Name Not Public
January 29, 2002
This is in response to your letters dated November 16, 2001 and December 13, 2001, requesting an exemption pursuant to NASD Rule 9610(b) for Firm from the prohibition of engaging in municipal securities business as defined in Municipal Securities Rulemaking Board ("MSRB") Rule G-37 ("Rule"). Your request results from an August 15, 2000 $1,000 political contribution by Name, who, at the time of the contribution, was both Title of the Firm and a member of the Firm’s Executive Committee. You acknowledge that, by virtue of his position within the Firm, Name is considered to be a municipal finance professional ("MFP").
Name's contribution was made to the State A gubernatorial campaign of Candidate A.1 The Firm became aware of this contribution in mid-September 2000 when Name disclosed the contribution according to Firm procedures that require all MFPs to complete a quarterly contribution report. Once the Firm learned of the contribution, it notified the MSRB and NASD Regulation and withdrew from a significant number of State A transactions. The Firm represents that the contribution was reported appropriately in its quarterly Form G-37/38 filings, and that $750 of the contribution was returned to Name.
Candidate A was an incumbent U.S. Congressman from Name's home state and district, and for years Name made contributions to Candidate A’s campaigns. According to the Firm, representatives of Candidate A’s campaign told Name that the "rules had changed" and that it was now permissible to contribute up to $1,000 to the candidate’s campaign. Candidate A lost the gubernatorial election in November 2000 and currently holds no elective office.
On March 1, 2001, Name retired as Title and all other corporate officer positions, and stepped down from his position on the Executive Committee. Name remains associated with the Firm as a registered employee. The Firm represents that he is still considered an MFP; that he holds the honorary title of New Title which is not a corporate officer position; and that he has no involvement in the day-to-day securities business of the Firm, including Firm municipal securities business, and receives no compensation based on municipal finance business or the profitability of the Firm. Your exemption request is premised, in part, on the argument that neither the donor nor the donee of the contribution are in any position to participate in the municipal securities marketplace and there is no forward-looking issue relating to investor protection and the practice of "pay-to-play."
The Firm’s policy requires prior approval of contributions to any person who is a candidate for state or local office, even if that person is an incumbent federal official. The Firm represents that it has had in place policies and procedures relating to political contributions and activity since at least 1993, prior to the adoption of the Rule; that it was an original signatory to the voluntary initiative of the securities industry designed to minimize the perception or practice of "pay-to-play" in the municipal securities industry; and that, over the years preceding the contribution, the Firm regularly provided training and reminder notices to its employees concerning the Firm’s political contributions policy.
The Firm represents that, upon learning of the August 2000 contribution, the Firm notified senior management of the Firm’s Public Finance department and other appropriate senior management of the business restriction in place. At the same time, individual investment bankers not included in the above group who are primarily engaged in municipal securities business with affected issuers in the State A were advised of the restriction. The Firm took remedial action to withdraw from, or avoid engagement in, any municipal securities business from which it is prohibited under the Rule. The Firm promptly engaged reputable local counsel to identify all issuers that the Firm would be prohibited from doing business with under the prohibition, and thereafter, contacted affected major state public finance clients by letter and telephone. At that time, the Firm also notified the Firm’s entire Public Finance department of the business ban.
The Firm represents that it resigned from 20 underwriting transactions and from two additional underwriting teams that had submitted underwriting proposals (both of which ultimately were successful). In total, the Firm estimates that it has foregone not less than $3,500,000 in revenue since August 2000 as a direct result of the contribution and the ban on business, and that the financial impact of the ban has been disproportionate to the contribution that was given.2
The Firm has distributed its most recent annual compliance meeting videotapes to the Firm’s registered representatives. The videotapes include a discussion of the Firm’s political contributions policy. Contributions to federal candidates and incumbents are discussed as an area of concern. In addition, a Firm Internal Compliance Alert was distributed in September 2001 to all employees outlining the key elements of the Firm’s policy, including a specific discussion of contributions to federal candidates and incumbents.
