Name Not Public
May 15, 2002
Via Certified Mail, Return Receipt
Law Firm A
Re: MSRB Rule G-37 Exemption Appeal by Firm X
On May 2, 2002, the National Adjudicatory Council ("NAC") of NASD Regulation, Inc. ("NASD Regulation") reviewed Firm X's ("Firm X" or the "Firm") appeal from a decision of NASD Regulation's Department of Member Regulation ("Member Regulation") dated Date that denied an exemption from MSRB Rule G-37 ("Rule G-37" or the "Rule"). For the reasons discussed below, the NAC reverses Member Regulation's decision and grants the Firm’s request for exemption.1
Under Rule G-37(b), a broker, dealer, or municipal securities dealer is prohibited from engaging in municipal securities business with an issuer for two years following any political contribution to an official of such issuer from the dealer, a municipal finance professional ("MFP") associated with the dealer, or any political action committee controlled by the dealer or any MFP. Rule G-37 contains a de minimis exception for contributions made by an MFP, if the MFP who made the contribution is entitled to vote for the candidate or official to whom the contribution is made and if the total contributions from the MFP to the candidate or official do not exceed $250 per official per election.
Firm X's Representations of Fact
Name has been employed at Firm X since Year - 8. He is an MFP and serves in a senior managing position at Firm X. Name triggered the Rule's two-year prohibition from engaging in the muncipal securities business of an issuer by contributing a total of $300 to the campaign of Candidate. Candidate is an elected member of the Board of Commissioners of the Issuer. The Firm represents that Commissioners are elected for six-year terms, and that Name is entitled to vote for the candidate. Pursuant to Rule G-37, the maximum contribution per election is $250.
The Firm maintains internal procedures for compliance with Rule G-37. These procedures require all Firm X employees seeking to make a political contribution to submit a "Political Contribution Request Form" to the Firm's compliance department for approval prior to making the contribution. This procedure applies to all employees, not just MFPs. In addition, the Firm requires all employees to complete a quarterly "MSRB G-37 Compliance Questionnaire." The Firm also includes a segment on Rule G-37 during its annual, internal training.
In Year - 2, Name donated $100 to Candidate's campaign. Name made the donation in response to an invitation to attend a cocktail reception for Candidate. Prior to sending in the contribution, Name forwarded the check and the Firm's "Political Contribution Request Form" for approval to the Firm's compliance department. The compliance department approved Name's $100 donation. The Firm sent a note to Name stating that the "maximum contribution of $250 per election" applied to this candidate.
In Year - 1, Name received another invitation to a cocktail reception for Candidate. He again decided to donate $100. Name followed the same procedures, and the Firm approved the contribution. The compliance department prepared a memorandum to Name that reminded him of the following:
- Name was subject to a "$250 per election" limitation;
- Candidate "is considered an issuer official, hold[ing] this office for a period of six years" until Year + 1;
- Name had already "made a total of $200 in contributions" to Candidate in Year - 2 and Year - 1; and
- "[t]hat any future contributions to Candidate prior to Year may not exceed $50 as this would be the $250 limit per official per election."
This memorandum was forwarded to Name.
In Year, Name again received an invitation to attend a cocktail reception for Candidate. On Date, Name wrote a check for $100 to Candidate's campaign. Name, however, failed to fill out a "Political Contribution Request Form" and did not submit it to the compliance department for approval. Instead, he sent the check directly to Candidate's campaign. Name did, however, disclose his contribution to Candidate in his quarterly questionnaire that he submitted to the compliance department on Date.
The Firm learned of the Year contribution after reviewing Name's quarterly questionnaire. At this point, the Firm retained outside counsel to perform a review of the conduct and potential impact. Due to this last contribution, Firm X was required to decline a municipal securities business contract with the Issuer. Name sought a partial refund of his contribution from Candidate and, on Date, Name received a refund check of $50 from Candidate's campaign.
