged in any municipal securities business with the Issuer since the date of the Contribution, and has instituted a self-ban on solicitation of business from the Issuer until an exemption from the prohibition on business contained in the Rule has been obtained. Your letter requests relief from Firm A’s self-ban on municipal securities business with the Issuer.
NASD has considered Firm A's request for exemptive relief in consideration of the standards applicable to the MSRB Rule. 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.
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: (1) Firm A took prompt action once it became aware of the Contribution by instituting a self-ban on any Issuer new business solicitation; (2) Firm A sent an electronic reminder to all Firm A and Firm A affiliate employees about Firm A's requirements for pre-clearance of all political contributions; (3) at the time of the Contribution, Name had no personal involvement in soliciting new, or participating in existing, municipal securities business; (4) Firm A has now offered to put in place processes to help ensure the segregation of Issuer information flow, minimizing the potential for quid pro quo resulting from the contribution; and (5) although a less weighty factor, the contribution was returned.
Important to our decision is your representation that Firm A has developed and implemented detailed procedures to ensure full compliance with the Rule, including a procedure to make quarterly political contribution inquiries. By following these procedures, Firm A successfully identified Name's Contribution and has been able to avoid a violation of the Rule. We have considered that Firm A took prompt action once it became aware of the Contribution by: refraining from engaging in new municipal securities business with the Issuer; and directing Name to seek a return of the Contribution. Firm A also represents that if and when an exemption is granted, Name will have no involvement, for a two-year period, with municipal securities business of the Issuer. In addition, Firm A has agreed6 that it will institute the following procedures to further ensure the segregation of the Name from municipal securities business with the Issuer:
- Until February 11, 2004, Name is prohibited from any involvement and must be segregated from all matters that pertain in any respect to offerings or potential offerings of municipal bonds or financial advisory business with the Issuer. No request for supervisory input or consultation on such matters may be directed to him.
- Name's compensation package will preclude him from receiving any compensation derived from negotiated municipal securities business with the Issuer for the period February 11, 2002 to February 10, 2004.
- Both Firm A's and Firm A's affiliate’s State - based public finance bankers, municipal trading and sales professionals, and municipal finance professionals will be informed in writing that Name has been segregated with respect to the Issuer, and instructed that they may not have any discussions or communications (including e-mail or voicemail) with Name regarding the Issuer. All such employees shall certify that they have received notice of this information barrier, understand and will comply with the information barrier, and acknowledge that they may be subject to sanctions, including potential dismissal, in the event they fail to comply.
- Name will receive similar notice of the information barrier conditions and will be subject to the same obligation to provide written certification of his compliance.
- Firm A's compliance department will undertake periodic inquiry to determine that the information barrier procedures have been followed.
Finally, Name will sign a Firm A internal compliance memorandum taking responsibility for violating Firm A's policy in connection with the Contribution and acknowledging the jeopardy of Firm A as a result of the violation; and certify his understanding of Firm A's political contribution pre-clearance procedures.
NASD staff’s decision to grant 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 Firm A's application for an exemption, the identity of Firm A, and the identity of the MFP 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.
Malcolm P. Northam
1 Confirmed by a July 23, 2002 telephone conversation between Individual and Malcolm Northam.
2 A municipal finance professional is defined by the Rule to include "any associated person who solicits municipal securities business." Associated persons of Firm B are also associated persons of Firm A as defined in Exchange Act Section 3(a)(18) because both firms are under common control, and they solicit municipal securities business on behalf of Firm A. See Fifth Third Securities, Inc. Exchange Act Release No. 46088 (June 18, 2002).
3 Confirmed by a July 19, 2002 telephone conversation between Individual and Malcolm Northam.
4 Confirmed by a July 23, 2002 telephone conversation between Individual and Malcolm Northam.
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 Confirmed by a July 19, 2002 telephone conversation between Individual and Malcolm Northam.