The Firm represents that if an exemption from the prohibition on business is granted it would be willing to take additional remedial steps to document more formally Names separation from the Firm’s municipal securities activities. The Firm notes that several recent exemptions have been granted to dealers who were subject to business restrictions that arose following political contributions made prior to the time the contributors became MFPs. As a condition of the exemptions, these dealers agreed to certain so-called "firewall" provisions designed to isolate the MFP from the municipal securities business and the financial benefits obtained from such business. The Firm proposes that the following firewall provisions would be implemented promptly if an exemption were granted:3
- Name would agree to be precluded from engaging or seeking to engage in municipal securities business with State A issuers until August 15, 2002.
- Name would agree to be precluded from discussing with other employees any municipal securities business with State A issuers until August 15, 2002.
- Name would agree to be precluded from receiving any compensation, including incentive compensation or finders fees, resulting from municipal securities business engaged in by the Firm with State A issuers until August 15, 2002.
- The Firm would provide written notice to those Public Finance employees who are engaging or seeking to engage in municipal securities business with State A issuers of the Firm’s prohibition against discussing such business with Name until August 15, 2002.
- Each employee who receives such notice would be required to represent in writing that he or she has read the notice, understands the prohibition, intends to comply with it, and acknowledges that he or she may be sanctioned by the Firm up to and including dismissal for any failure to fully comply with the prohibition.
- Name will receive similar written notice and would make a similar written undertaking.
- The Firm’s Director of Public Finance will be charged with the responsibility of ensuring compliance with these firewall restrictions by Public Finance employees.
NASD Regulation staff has considered the Firm’s request for exemptive relief based on the established standards of the Rule4 and has determined to deny the request. In reaching this determination, NASD Regulation staff considered several key factors, including that: (1) this marks the second time in three years that Name made a political contribution without following the Firm’s established pre-clearance processes resulting in a prohibition of municipal securities business under the Rule;5 and (2) Name has an extremely high profile within the Firm and the state’s political and business community. In light of these factors, NASD Regulation staff does not believe that the Firm’s proposal to implement limited "firewall" provisions for Name provides sufficient basis for granting the exemption. We believe that the factual circumstances surrounding the contribution by Name are dissimilar to the instances in which the NASD has granted an exemption subject to implementation of "firewall" provisions.6
We note that this is the second time in three years that Name has made a contribution in violation of the Firm’s internal procedures regarding the Rule. Important to our determination to deny relief is the Firm’s response to the first contribution, made in 1998. Rather than following Firm policy for remediation, the Firm placed the burden for future Rule compliance with Name's administrative assistant and secretary, who were asked to review Name's outgoing mail for any material that could potentially be considered a political contribution, so that any such item would be reviewed and approved before sending. Yet, neither of these individuals received any specialized training in the requirements of the Rule. In any event, this process did not work because both individuals were out of the office on the date the contribution was made.7
We also note that Name is a major figure in the state’s and region’s business community and has been an MFP and a prominent Firm executive for an extended period. Having recently made a prohibited contribution, Name should have been keenly aware of the pay-for-play restrictions in the Rule and the Firm’s internal policies designed to prevent triggering the ban on business and the possible economic hardship to the Firm resulting from anyone triggering the ban on underwriting business in a state that is very significant economically to the Firm.
Our conclusion is not affected by the fact that Name obtained a refund of part of the contribution. In this case, a return of the contribution8 does not outweigh the overriding regulatory interest in having an MFP maintain a continuing understanding of applicable laws and regulations, prudently adhere to internal Firm procedures designed to pre-clear political contributions, and otherwise ensure that the Firm and its officers and employees are in compliance with the Rule.
