Name Not Public
This request for exemptive relief is granted based on the representations that the Contributions were made prior to the individual's employment with the Firm, and the individual has never been involved in municipal securities business as defined by MSRB Rule G-37. Additionally, the Firm has agreed to institute information barriers and compensation restrictions, and the contributions have been returned.
October 11, 2005
This is in response to your September 8, 2005 letter 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 political contributions made by Name: (1) a May 10, 2005 $697 Contribution to "Friends of Candidate #1" (a State #1 gubernatorial candidate); and (2) a June 30, 2005 $1,000 Contribution to "Candidate #2 for State #2 Committee" (the U.S. Senate campaign for the current State #2 Treasurer) ("Contributions"). You represent that Name1 was hired and appointed to the Firm's Management Committee on September 1, 2005, and that this appointment results in Name being a municipal finance professional as defined by the Rule.
You represent that Name is the Chief Administrative Officer for the Firm. You also represent that Name has never been involved in municipal securities business, and immediately prior to his association with the Firm he was CEO of Company, a public relations firm. You also represent that the Contributions were made by Name based on his personal relationships with Candidate #1 and Candidate #2 and his longtime involvement in Party politics. You further represent that the Firm first became aware of the Contributions as part of the Firm's new hire due diligence process.
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 Contributions. First, you have represented that Name, prior to being hired by the Firm, was not engaged in the solicitation of municipal securities business, as defined in the Rule. Second, you have represented that the Contributions were made by Name prior to his being hired, and the Firm has a long relationship as an underwriter of municipal securities for the States #1 and #2, and their state agencies where the Candidates would be considered to be issuer officials ("Issuers"), and neither the hiring of Name nor his Contributions are necessary for the Firm to obtain municipal securities business from the Issuers.3 Third, the Firm has agreed to institute preventive information barriers (as described below) to help avoid the potential for conflicting interests to exist and be used, or appear to be used, by the Firm or Name to obtain municipal securities business or compensation or other financial benefits related to such business. Fourth, although a less weighty factor, the Contributions have been returned.4
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 quarterly process for MFPs to report contributions and provide certifications as to their contributions or lack thereof. The Firm became of aware of the Contributions as part of its new employee pre-screening process used to identify political contributions and a possible resulting prohibition on certain new municipal securities business.
In addition, the Firm has agreed that it has adopted or will institute the following:
- Name's compensation package will preclude him from receiving any compensation (including Firm-wide or other incentive compensation) derived, directly or indirectly, from municipal securities business, as defined in the Rule, from the Issuers, until at least June 30, 2007;
- Name will be prohibited from soliciting municipal securities business (as defined in the Rule) from the Issuers until at least June 30, 2007;
- The Firm's State #1 and State #2 - based MFPs and the Firm's municipal syndicate desk (and others directly or indirectly involved with solicitation of the Issuers) will be informed in writing that Name has, until at least June 30, 2007, been segregated with respect to the Issuers, and instructed that they may not have any discussions or communications (including e-mail or voicemail) with Name regarding such business ("Information Restrictions"). All such employees shall certify that they 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
1 Confirmed in an October 5, 2005 telephone conversation between Malcolm Northam and Attorney representing the Firm.
2 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; (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.
3 You represent that in 2004 and year-to-date 2005 the Firm has acted as the lead underwriter on over $36 billion in principal amount of municipal bond issues in State #1, and over $3 billion in principal amount of municipal bond issues in State #2.
4 In support, you have provided a copy of a September 9, 2005 check for $697 from the campaign of Candidate #1 which you represent is a return of the Contribution made to Candidate #1, and a copy of a September 12, 2005 check for $1,000 from the campaign of Candidate #2.