Name Not Public
August 23, 2004
This is in response to your letter dated August 3, 2004, 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 of a $1,000 contribution by Name, the head of the Firm’s Corporate Finance Department, made on June 16, 2004 to the Candidate in support of Candidate’s campaign for the Governor of State. You represent that Name’s Contribution was made based on a solicitation from a business acquaintance and was not made in response to either a direct request from Candidate or from his campaign. You acknowledge that Name is a municipal finance professional (“MFP”) as defined by the Rule by virtue of his membership on the Firm’s Executive Committee.
You represent that on July 22, 2004, the Firm first became aware of the Contribution when Name disclosed it in his response to the Firm’s regularly scheduled, firm-wide, quarterly request for information from all MFPs regarding political contributions made during the second quarter of 2004. Name’s written disclosure was the first knowledge that the Firm had of the Contribution because Name has not followed the Firm’s established political contribution pre-clearance procedures. At the Firm’s request, on July 26, 2004, Name sought and obtained a refund of the Contribution.1 You represent that Name has never engaged in municipal bond business and he has never solicited municipal finance business from the State or entities or agencies connected with the State that, on a state-wide basis, issue or approve the issuance of municipal securities to fund various projects (“State agencies”).
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.2 In reaching a determination, NASD staff considered several key factors surrounding the Contribution. First, you have represented that Name is not now nor was he ever engaged in the solicitation of municipal securities business (as defined by the Rule). Second, you have represented that the Firm has a long relationship as an underwriter of the State and State agencies, and the Contribution was not necessary to obtain municipal securities business from such issuers.3 Third, the Firm acted promptly to address the circumstances of the Contribution, including making Name the subject of a written Firm censure for failing to follow Firm policy regarding pre-clearance of political contributions and for otherwise making the Contribution. Fourth, although a less weighty factor, the Contribution has been returned.
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 quarterly4 process for MFPs and non-MFP Executive Officers to report contributions and provide certifications as to their contributions or lack thereof. Moreover, we have considered that the Firm took prompt action once it became aware of the Contribution by: circulating to each MFP and non-MFP Executive Officer a political contribution compliance reminder, 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 adopted or will institute the following:
- Name will be prohibited from participating in the profits of the Firm’s municipal securities business (as defined by MSRB Rule G-37), as well as its municipal sales and trading activities for the 2004 calendar year;
- For at least the period from July 29, 2004 to July 28, 2005, Name will be prohibited from participating in any Executive Committee decisions that involve the Firm’s municipal securities business (as defined by MSRB Rule G-37);
- For at least the period from July 29, 2004 to July 28, 2006, Name will be prohibited from making any political contributions. On a quarterly basis during that period, Name will certify that he has not made any such contributions. The Firm’s compliance or legal department will retain a copy of Name’s certifications;
- The Firm’s State-based MFPs and the Firm’s municipal syndicate desk (and others directly or indirectly involved with solicitation of State municipal securities business) will be informed in writing that Name has been segregated with respect to State municipal securities business, and instructed that they may not have any discussions or communications (including e-mail or voicemail) with Name regarding such business without the prior written approval of the Firm’s compliance or legal department (“Information Restrictions”). All such employees shall certify that they have received, understand and will comply with the notice, and will acknowledge that they may be subject to sanctions, including potential dismissal, in the event they fail to comply; and
- Name will receive similar notification of the Information Restrictions and will be subject to an obligation to provide a quarterly certification of compliance. The Firm’s legal or compliance department will retain a copy of Name’s certifications.
Based on the facts and circumstances as represented in your letter, and our application of the standards for exemptive relief in the Rule, we conclude that it is appropriate to grant an exemption from the 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 determination 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, the identity of the Firm, and the identity of the MFP remain confidential. NASD grants that request. However, our determination to provide exemptive relief will be available, with identifying information redacted, on the NASD Web site with other NASD responses to requests for exemptive relief under Rule G-37. By publishing the NASD responses 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
1You have enclosed a copy of a $1,000 check from the Candidate that you represent constitutes a refund of the Contribution.
2MSRB 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 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.
3You represent that since January 2002, the Firm has managed or co-managed four State bond offerings in the aggregate amount of $2.6 billion. The Firm has also managed or co-managed 14 State conduit or agency financings and acted as Financial Advisor on two transactions equal to $430 million.
4You represent that as a result of the discovery of the Contribution, the Firm recently instituted a monthly reminder regarding political contributions, which is sent to all Firm MFPs and non-MFP Executive Officers.