Finally, the Firm notes in its request for relief that as a result of the contribution to the Candidate A campaign it has been subject to the restrictions of the Rule for over one year. We are not persuaded that this factor is sufficient to support granting an exemption in this case. Here, we are faced with a repeat violation of the Firm’s internal procedures, and it appears evident that the Firm’s processes to prevent future violations of Firm internal procedures were not effective. Under the facts presented in this case, the two-year prohibition of the Rule will serve important investor protection and market integrity purposes.
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, if not appealed, will be available, with identifying information redacted, on the NASD Regulation Web Site with other NASD decisions responding to MSRB Rule G-37 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.
Please be advised that the Firm has 15 days in which to appeal this determination to NASD Regulation’s National Adjudicatory Council. If you do not want the appeal decision to be publicly available in whole or in part, please include in your appeal a detailed statement, including supporting facts, showing good cause for treating the decision as confidential. If you wish to do so, you should send the written appeal request to:
Vice President & Acting General Counsel
NASD Regulation, Inc.
1735 K Street, N.W.
Washington, DC 20006-1500
Sincerely,Malcolm P. Northam
1 The exemption request is necessary because MSRB Rule G-37(g)(vi) defines the term "official of an issuer" to include candidates for elective office.
2 In addition to the transactions referenced above, the Firm represents that historically it has taken part in the underwriting team for offerings similar to three offerings that have occurred since August 2000. Accordingly, the Firm believes that its economic losses extend to the compensation the Firm would have received if it had been able to participate in these offerings.
3 You represent that Name has long been an active supporter of, and participant in, the local community in which he works, particularly with respect to the City public school system. Accordingly, you request that Name's continued involvement in City community affairs not be considered to constitute "solicitation" of business from any public entity and that he be allowed to continue his involvement with such locally-important community issues.
4 MSRB Rule G-37(i) permits the NASD to grant an exemption based on consideration of the following factors: (1) whether the exemption is consistent with the public interest, the protection of investors and the purposes of the Rule; and (2) whether the broker, dealer, or municipal securities dealer: (A) prior to the time the contribution 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 which resulted in the prohibition was made, had no actual knowledge of the contribution; (C) has taken all available steps to cause the person or persons involved in making the contribution which resulted in such prohibition to obtain a return of the contribution; and (D) has taken such other remedial or preventive measures as may be appropriate under the circumstances.
5 In 1998, Name made a contribution of $200 to Candidate B based on his mistaken understanding that he was contributing to Candidate B’s federal presidential election campaign. However, the Candidate B had not yet formally declared his candidacy for that office. As a result of that contribution, the Firm withdrew from ongoing transactions in State B, timely reported the contribution on the Firm’s quarterly Form G-37/G-38 report, and was subject to a two-year business restriction involving State B issuers. In 1999, the NASD denied the Firm’s request for an exemption from the remaining period of the two-year ban. We note that it is the Firm’s normal practice to issue a "letter of education" to an employee who has not obtained approval prior to making a political contribution that is subject to the Firm’s policy. The purpose of the letter is generally to ensure that the employee is aware of the potentially significant consequences of making contributions as well as to clarify key elements of the Firm’s policy. In Name's case, however, no letter was sent. Instead, the Director of Law & Enforcement met with Name to discuss the contribution.
6 NASD Regulation staff has previously granted exemptions, in certain limited situations, when, taking into account other factors, the firm agreed to implement certain "firewall" provisions designed to insulate the MFP from day-to-day municipal securities business as defined in the Rule, and which were designed to limit apparent quid pro quo resulting from the contribution. For example, the likelihood of a quid pro quo was minimized when the contribution was made prior to the individual becoming an MFP, the contribution was made after the individual ceased to work in the municipal securities portion of the firm but yet was still, by virtue of the Rule definition, considered to be an MFP, or, based on certain business combinations or reorganizations, a person who had not been designated as an MFP at the time of the contribution, became one after the combination or reorganization.
7 This was explained in a November 27, 2001 telephone communication from Staff to Malcolm Northam.
8 We take no position here on whether the return of only part of a contribution would be sufficient in another case.