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99-14 NASD Grants Exemptive Relief Under MSRB Rule G-37(i)
Legal & Compliance
NASD Regulation, Inc. (NASD RegulationSM) recently considered and granted three requests for exemptive relief under Municipal Securities Rulemaking Board (MSRB) Rule G-37(i). The staff decisions are published on the following pages in redacted form.
Questions regarding this Notice should be directed to Malcolm Northam, NASD Regulation, at (202) 728-8085; or Sharon Zackula, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8985.
Two of the exemption requests resulted from circumstances involving political contributions made prior to a merger of member firms. One exemption request resulted from unique circumstances surrounding the application of MSRB Rule G-37 to member firms that distribute Internal Revenue Code Section 529 tuition savings plans.
Recent Decisions Regarding MSRB Rule G-37(i) Exemptive Relief
Letter 1: Exemptive Relief Granted
Re: Firm A MSRB Rule G-37 Exemption Request
This is in response to your letters dated Date, and Date and our telephone communication of Date requesting an exemption for Firm A from the prohibition of engaging in municipal securities business contained in Municipal Securities Rulemaking Board (MSRB) Rule G-37 (Rule).
Based on your letters, as well as our telephone conversation on Date, we understand that this request arises out of Firm A's Date purchase of certain assets of Firm B, a municipal securities dealer located in City. You represent that although Firm B was a municipal bond dealer, its retail municipal bond business accounted for less than 2% of its annual revenue, and any such business merely accommodated clients who wished to purchase or sell municipal bonds. Firm B was not involved in municipal negotiated underwriting activities, private placement activities, remarketing services, or financial advisory or consultant services. You also represent that Firm B's municipal business did not play a role in Firm A's decision to purchase certain of its assets.
Name was the President and Chief Executive Officer of Firm B and on its executive committee. By virtue of his position on the executive committee, Name falls within the Rule's definition of a municipal finance professional (MFP). However, you represent that he was the only individual in Firm B that was an MFP as defined in G-37(g)(iv). Accordingly, pursuant to G-37 (g)(iv)(E), any political contributions made by Name while employed at Firm B were neither recordable nor reportable and would not have triggered a two-year business ban for Firm B.
In connection with the Date asset purchase, both Firm A and Name envisioned that Name would play an integral role at Firm A. Prior to the closing of the purchase, Name disclosed that within the past two years while employed at Firm B, Name had made a political contribution to an issuer official for whom he was not eligible to vote. Specifically, Name made a $1,000 personal contribution to City Mayor Name on Date. You represent that Name contribution was not intended to influence, obtain or retain municipal securities business for Firm B or any other firm. Because Name was not deemed an MFP under Rule G-37, his contribution did not trigger any business ban for Firm B.
Firm A, as a registered municipal securities dealer, is subject to Rule G-37. You represent that, to date, Name is not deemed an MFP at Firm A. Name has been appointed an Executive Vice President - Capital Markets. He does not operate in any municipal securities representative capacity at Firm A and does not obtain or retain any municipal securities business for Firm A. You represent that Name's current position as an associated person in charge of a principal business unit classifies him as a "non-municipal finance professional executive officer" under the Rule, and does not subject Firm A to a two-year prohibition due to his 1997 contribution to Mayor Name.
If the request for an exemption from the prohibition of engaging in municipal securities is granted, Firm A will appoint Name to its Executive and Management Committee, making him a MFP within the definition of the Rule. You indicate that Name's extensive and considerable experience in corporate finance and management will provide essential advice and guidance to the direction of Firm A's overall business as it cultivates clients and develops new products and markets.
You indicate that Firm A's purchase of Firm B's assets was not an attempt to circumvent the letter or spirit of MSRB Rule G-37. You assert that if Firm A's request for an exemption is not granted, Firm A would be penalized based solely for a political contribution made by Name prior to Firm A's acquisition that was not subject to the Rule when it was made. You believe this is inconsistent with the intent of Rule G-37 and interpretive guidance.
