Name Not Public
This request for exemptive relief is granted based on the Firm's representation that the Contributions were made prior to the individual being employed by the Firm, and that the individual has never engaged in municipal securities business, as defined by MSRB Rule G-37, the return of the Contributions, and the extensive information barriers and compensation restrictions.
October 11, 2005
This is in response to your July 27, 2005 letter 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"). You have requested this exemption because of two contributions made by Name: a $500 Contribution made January 25, 2005 to Candidate #1, City Council President; and a $500 Contribution made February 24, 2005 to City Council member Candidate #2. ("Contributions"). Although Name lives in City, he is not eligible to vote for either Candidate #1 or Candidate #2. You represent that the Contribution to Candidate #1 was made based on personal friendship, and the Contribution made to Candidate #2 was based on his close working relationship with Name while he was President of the City Recreation and Parks Commission. The Firm hired Name on August 29, 2005 as a municipal finance professional as defined by the Rule.1
You represent that the Contributions were made by Name when he was engaged by your Firm as a consultant as defined by MSRB Rule G-38, but that Name did not solicit any business for the Firm from the City for which the Firm is currently engaged as an underwriter. You also represent that both your Firm and Name, as an MSRB Rule G-38 consultant, have been in compliance with all applicable provisions of MSRB Rules G-37 and G-38 including notice of his MSRB Rule G-38 consulting engagement to prospective clients and to the MSRB regarding Contributions made during his engagement with your Firm.2 You represent that the Firm hired Name because of his public service in the State Legislature, his reputation for ethical and thorough work, and the numerous contacts he developed throughout his career. You represent that Name served in the State Assembly from 1977 to 1991, has been associated with various civic and educational initiatives since 1991, and is the founder and chief consultant of Company, a public affairs management company. Since March 2003 Company has been engaged as a consultant, as defined by MSRB Rule G-38, to represent the Firm in the municipal finance field. You represent that Name has never engaged in municipal securities business, as defined by the Rule, that the Contributions were made prior to his becoming associated with the Firm as a municipal finance professional, and the Contributions have been returned.3
NASD has considered your Firm'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.4 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, from City Issuers. Second, you have represented that the Firm has a long relationship as an underwriter of municipal securities for City Issuers and neither the hiring of Name nor his Contributions were necessary to obtain municipal securities business from such City Issuers.5 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. Fourth, although a less weighty factor, the Contributions have 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 require, as part of the new MFP hiring process, an inquiry to ascertain whether they have made any political contributions. It was as a result of this routine pre-hire inquiry that the Firm confirmed the subject political contributions.6
In addition, the Firm has agreed that it has adopted or will institute the following:
- Name will be prohibited, until at least February 24, 2007, from soliciting municipal securities business (as defined in the Rule) from the City , or any entity or agency for whom the City Council, or any member of the City Council, is considered an "official of such issuer" or "official of an issuer" as defined in MSRB Rule G-37(g)(vi) ("City Issuers");
- Name's compensation package will, until February 24, 2007, preclude him from receiving any compensation (including Firm-wide or other compensation) derived, directly or indirectly, from such City Issuers' municipal securities business, as defined in the Rule;
- The Firm's State-based MFPs and the Firm's municipal syndicate desk (and others directly or indirectly involved with solicitation of the City Issuers' municipal securities business) (as defined by the Rule) will be informed in writing that Name has been segregated with respect to the Issuers municipal securities business (as defined by the Rule), and instructed that they may not have any discussions or communications (including e-mail or voicemail) with Name regarding such business. All such employees shall certify that they have received, understand and will comply with this notice, and will acknowledge that they may be subject to sanctions, including potential dismissal, in the event they fail to comply;
- Name will receive similar notification of the Information Restrictions and will, until at least February 24, 2007, be subject to an obligation to provide 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 undertaking 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 This was confirmed in a September 7, 2005 e-mail message from Firm Employee to Malcolm Northam.
2 In support of this representation on August 19, 2005 you provided a copy of the Firm's MSRB form G-37/38 filing for the time period January 1, 2005 to March 31, 2005 which included disclosure of Name as a Firm consultant and disclosed the two Contributions that now necessitate this MSRB Rule G-37 business prohibition exemption request.
3 In support of this representation you have provided a copy of a April 5, 2005 $500 check from the campaign of Candidate #1, and a copy of an April 7, 2005 $500 check from the campaign of Candidate #2 that you represent are refunds of the Contributions.
4 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.
5 You represent that the Firm served as the underwriter in 2001 and continues to serve as Remarketing Agent for $46,300,000 of variable rate bonds sold by the City Wastewater System, and in March 2003 served as the lead manager for a $135,000,000 land-secured infrastructure financing for the City Project. Both are City Issuers. Further, you represent that the Firm, for the past 10 years, has been involved in a second phase financing for the City Project, which is projected to include a bond issue in excess of $100,000,000 to be sold next year.
6 Confirmed in a September 12, 2005 telephone conversation between Malcolm Northam and Firm Employee.