Name Not Public
March 10, 1997
This is in response to your letter of February 21, 1997, and letter of Addendum dated February 25, 1997, requesting an exemption for Firm X from the prohibition on engaging in municipal securities business contained in Municipal Securities Rulemaking Board (MSRB) Rule G-37 (Rule).
The request stems from the fact that Firm X issued checks on behalf of A, CEO and sole shareholder, for political contributions in 1995 and 1996 of $250 and $50 respectively to candidates for municipal office in the City and County. A was eligible to vote for the candidates involved. You note that, " ... pattern of the Corporation making the political contribution on behalf of its executive officer had been clearly established" prior to the April 25, 1994, effective date for MSRB Rule G-37.
You state that it was your's and the firm's compliance officer's belief that, " ... without exceeding the $250.00 contribution limit within the jurisdiction, where the executive officer and sole shareholder of the firm was eligible to vote, the firm could continue to make the contribution on [A's] behalf."
The Rule makes provision for a de minimis political contribution in instances where the contributor is entitled to vote for the recipient. However, there is no de minimis exemption when a political contribution is made by a firm. The MSRB in filings with the SEC1 and in its interpretations2 has made clear that the granting of exemptions to the Rule should only be done in very limited circumstances. It identifies only two specific examples that are appropriate for an exemption: (i) a contribution by a disgruntled employee to an issuer official for the purpose of injuring the member; or (ii) a number of small contributions by an employee during an election cycle (e.g., four years) which, when consolidated slightly exceeds the $250 de minimis exemption, such as contributions totaling $255.
The SEC in approving the NASD rule change to establish internal procedures to review requests by members for exemptions from Rule G-37(b)3 stated, "the Commission finds that the rule change is consistent with the provisions of Section 15A(b)(2) of the Act because it establishes a procedure to enforce compliance with MSRB Rule G-37 that is intended to effectuate the intent of the MSRB that the NASD grant exemptions only under the limited circumstances contemplated by the MSRB. The Commission also finds that, for the reasons set forth above, the rule change is consistent with the provisions of Section 19(g)(1)(B) of the Act, which requires that the NASD, absent reasonable justification or excuse, enforce compliance with MSRB rules." (emphasis added)
The Rule imposes a requirement on all firms subject to its provisions to know them and to have in place supervisory procedures to reasonably insure compliance with the Rule. The language of the rule is clear with respect to the limitations imposed on member firms, as distinct from municipal financial professionals. In the instant matter, we cannot conclude that ignorance of the Rule's provisions constitutes reasonable justification or excuse for granting the requested exemption. Accordingly, Firm X's request for exemption is denied.
Be advised that Firm X has 15 days in which to appeal this determination to the Fixed Income Committee of the NASD Regulation, Inc. Any such determination is subject to review by the NASD Regulation Board of Directors. If you wish to do so, you should send the written appeal request to:
NASD Regulation, Inc.
Fixed Income Committee
c/o Mr. John Pilcher, Esq.
Office of General Counsel
1735 K Street, N.W.
Washington, D.C. 20006
Thomas R. Cassella
|cc:||NASD District Director
Christopher A. Taylor, MSRB
1 Securities Exchange Act Release No. 34160 (June 3, 1994), 59 FR 30376 (June 13, 1994) (Release 34-34160).
2 MSRB Manual, General Rules, Rule G-37 (CCH) ¶ 3681, Additional Rule G-37 Q & A June 15, 1995, Q4.
3 Securities Exchange Act Release No. 34-36403 (October 20, 1995), 60 FR 54898 (October 26, 1995).