As you know, the Rule makes provision for a de minimis political contribution in instances when the political contribution is made to a person for whom the contributor is entitled to vote. However, there is no de minimis exemption when a political contribution is made to a person for whom the contributor is not entitled to vote. The MSRB has published several interpretations to Rule G-37. In a published interpretation dated May 24, 1994 (Q&A number 15), the MSRB indicates, in part, that in the event political contributions were made prior to becoming a MFP, the dealer's prohibition on business would begin when the MFP becomes associated with the dealer. However, in June, 1998, the MSRB provided interpretive guidance that Rule G-37 was not intended to prevent mergers in the municipal securities industry or, once a merger is consummated, to seriously hinder the surviving dealer's municipal securities business if the merger was not an attempt to circumvent the letter or spirit of Rule G-37.
Based on the representations contained in your letters, including that Firm B was deemed not to have any MFPs, that Name does not currently meet the Rule's definition of an MFP, and that Name will become an MFP solely by his appointment (if the exemption request is granted) to Firm A's Executive and Management Committees, we consent to exemption relief to Firm A by removing the ban on the MSRB's Rule G-37(b) business activities effective as of the date of this letter. Please be aware that our consent is based strictly on our understanding of the material facts as you have represented them and that our decision in this matter could be different if the facts are not as represented or if other material facts have not been disclosed to us.
Letter 2: Exemptive Relief Granted
This is in response to your letters dated Date, and Date and subsequent telephone conversations requesting an exemption for Firm A from the prohibition of engaging in municipal securities business contained in Municipal Securities Rulemaking Board (MSRB) Rule G-37 (Rule).
The request for an exemption is the result of the merger of Firm B into Firm A, and arises because of political contributions to issuer officials made by three employees who were designated as municipal finance professionals at Firm A.1
In support of your request for an exemption, you make a number of representations in your letters, including:
- the applicable contributions were made by three associated persons of Firm C [a firm which previously merged into Firm A] and two of these individuals are no longer associated with Firm A;
- the designation by Firm C of these three individuals as municipal finance professionals was a conservative measure taken by virtue of their membership on the Firm C Executive Committee and had no bearing on the business of Firm C because the firm did not engage in negotiated underwritings, financial advisory services, or placement or remarketing agent services with issuers of municipal securities;
- the contributions were not intended to influence the award of municipal securities business within the meaning of the Rule because Firm C did not engage in municipal securities business, as defined in the Rule, prior to its acquisition, and Firm A has not been involved in such business in State since such date;
- both Firm C and b had developed and instituted procedures reasonably designed to ensure compliance with MSRB Rule G-37 when the contributions were made and the contributions were duly reported on MSRB Form G-37/G-38 in accordance with Rule G-37; and
- the merger of the two member firms was incidental to, and effected subsequent to, the merger of the bank holding companies Name and Name.
We consent to an exemption of the two year prohibition from municipal securities business with an issuer as defined by Rule G-37. Our consent is based on all of the representations made in your letters; in consideration of the MSRB's recent published interpretation of Rule G-372; and in consideration of the fact that instead of combining the activities of their affiliated securities firms, the parent holding company could have exercised its ability to simply avoid the prohibition contained in the Rule by maintaining separate securities affiliates, and Firm B could have continued to engage in municipal securities business throughout State free from any Rule G-37 prohibition.
Please be aware that our consent is based strictly on our understanding of the material facts as you have represented them and that our decision in this matter could be different if the facts are not as represented or if other material facts have not been disclosed to us.
2 In recent interpretive guidance concerning the applicability of Rule G-37 in connection with mergers in the municipal securities business, the MSRB stated:
[Rule G-37] was not intended to prevent mergers in the municipal securities industry or, once a merger is consummated, to seriously hinder the surviving dealer's municipal securities business if the merger was not an attempt to circumvent the [Rule's] letter or spirit......(emphasis added). See MSRB Notice of Interpretation, Q&A No. 1, Securities Exchange Act Release No. 34-40167 (July 2, 1998), 63 FR 37434.
