Name Not Public
June 30, 2000
This is in response to your letters dated May 11, 2000 and May 31, 2000, and a telephone conversation of June 26, 2000, in which you request that Firm A 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 the proposed hiring of Name as a municipal finance professional who made a political contribution to an issuer official within the past two years (the "Proposed Hire"). In support of your request for an exemption, you make a number of representations in your letter including the following:
At no time during his/her career has the Proposed Hire worked in the municipal finance business. After receiving a bachelor’s degree in business administration in 1994, the Proposed Hire worked full-time as the Executive Director of the State Association of Commodity C. In 1997, the Proposed Hire founded a corporation, a consulting and marketing business. At all relevant times since then and continuing to date, the Proposed Hire has owned and controlled the consulting firm. The consulting firm provides marketing and consulting services for a contractual fee to various clients throughout the United States, including certain individuals who have run for public office. Since December 1998, the Proposed Hire has been employed full-time as Director of Public Affairs of the City R Metro Chamber of Commerce.
You also represent that one of the clients of the Proposed Hire’s consulting firm, Elected Official, has served on the City R Council since 1991 and is a personal friend of the Proposed Hire. On April 15, 1999, the Proposed Hire made a $100 contribution to the re-election campaign of Elected Official (the "Contribution"). At the time of the Contribution, the Proposed Hire was not eligible to vote for Elected Official. The Proposed Hire has requested that Elected Official return the Contribution. A copy of the letter requesting the return and the returned check are enclosed as Exhibit 2 to your letter.
Firm A has served as financial advisor to City R, and it has engaged in various underwritings of municipal securities on behalf of City R for many years. If an exemption is granted by NASD Regulation, you represent that Firm A would undertake to erect a "firewall" around the Proposed Hire that bars him/her from any involvement in, or communication regarding, municipal securities business with the City R until after April 15, 2001. This firewall provision would be made an express requirement in the Proposed Hire’s prospective employment contract with Firm A and would include the following conditions:
- The Proposed Hire would be precluded from receiving any compensation derived from or based upon municipal securities business in which the firm might be engaged with City R until April 15, 2001.
- The Proposed Hire’s consulting and marketing firm would be prohibited from doing any business with or obtaining any fees from City R or any issuer official of City R until April 15, 2001.1
- The Proposed Hire’s spouse, any other member of his/her family, and his/her consulting company would be precluded from receiving from Firm A any compensation derived from revenues received by Firm A in connection with municipal securities business with City R before October 1, 2001.
- The firm would deduct from the Proposed Hire’s share of any firm-wide or other incentive compensation any amounts attributable to such business with City R .
- By the terms of his/her employment agreement, the Proposed Hire would be precluded from engaging or seeking directly or indirectly to engage in municipal securities business with City R until April 15, 2001.
- Until April 15, 2001, the Proposed Hire would be precluded from discussing with other employees municipal securities business with City R or efforts to secure such business and from obtaining access to documents and computer files relating to any such activity.
- The firm would provide written notice to those employees engaging or seeking to engage in municipal securities business with City R of the firm’s prohibition on their discussing such matters with or in the presence of the Proposed Hire.
- Each employee engaged or seeking to engage in municipal securities business with City R who receives notice of the firewall conditions will be required to certify 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 in the form of actions up to and including dismissal for any failure to comply fully with the prohibition.
- The Proposed Hire would receive similar written notice of the firewall conditions and would be subject to the same obligation to provide written certification of his/her compliance.
- The firm’s supervisory principal in charge of public finance would be charged with the responsibility of ensuring the compliance of 11 affected individuals with the foregoing procedures.
You argue that the requested exemption should be granted in particular based on the following:
First, the circumstances surrounding the contribution demonstrate that it could not have been made for any purpose inconsistent with the policies underlying the Rule. You state that the Proposed Hire made a de minimis contribution to the re-election campaign of a friend long before the employment opportunity at Firm A ever came to his/her attention. You also assert that the Proposed Hire has never been employed in the municipal securities business, and thus, had no reason to know of the Rule. Second, you argue that the contribution is extremely small and thus highly unlikely to influence an issuer official’s deliberations regarding the award of municipal securities business. Third, you state that, consistent with provisions of Rule G-37(i), Firm A has maintained and enforced procedures reasonably designed to ensure compliance with the Rule. Finally, you argue that an exemption is consistent with the guidance issued by the MSRB in June 1998, which emphasized that exemptive relief under MSRB Rule G-37(i) was potentially available where the person making the contribution had not yet become an MFP.2
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.3 The staff has considered Firm A'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.
In this instance, the staff believes the de minimis nature of the Proposed Hire’s Contribution made more than one year ago 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 official is also significantly minimized. To the extent that any potential investor protection concerns continue to exist, the staff believes these concerns will be appropriately addressed by the proposed firewall that Firm A has represented it will erect if, in the future, the Proposed Hire is employed by the firm.
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. The exemption is granted on the condition that Firm A erect a firewall around the Proposed Hire barring him/her from any involvement, directly or indirectly, in municipal securities business with the City R until April 15, 2001, which bar shall be an express requirement in the Proposed Hire’s prospective employment contract. Further, until April 15, 2001, the Proposed Hire shall be precluded from receiving any compensation, directly or indirectly, derived from or based upon municipal securities business in which the firm might be engaged with City R.
Jeffrey S. Holik
1 Confirmation of this particular firewall condition was provided by Firm A's legal counsel, during a June 26, 2000 telephone discussion with 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 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.