The Firm took the following remedial and preventative measures: (1) retained outside counsel; (2) conducted a full inquiry into the adequacy of the Firm's Rule G-37 procedures; (3) required Name immediately to seek a refund from Candidate's campaign of the excess contribution; (3) temporarily barred Name from making any further contributions; (4) issued a formal "Memorandum of Warning" to Name criticizing Name's action and threatening serious disciplinary action in the event of future violations of Firm policies; (5) removed Name from primary oversight responsibilities for the Issuer account; (6) pledged to deny Name, if the exemption is granted, any compensation received in connection with the municipal securities business with the Issuer during the time of the two-year prohibition provided under the Rule; and (7) voluntarily contacted Member Regulation to disclose all the facts.
Standards for Considering Exemptions from Rule G-37
In examining the merits of an exemption request, Rule G-37(i)(i) instructs NASD Regulation to consider, among other factors, whether "such exemption is consistent with the public interest, the protection of investors and the purposes of the Rule." In addition, Rule G-37(i)(ii) instructs NASD Regulation to consider whether such dealer:
- 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 this Rule;
- prior to or at the time the contribution(s) which resulted in such prohibition was made, had no actual knowledge of the contribution(s);
- 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
- has taken such other remedial or preventive measures, as may be appropriate under the circumstances.
The MSRB has explained that a dealer that is subject to Rule G-37's prohibition must make a substantial showing to qualify for an exemption and that exemptions should be granted sparingly.2
The NAC finds that, under the facts and circumstances of this request, an exemption from Rule G-37 is warranted. The NAC has followed the MSRB's guidance that exemptions should be granted sparingly, and it finds that Firm X has made a substantial showing to qualify for an exemption.
Looking first to the four factors enumerated in Rule G-37(i)(ii), the NAC finds that all four factors favor granting an exemption. First, prior to Name's contribution, Firm X maintained a thorough and comprehensive set of procedures reasonably designed to ensure compliance with the Rule. Second, the Firm had no actual knowledge of Name's contribution. Third, once Firm X learned of Name's contribution, it took all available steps to cause Name to obtain a return of the contribution that resulted in the prohibition. In fact, Name obtained a partial refund of his contribution within 30 days of when the Firm learned of the contribution.3 Fourth, Firm X took remedial or preventive measures, which were appropriate under the circumstances. In the context of Firm X's compliance procedures and considering the particular fact of Name's contributions, the NAC finds that the following combination of remedial and preventive measures taken by the Firm were appropriate: conducting a full inquiry in the adequacy of the Firm's Rule G-37 procedures; temporarily barring Name from making any further contributions; removing Name from primary oversight responsibilities for the Issuer's account; and pledging to deny Name any compensation received in connection with the Issuer's municipal financial business during the time of the two-year prohibition provided under the Rule.
Finally, the NAC concludes that granting an exemption from the two-year prohibition on municipal securities business with the affected Issuer is consistent with the public interest, the protection of investors, and the purposes of the Rule. Here, Firm X voluntarily contacted Member Regulation and disclosed the facts relating to this episode. The NAC considers such self-reporting to be consistent with the public interest and the protection of investors. Moreover, the NAC notes that the Firm has been prohibited from engaging in a municipal securities business with the affected issuer for approximately one year. The NAC finds that granting an exemption from Rule G-37's prohibition at this time is consistent with the purposes of the Rule.
The NAC grants the Firm's request for confidential treatment regarding the record generally, except that the decision of the NAC will be published in redacted form. Key identifying information that may identify the actual parties or the issuer will be redacted (e.g., the name of the MFP; the name of the member firm; the name of the recipient of the contribution; the name of the city, state or governmental entity that is the issuer; and other legal names that may allow a reader to identify the parties involved).
On Behalf of the National Adjudicatory Council,
Barbara Z. Sweeney
Senior Vice President and Corporate Secretary
Christopher A. Taylor,
Malcolm P. Northam
1 As a preliminary matter, the NAC denies the Firm's motion for oral argument.
2See Political Contributions and Prohibitions on Municipal Securities Business: Rule G-37, MSRB Reports, Vol. 14, No. 3 (June 1994) at 17.
3Name obtained a refund of $50, the amount that caused him to exceed the $250 de minimis exception.