Letter 3: Exemptive Relief Granted
This is in response to your letter dated Date requesting a one-time exemption for Firm A from the prohibition of engaging in municipal securities business contained in Municipal Securities Rulemaking Board (MSRB) Rule G-37 (Rule).
Based on your letter, we understand that this request arises because of Firm A's desire to act as distribution agent in a tuition savings plan3 being developed by the Issuer. As indicated by your letter, you believe that certain Section 529 tuition savings plans might be deemed to be municipal securities. Accordingly, by virtue of being the distribution agent for such securities, Firm A might be responsible for complying with MSRB rules pertaining to the municipal securities underwriting business.2 If so, Firm A would be precluded from performing the functions described in your letter with respect to issuer's proposed Section 529 tuition savings plan program.
According to your letter, Firm A is not in the municipal securities underwriting or finance business, and has not engaged in, and does not intend to engage in, municipal securities business as defined in Rule G-37 other than in connection with Section 529 tuition savings plans. Name is the President of Firm A and is eligible to vote in the State gubernatorial election. On Date, he made two $500 contributions to each of two candidates for Governor of State. Two months after the contributions were made, Firm A was advised by outside counsel that its participation in Section 529 tuition savings plans might be deemed to involve the underwriting of municipal securities. Name subsequently sought and received the return of $250 of each of his contributions, thus bringing the contributions within the " de minimis " exception to Rule G-37(b). In order both to assist Issuer in implementing its Section 529 tuition savings plan and to participate in the distribution of interests in the Section 529 tuition savings plan, Firm A has undertaken to comply with all of the applicable MSRB rules, including Rule G-37.
The following additional representations and arguments are made in support of your request:
- In its letter to Alden Adkins dated Date, Issuer has represented that unless the exemption request is granted, the citizens of State will be deprived of access to an important state-sponsored college savings program until Date, and that this will have a significant negative effect on the ability of the State to offer an effective and secure savings program.
- The Section 529 tuition savings plan seemingly has little in common with investments that are classified as municipal securities, and Firm A reasonably did not assume that its role in distributing interests in the tuition savings plan on an agency basis would constitute municipal securities business.
- In Date, when Firm A discovered that Name might become a municipal finance professional because of the proposed Section 529 tuition savings plan business, his contributions already had been identified and reported to the MSRB because of his association with, and designation as a non-MFP executive officer of, a different Firm A broker-dealer, Firm B.
We hereby grant an exemption to Firm A from the prohibition of MSRB Rule G-37(b) effective Date. This position is based on all the representations contained in your letter, supporting attachments, and telephone communications. In granting this exemption we note in particular: that the contributions by Name are the only contributions by a person who may deemed a Firm A municipal finance professional that, absent an exemption, would prohibit Firm A from engaging in municipal securities business with State; that all contributions by Name previously have been properly recorded and reported; that Firm A has not engaged in municipal securities business as defined in Rule G-37 other than in connection with Section 529 tuition savings plans; that Firm A does not intend to engage in municipal securities business as defined in Rule G-37 during the remainder of the two-year period since Name contributions; and the unique characteristics of the tuition savings plans. Please be aware that our consent is based strictly on our understanding of the material facts as you have represented them and that our decision in this matter could be different if the facts are not as represented or if other material facts have not been disclosed to us.
3 In 1996, the Internal Revenue Code was amended through the addition of Section 529 to encourage "qualified state tuition programs" pursuant to which states can establish and maintain tax-deferred savings programs under which participants may make contributions to accounts established for the purpose of meeting the qualified higher education expenses of designated beneficiaries. To qualify, the program must be "established and maintained" by a state, a state agency, or a state municipality (Section 529 tuition savings plan).
2 For purpose of this request we assume that participant interests in Issuer's Section 529 tuition savings plan constitute "municipal securities," and that Firm A's activities in connection with the plan constitute municipal securities business within the meaning of Rule G-37. Any questions concerning the legal interpretation of terms used in the letter should be addressed to the MSRB.