Name Not Public
October 27, 2004
This is in response to your August 20, 2004 and October 27, 2004 letters 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 made in September 2003 to the Candidate in support of Candidate’s campaign for Governor. You represent that the amount of Name’s Contribution was the price of attending a fundraiser for Candidate and was not made in response to either a direct request from Candidate or from his campaign. You acknowledge that Name, as a Firm public finance banker, is a municipal finance professional (“MFP”) as defined by the Rule.
You represent that Name has been a State public official for nearly ten years. From 1995 to 1999, Name worked in the State Treasurer’s Office, and since 1999 he has served as an employee for the City in State. You represent that the Firm hired Name on October 27, 20041 because of his understanding of finance and his experience as a public official, which has allowed him to develop extensive knowledge of and familiarity with the complexities and intricacies of public finance deals. You also represent that the Firm first became aware of the Contribution when Name disclosed it in his response to the Firm’s request that is part of the Firm’s due diligence inquiry regarding the Rule used to screen job candidates and new hires. The Contribution has been returned.2 You represent that Name has never engaged in the municipal securities business, as defined in the Rule, 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.3 In reaching a determination, NASD staff considered several key factors surrounding the Contribution. 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 Firm has a long relationship as an underwriter of municipal securities for the State and State agencies, and neither the hiring of Name nor his Contribution was necessary to obtain municipal securities business from such issuers.4 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 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 quarterly process for MFPs to report contributions and provide certifications as to their contributions or lack thereof. The Firm became aware of the Contribution 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 State or State agencies, until at least September 30, 2005;
- Name will be prohibited from soliciting municipal securities business (as defined in the Rule) from the State, State agencies, and the City, until at least September 30, 2005:
- The Firm’s State-based MFPs and the Firm’s municipal syndicate desk (and others directly or indirectly involved with solicitation of State, State agencies, and City municipal securities business) will be informed in writing that Name has, until at least September 30, 2005, been segregated with respect to State, State agencies, and City municipal securities business, 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
1Confirmed in a October 27, 2004 telephone conversation between Malcolm Northam and Firm attorney.
2You have enclosed a copy of a $1,000 check dated July 28, 2004 from the Candidate that you represent constitutes a refund of the Contribution.
3MSRB 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.
4You represent that in the past ten years the Firm has completed 496 bond financings as senior or co-manager in State. You also represent that, as confirmed in a August 27, 2004 telephone conversation between Malcolm Northam and Firm attorney, in 2003 the Firm underwrote municipal securities totaling $21.968 billion in State, ranking the Firm fourth in total dollar amount of bonds underwritten in State, and that over the last six years, the Firm is ranked fifth in total dollar amount of bond underwritings in the State.